Startup Review

Newegg Case Study

written by Nisan Gabbay, posted on August 14th, 2006

Why profiled on Startup-Review.com

Newegg is a private company that has not yet exited, but has successfully built a strong online brand and shown impressive revenue growth since its founding. The revenue numbers basically speak for themselves: 2005 ~$1.3B, 2004 $980M, 2003 $526M. How does this compare to Amazon? Amazon’s trailing twelve months sales were $8.5B, so Newegg is roughly one-sixth the size! Even more impressive was that this growth was achieved without venture capital funding in the early days, only taking outside equity financing in late 2005 from Insight Venture Partners.

Interviews conducted: Howard Tong, Co-Founder and VP; Ryan Hinkle, VC investor at Insight Venture Partners

Key success factors

Site (and company) built with needs of core user in mind

Newegg’s success can largely be attributed to understanding and satisfying the needs of its core user demographic: the tech enthusiast that is comfortable with constructing or modifying their computer. When you visit the Newegg site, it is clear that the site was not designed for use by the average consumer. Newegg is a good example of an e-commerce site that has matched its product to the needs of its target demographic.

This customer-centric viewpoint can also be seen in Newegg’s approach to customer service. Newegg made the decision early on to make its logistics operations a core differentiator of the company. Internally managing inventory in its own warehouses enabled Newegg to meet the quick turnaround times demanded by its customers.

Created sense of community amongst customers

Although much has been made about the strength of online communities like MySpace and Facebook, Newegg has shown that community is also an important element to a pure-play e-commerce retailer. Newegg does a great job of engaging its customers through online discussion forums. If a customer needs help in modifying a computer or selecting a component, they can turn to a trusted resource – other Newegg customers like themselves. Successful offline retailers often create a shopping experience that engages its customers on a personal level; Newegg has been able to replicate such an experience online. In an industry with razor thin margins and intense price competition, customer loyalty and repeat purchasing is critical to financial success. Giving people the sense that they are part of a community - something warm and fuzzy - helps to drive repeat purchases and word of mouth marketing. A nice side benefit is a significant reduction in technical support calls.

Narrow initial product selection

In the early days Newegg was able to build a loyal customer base by being the premier provider of VGA (graphics) cards online. Newegg management purposefully started with a narrower product catalog to deliver the best value it could to the customer. Management was careful not to spread themselves too thin by offering too many products, preferring to build upon the successful foundation of VGA cards and expanding from there.

Management’s industry relationships

Newegg’s fantastic growth would have been hard to achieve from a standing start. Newegg’s founder had previous experience in a tangential market, which was important to secure relationships with key suppliers, particularly those based in Asia. Newegg was an offshoot business from the founder’s original company, which made custom assembled computers.

Launch Strategy

Newegg spent no money on external marketing in the early days, instead preferring to focus on the customer experience and relying on word of mouth marketing by its customers. Even as a $1B+ company, Newegg still spends less than 2% of its revenue on marketing. Newegg is a great example of an e-commerce company that was able to build a successful brand without spending money on branding. So how did they get the initial users? Newegg did a good job of SEO (search engine optimization), optimizing natural search rankings as best as possible. Newegg also focused on its rankings with the shopping comparison engines, places where many of its users start their searches for products. Other launch strategies previously mentioned: initial narrow product focus and build strong relationships with key vendors.

Exit Analysis

The e-commerce market has not seen many substantial exits in recent years relative to the hot online advertising market. Given that e-commerce growth continues to become a larger part of the overall retail market, are exits far behind? Perhaps the recent $477M acquisition of Provide Commerce by Liberty Media is a sign of things to come. The recent influence of Fox, Viacom, and Experian as acquirers in the online advertising market has made a big impact on the M&A market there, and we have yet to see any traditional retailers make big e-commerce acquisitions. E-commerce now accounts for ~3% of all US retails sales, while online advertising accounts for ~5% of the US ad market. Both markets are growing in the 20-30% range per year. My guess is that the e-commerce M&A market is about 18 months behind the online advertising market. Newegg will no doubt be an attractive acquisition target or IPO candidate when the market heats up.

Reference Articles

Below are a few well-written articles that cover the Newegg success story:

Winning Strategy – How Newegg.com Hatched into a $1 Billion Company (May 2005)

Newegg.com Hatches Growth With Tech-Savvy Customers (March 2006) – LA Business Journal (available on NewEgg site)

Where the Tech Buffs Shop (November 2005) – Business Week

If anyone has some other links with more insight into Newegg, please leave a comment below. Any other thoughts on the reasons for Newegg’s success?

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