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Case Study: Drugstore.com

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Posted June 30, 2003 By James Maguire     Feedback

The online pharmacy has learned a lot about e-commerce shopping behavior using its sophisticated customer tracking and analysis tools. It also uses these tools to accentuate a factor that's critical to maintaining the site's success.

At first glance, it appears that Drugstore.com faces a couple of major challenges in its efforts to attract customers.

First, its products aren't unique. Although it sells about 25,000 items, from toothpaste to aspirin to shampoo, most of them can be found at the local drugstore. "We sell commodities, and you can get them anywhere," says Ramer Holtan, Drugstore's customer retention manager. "We're competing with grocery stores and corner drugstores."

Second, the site's prices are competitive but not discount. So a tube of toothpaste is priced about the same on the site as it is at your local drugstore.

If Drugstore doesn't have unique products or compelling prices, how has it been able to not just survive but thrive? According to comScore Media Metrix, the site is the clear leader in the Retail Healthcare category, with 2.6 million unique visitors in March.

Online Advantage
"They've stayed in business because of the convenience factor," says Forrester analyst Carrie Johnson. "There's a group of people who would rather order almost everything from the Internet instead of having to go buy it."

While Drugstore's selection resembles that of a local drugstore, it's actually much wider, Johnson explains. They include low-end as well as high-end products, a combination of goods you really can't find in the offline world, because there's not enough shelf space.

"They'll carry Paul Mitchell shampoo, which you can only get in some salons," Johnson says. "While you're at it, you'll buy suntan lotion because you're going on vacation which you could certainly buy at the store, but as a convenience you throw it in your shopping cart.

According to Johnson, one could argue that Drugstore.com really is a specialty boutique combined with a traditional mass merchant drugstore.

Because Drugstore's prices aren't discount, they're probably going to have to let go of the very low end of the market, says IDC analyst Jonathan Gaw. "There is another segment that is less price sensitive and more concerned with ease of use making life simpler," he says. "They're pressed for time and have multiple pharmaceutical requirements to be fulfilled on a regular basis."

Also helping Drugstore is the company's partnership with Amazon. Even before Drugstore's IPO in 1999, Amazon held a major stake, and the healthcare site's sales partnership with the e-commerce superstore has proven to be the perfect medicine for reaching customers. Drugstore has survived "without spending an obscene amount of money," Johnson says.

Warehouse Of Data
A big part of the convenience that Drugstore's customers value so much comes from the site's comprehensive tracking and analysis tools. The software was developed in-house in the late 90s, though similar tracking programs are now available off the shelf.

"We capture every visit that comes to our site: who's visiting our site, how long they spend, what pages they see, every link they click," Drugstore's Holtan says. "Then there's the transaction-based information: what products they order, what promotions they used, the dates and times of their orders, where we shipped it."

At its most basic, Drugstore's tracking software knows whether a visitor is a new surfer or a repeat buyer, and displays messages accordingly. Repeat buyers are presented with a YourList display of previous purchases; with one click they can buy without hunting through the site. New visitors are presented with a free gift offer.

At a more advanced level, the tracking software allows Drugstore to send out 2 million individually customized e-mails per week. The software uses a template, and plugs in offers based on past customer purchases. Not all 2 million e-mails are completely different (there are only so many likely purchase combinations) but there are tens of thousands of different combinations.

"Drugstore items are one of the few categories where personalized e-mails really make sense because most of their items are replenishment or reorder items," Forrester's Johnson says. "Chances are you need reminding that you're about to run out and it's time to reorder. That's a sweet spot for these guys."

On alternate weeks, the software divides the mailing list into three to eight different segments, targeting past purchasers in categories like vitamins or hair care. As a third alternative the least personalized the site sends "blanket" e-mails with a special occasion theme. Recipients are targeted by gender, with the two groups receiving different offers.

"The more detailed the segmentation we use, the better the response," Holtan says, explaining that highly segmented e-mails enjoy a two to three times better conversion rate than blanket e-mails. And the YourList e-mails, which the customers themselves decide how often to receive, convert 1.5 times better than the most highly segmented e-mail.

"There's a fine line between spitting back to our customers stuff they've already purchased and trying to show them products they don't already know about," Holtan says. "We don't use this [personalization] technology all the time. We have an affinity engine that predicts, based on those [past purchase] products and categories, other products and categories customers might be interested in."

IDC's Gaw observes that, "The nice thing about personalization for Drugstore is that when you're buying something from them, chances are you're buying it for yourself. So personalization probably works better at Drugstore than it does for, say, Amazon. At Amazon, they have a harder time knowing if you're buying something for yourself or as a gift."

Tracking Consumer Behavior
As much as Drugstore's tracking software personalizes customer e-mails, it also helps the site study consumer behavior. "The fun part for me is when we take random customers and show them different content on the site. So you have a true A-B testing of site content," Holtan says.

"Maybe on a given day, you have half your traffic seeing a showcase that advertises a free gift with purchase. You have the other half seeing, in the exact same place, a showcase that advertises free shipping."

Drugstore has found that free shipping, which it offers with $49 purchase, is the Holy Grail of online commerce, a finding that Forrester's Johnson concurs with: "Free shipping is the number one promotion that consumers love according to all our surveys," she says.

The site's use of its tracking tools is highly detailed. "If there's a link that's not being used much, and we feel we have a strong message, we'll do things to make it stand it out more," Holtan says. "We'll make it bold or change the background color. It's amazing the way you can change the behavior of visitors by making small changes to the page or small graphic changes."

His site analysis also tells him, for example, that text links are more effective than links attached to pictures. "The text links are better because they're more informative, they better define what a customer expects to find," Holtan says.

Outlasting the Competition
All of Drugstore's personalization wouldn't mean much without one essential fact: Unlike the vast horde of online pharmaceutical e-tailers peddling wholesale Viagra and quick weight loss pills with spam, Drugstore is a licensed pharmacy. The site is an accredited Verified Internet Pharmacy Practices Site by the National Boards of Pharmacy.

About 6,000 of Drugstore's products are prescription drugs, dispensed from the company's huge, fully automated warehouse in Swedesboro, New Jersey. A team of licensed pharmacists performs a series of checks to ensure that online prescription fulfillment isn't abused. (And Holtan stresses that, due to federal privacy legislation, Drugstore's marketing is not directed at its pharmacy customers, only its over-the-counter customers.)

The ranks of licensed Internet pharmacies have thinned considerably since Drugstore's launch, analysts agree. "It's been a difficult road for Drugstore, but they've outlasted all their competitors," IDC's Gaw says.

Though it faces less competition, Drugstore has yet to make a profit. The company forecasts EBITDA profitability by the end of 2003, with GAAP profitability (that is, a true bottom line profit) "to follow shortly," says Drugstore communications director Walter Connor. He says that all the metrics for the company are headed in the right direction; for example, the cost to acquire a new customer has fallen from $109 in 2000 to $16 today, he notes.

And Gaw points out that the company has cash reserves. "In December they had about $60 million cash on hand. So, if they're losing $6 million a quarter, they've got a little bit of time."

The company expects additional revenue from licensing its business infrastructure: "Licensing out the technology for others to use, or creating partnerships with people who don't have an easy or cheap way to create or expand their online presence," Connor explains.

Drugstore's most impressive business success may be that it has remained in business through the Internet's turbulent life cycles, says Aberdeen Group analyst Kent Allen. "The value is that they've survived, and right now surviving is pretty positive for many people."

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