The Overstock Obsession

Every so often, there’s a company, a person or a philosophy that attracts such a rabid following it can be only be described as a phenomenon.

In music, the Beatles and Elvis come to mind. It’s hard to think of either without envisioning ecstatic throngs of screaming, teary-eyed fanatics who would do anything for a souvenir to link them forever to their idol.

In technology, Apple Computer has survived as much (or more) on the strength of its zealous customers as on more mundane considerations like operating efficiencies or distribution channels. A piece of advice: Never try to tell a Macintosh user there are any advantages to using a PC.

In dieting, the current rage is Atkins. Eat all the protein and fat you want, but lay off the bread and pasta. Want to know more? Just ask someone who’s on it. They’ll talk the pounds right off you.

Overstock is like that in the affiliate world. Although it’s a nascent company that is far from perfect by some business measures, its customers, affiliates and employees simply ooze adoration for the fast-growing e-tailer and its undeniably magnetic CEO, Patrick Byrne. It’s not just that they like the company. This is unbridled zeal. It’s the kind of blissful rapture one expects from saffron-robed monks selling flowers at the airport.

The numbers show the love. Gross merchandise sales jumped 88 percent to $96.6 million in the company’s second quarter from the year before. And more than 3 million consumers have now bought something from the site, thanks in large part to Overstock’s 35,000 evangelistic affiliates. To put that last number in perspective, Macys.com has only 2,000 affiliates, or less than one for every 16 that Overstock claims.

After only five years in business, Overstock has blossomed into the 18th largest e-tail site. It attracted 9.3 million unique visitors during July alone.

Much of that success can be attributed to Byrne, a sort of existential capitalist whose top-tier schooling (BA at Dartmouth, MA at Cambridge, PhD at Stanford) has left him with a penchant to quote philosophies ranging from the Bible to Sun Tzu to Obi-Wan Kenobi. He often speaks in adages colored by a metaphysical hue.

“If you treat people well and customers well, you’ll be rewarded,” he says describing the “virtuous circle” of the retail world. “You can’t cheat karma. The karma police will always get you.”

He’s first to admit his company’s shortcomings in a way that enhances his credibility. In the company’s last earnings report, for example, he expressed his disappointment with Overstock’s “Daily Deals” promotion. “I am not giving up,” he said, “but this has been a dud.” He also admits to worrying about “bottlenecks” and declared outright that “B2B has been a disappointment.”

“Cynics claim that my candor is but an attempt to pump my stock by drawing investors looking for someone who does not pump his stock,” Byrnes wrote in the company’s recent earnings report. “I am flattered to have attributed to me such Machiavellian subtlety!”

Byrne grew his company the hard way after “getting turned down by 55 VCs (venture capitalists)” in his quest for funding. Overstock went public in 2002, using the same Dutch auction process that Google adopted this year.

The Art Of Affiliates

He’s so dedicated to building his affiliate program that he’s given Affiliate Manager J.T. Stephens a force of 10 assistants to build it. Byrne required them all to read Sun Tzu’s The Art of War, which he views as the “textbook on Internet affiliate marketing.” And, although Overstock’s commissions are relatively low at 3 percent to 7 percent (many merchants pay 10 percent to 12 percent), affiliates love the company for its highly personalized support.

“It isn’t always the commission,” says Sandy Breckenridge of SlipCovers- Fabric.com. “Higher commission sites don’t come near Overstock when it comes to support and personal attention.”

Another devout affiliate, Asif Malik of Plaza101.com, strayed from the Overstock flock for a while until one of its managers came after him like a shepherd looking for a lost lamb. “For a while, I dumped them,” says Malik. “But I got a call from Adam Russo and that changed.” Now the two work closely on updates, sometimes talking several times a day to make sure Malik is doing all he can for Overstock.

“It makes a difference,” says Malik. “I email or call and they respond right away. I email or call other companies and sometimes never hear from them. Or I get a message back telling me they don’t provide tech support.” Malik scoffs. “I don’t need tech support. I have technical know-how. I am just trying to help generate revenue for them. They are fools and I drop them. If they are too busy to talk to an affiliate like me, they lose.” And Overstock wins.

“No other merchants are calling them,” says Stephens. “We call them. We’re like a free marketing consultant, and affiliates are all ears.We tell them our best sellers and suggest placement. We give them the resources and tools to make money.”

Industry Advocate

The company also won admiration from many affiliates for filing the first suit under Utah’s groundbreaking Spyware Control Act. The suit alleged rival SmartBargains created ads that popped up over the Overstock Web site. (SmartBargains had filed its S-1 for an IPO. At the time of publication, it was in a quiet period and could not comment.)

“I love them,” said affiliate Connie Berg of FlamingoWorld.com, who recently shared LinkShare’s award for “Most Vocal Advocate” with Overstock’s affiliate team. “If they can get some spyware stopped, it helps people in other programs, not just Overstock’s.”

Byrne sees his raft of affiliates as his not-so-secret army to do battle with larger rivals like Amazon.com. “It’s a war of the fleas against the elephant,” he says. “A few years ago, affiliates did $150,000 in sales a month. Now they do millions It’s not yet $10 million a month, but it will be by the end of this year.”

While many companies trim inactive affiliates from their ranks to concentrate on their top producers, others see them as a source of potential growth. LinkShare CEO Steve Messer, for example, believes that once an affiliate shows interest in a company, “there’s always a chance to reactivate them.” (See Issue 3, Share And Share A Link.)

