Pets.com
The dotcom that sold pet supplies online, famous for its sock-puppet mascot
- Founded
- 1998
- Closed
- 2000
- Lifespan
- 2 years
- Total funding
- $93 million
- Country
- United States
- City
- San Francisco
- Sector
- E-commerce
- Founders
- Greg McLemore, Eva Woodsmall
- Investors
- Amazon, Hummer Winblad Venture Partners, Bowman Capital Management
- At its peak
- Around 570,000 customers before closure (2000)
- Cause of closure
- Business model failed
What did it do?
Pets.com was a San Francisco-based online shop selling pet supplies such as food, litter and toys directly to consumers. Thanks to its sock-puppet mascot, which appeared in a Super Bowl advert and in the 1999 Macy's Thanksgiving Day Parade, it became one of the best-known internet brands of its day.
Why did it shut down?
The company sold products below cost; even in its second financial year, sales came in about 27 per cent below cost. In a sector with profit margins of 2 to 4 per cent, absorbing the shipping cost of heavy bags of food and litter turned almost every sale into a loss. In its first financial year it spent $11.8 million on advertising against revenue of $619,000, and no independent market research was carried out before launch. The more it sold, the more it lost, and PetSmart's takeover offer came in below the company's net cash value. Unable to secure enough funding, Pets.com stopped taking orders in November 2000 and went into liquidation.
The story
In January 2000, Super Bowl viewers were introduced to a sock puppet holding a microphone, in an advert that cost the company $1.2 million. The puppet was the mascot of San Francisco-based Pets.com, and it quickly became a nationally recognised figure. The Pets.com domain had been bought in 1994 by the entrepreneur Greg McLemore; the site launched in November 1998, and Julie Wainwright took over as head of the company in early 1999. Amazon took a 54 per cent majority stake in the first funding round, investing $10.5 million in March 1999 alongside Hummer Winblad and Bowman Capital.
The marketing machine ran at full throttle. The puppet appeared on Good Morning America, gave an interview to People magazine and floated through the 1999 Macy's Thanksgiving Day Parade as a giant balloon. The company went public on Nasdaq in February 2000, raising $82.5 million, and in June 2000 it bought its biggest online rival, Petstore.com, for $10.6 million. Before it closed, it had reached around 570,000 customers.
But the equation behind the sales was broken from the start. In its first financial year, from February to September 1999, the company earned $619,000 in revenue and spent $11.8 million on advertising. In a sector where profit margins hovered between 2 and 4 per cent, covering the shipping of heavy bags of food and cat litter turned almost every sale into a loss. In the second financial year products were still being sold about 27 per cent below cost; the more sales grew, the bigger the losses became. Not even an independent market study had been carried out before launch.
Attempts to sell the company came to nothing; PetSmart's offer was rejected because it was below the company's net cash value. On 7 November 2000 Pets.com announced that it would stop taking orders two days later and lay off 255 of its 320 employees. The shares, priced at $11 at the IPO, had fallen to 19 cents that day. The domain and brands were sold to PetSmart in December 2000, and the liquidation was completed in January 2001.
Pets.com became one of the starkest examples of awareness not equalling profitability. The fact that the same idea later succeeded with Chewy suggests the problem lay not in selling pet supplies online but in a pricing and logistics set-up that lost money on every order.
Lessons for founders
- Work out the contribution margin on every order before setting an advertising budget; growing with negative unit economics only grows the losses.
- With heavy, low-margin products, do not promise free shipping until you have verified the logistics cost per order.
- Before launch, use a small market test to measure how much customers will actually pay to shop online.
- Do not mistake brand awareness for profitable demand; test advertising spend against repeat-customer data.
Sources
- Pets.com (Wikipedia)
- TECHNOLOGY; Pets.com, Sock Puppet's Home, Will Close (The New York Times, 2000-11-08)
- Pets.com raises $82.5 million in IPO (CNET, 2000-02-10)
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