Overstock never cuts affiliates, meaning many of those 35,000 soldiers are ghosts that occasionally come back to life. One “inactive” affiliate who hadn’t generated any sales for Overstock in more than three years recently turned in $10,000 in one month.

Overstock champions the little guys, small affiliates who generate between only $500 and $3,000 in sales per month. The superaffiliates may generate more sales per affiliate, but they also demand higher pricing, flat fees and enhanced commissions, which makes them more expensive and harder to work with.

“We like the medium and small affiliates. I’d rather have 10,000 of them anyway. We try to do well by our affiliates. At this point, we think of them as jedis and padawans,” says Byrne, referring to the fully trained warriors in Star Wars and their young apprentices. “They are a mercurial bunch and they react quickly to good treatment.”

Stephens, meanwhile, translates the focus on the smaller affiliates to hard cash. “When you work to get 50 affiliates to add even $1,000 to $2,000 each in sales each month, it ends up affecting the bottom line,” he says. “Everyone else is cutting down and we are building out. Other companies limit themselves. But their loss is our gain.”

And the company does try to treat them well. “You can never lose sight of the fact that affiliate marketing is a symbiotic relationship,” says Stephens. This focus on affiliate appreciation seems to be paying off for Overstock. Affiliates like knowing they are talking to someone who specializes in their category (see list).

“Overstock is one of the easiest ones to set up and start earning money with,” says Gabriel Lam, who runs GotApex.com. “They have a wide range of products and very good pricing.”

Less Than Perfect

Of course, just as Elvis had a weakness for fried peanut butter and banana sandwiches, Overstock has a few flaws, too. Its immense expansion had led to some growing pains, and the company has yet to achieve profitability.

Some affiliates report that Overstock’s coupons get posted but don’t work right away, which they say happens very infrequently with other merchants. And Overstock spends a lot on advertising: $5 million in 2003 and $2 million in January through July 2004. It acquired 744,000 customers during 2003, but the cost was high – $13.30 per customer.

Overstock handles all advertising internally, a risky venture for a company dependent on brand awareness and national media buys. (It had to back off its “Big O” campaign after Big O Tires complained.) And Wall Street analysts remain wary. Only two analysts follow the stock and both are from investment banks that do business with Overstock.

In a research report published in July, analyst Tom Underwood of Legg Mason Wood Walker rated the stock as a “hold,” roughly the equivalent of a grade of C in school. “Success is not only still unassured,” he said, “we can’t quantify potential financial results around the business with any accuracy.”

And then there’s the area of search engine ranking. Overstock does its own optimization and could use some improvement. In a recent Google search for “discount shopping,” Overstock didn’t even appear on the first page for sponsored or unsponsored links. (The sponsored links included Target and SmartBargains. Curiously, Connie Berg’s FlamingoWorld .com topped the unpaid list.) Because Overstock describes itself as selling “name-brands at clearance prices,” Revenue ran a search for “name-brands clearance prices.” Again, Overstock was a no-show, paid or unpaid.

‘Smitten’ Buyers

Some affiliate managers find that some of their best customers are their own affiliates. It makes sense given that affiliates want to support their merchants and earn a commission on their own purchases. But Overstock’s cultish shoppers have been known to turn that model around by becoming affiliates simply because they love shopping at Overstock.

That’s the case with an affiliate named Beverly C. Lucey, editor of the blog WomanOfACertainAgePage.com. She has affiliate links to Amazon because, as an educator she wants to encourage reading. She turns down other business ventures offered her – from manufacturers of Viagra, weight loss products and “anti-aging goop.” But she decided to provide a link on her site to Overstock.com. “They didn’t ask me to,” Lucey wrote in an e-mail interview. “I’ve been a happy customer for the last four years.”

Of course, she swoons, there was another factor: After hearing an NPR interview with Patrick Byrne, she became “smitten.”

Byrne seems to have that effect. “Everything he touches turns to gold,” gushes Stephens. And Marketing Vice President Kamille Twomey says, “He is an exciting and convincing man. ” I came in to talk to him and a few minutes later, I was working for him.”

Special Treatment

The company runs network-wide promotions with tiered bonuses, but it also brokers one-on-one deals with Web sites, letting affiliates sell, say, a Burberry scarf, for less than Overstock does. Many affiliates who Revenue interviewed said special deals were a great incentive.

“I call Overstock and Amazon the Masters of Promotion,” says Michael Conley of Amazing-Bargains.com, who has been working with Overstock since 2000. He also likes their dependable and cheap shipping, which is usually $2.95 whether users buy a book or a couch, and sometimes is free. The symbiosis should help around the holidays.

The holidays are critical to Overstock. “In 2003, half our sales were in the fourth quarter,” says Twomey. In the late summer, the company employed about 500 people. With seasonal help, that number will jump to 2,500, up almost 80 percent from the 1,400 working for Overstock last holiday season. Clearly, the company is preparing for sales of biblical proportions.

“We’ve been thinking about the holiday season since January,” says Byrne. “In past Novembers we finished the ark by wading in waist-deep water pounding nails in the rain. This year our ark will be complete before the first raindrop falls.”

Spoken like a true believer.

DIANE ANDERSON is managing editor of Revenue.