Many consumer Internet companies leverage the scale of the internet to offer cost savings over local brick-and-mortar businesses. [1] StepUp Commerce instead uses the interactivity of the Internet to help local businesses compete against internet companies and big-box retailers. Likening itself to an internet-era yellow pages, StepUp helps local retail businesses increase visibility and advertise current inventory to web shoppers. StepUp, which was founded in 2004 and acquired by Intuit in September 2006 for $60M, charges retailers an annual fee to place their businesses and inventory with leading search engines.

StepUp was founded based on the experience of Kendall Fargo at Handspring, where he helped promote the original Treo smartphone. He explained that when the product launched internet marketing worked well to drive interest, but many customers wanted to see and hold it before buying. Many store locations sold out of inventory quickly while others had units available, but Handspring had no way to determine where the inventory existed in real-time.

StepUp was formed in early 2004 out of this experience and developed into an online resource for local retailers- with or without internet storefronts- not only to advertise their presence online, but to highlight inventory as well. Consumer trends indicate that many consumers do product research online but actually purchase offline. StepUp helps match consumers with offline purchasing opportunities.

Interview conducted: Kendall Fargo, founder and CEO

Key Success Factors

Subscription model was the key to local commerce search

StepUp derived its revenue from fees paid by retailers to include their inventory listings. Some of its competitors relied instead on site advertising to generate revenue, only to find that the local search market had not evolved sufficiently to support the advertising model. Anecdotal evidence suggests that in the 2004-2006 time period there were not enough consumers looking for local shopping opportunities online to support high clickthrough and PPC rates. StepUp spent time and resources targeting retailers at tradeshows and elsewhere, and this effort paid off with revenue.

A parallel point is that StepUp never maintained a destination site (except a limited one for demonstration purposes). Kendall told me that as a somewhat late entrant to the space, the company saw limited opportunity to differentiate itself in that regard and instead focused on back-end integration of retailer point-of-sale tools with major search engines and shopping portals. The retailer subscription revenue model allowed this approach in a way that advertising revenue would not.

Narrow focus on solving a single, large problem

Local retailers put under pressure by chain stores and online retailers could easily understand the value of an online presence, especially one that could help consumers find offline sources for specific goods they wanted to buy. To differentiate itself from other local search businesses, StepUp focused on inventory management- not just telling people where a store is, but what they can find there.

Kendall told me that the company considered expanding to include other local businesses such as restaurants and service companies, but decided that the heart of its business was its ability to manage and promote retail inventory. The company viewed this market as large enough, and the need great enough, to support a profitable enterprise without expanding into different areas.

Also noteworthy is that StepUp works by integrating with customers’ existing point-of-sale systems, making StepUp’s product offering not only valuable, but relatively painless for retailers to use.

Bridging online and offline applications

I find it fascinating that StepUp was founded as an online search-based business, but was acquired by a company best known for its desktop application. Intuit announced the StepUp acquisition simultaneously with an announcement of a Google alliance to promote small businesses through Google Maps, AdWords and QuickBooks’ new Product Listing Service. StepUp helped form a link between QuickBooks’ offline inventory management function and Google’s local business listings. The sequence of events surrounding StepUp’s work with Intuit suggests that StepUp was acquired when the value of that “bridge” became apparent to Intuit.

Launch strategy and marketing

At launch, StepUp faced the classic startup problem of needing traffic to attract customers, and needing customers to generate traffic. Kendall reported that the company approached this problem initially by partnering with chain store retailers such as Lowe’s, Circuit City and Best Buy. This allowed them to immediately populate search results with a substantial amount of inventory.

The chain store focus came naturally from Kendall’s experience at Handspring and the company developed further plans to pursue that market, but ultimately decided that the real value was in serving the small, local retailer market. Chain stores have IT departments and the ability to create their own product feeds. While the chains found StepUp’s system useful, StepUp’s added value was not as great as for local retailers with no IT support. I suspect that chains would have required customized versions of StepUp’s product as well, and pursuing small retailers let the company sell an of-the-shelf product in higher volumes with less engineering time per sale.

This focus on local markets paid off when Google approached StepUp in late 2004 as it was developing its own local search presence. Google integration gave StepUp a big boost in traffic and most likely facilitated the eventual sale to Intuit.

Exit analysis

Intuit first sought to include StepUp’s functionality as an add-on to its newest version, QuickBooks 2007. Intuit then decided to integrate StepUp directly into the product, and not long thereafter made an offer to acquire the company entirely. As noted, I believe that Intuit ultimately came to view StepUp as a pre-built tool it could use to help QuickBooks users get not only their names and addresses, but also their inventory data into Google (and other) search results.

Kendall told me that the offer was unexpected and unsolicited. The company had intended to remain independent for at least “another year”, but not indefinitely. The Board considered the offer and decided that the opportunities to develop an additional channel through QuickBooks integration as well as the economics of the transaction simply made sense to everyone. As a result, the company agreed to be acquired without shopping for competitive bids.

SEC filings and StepUp’s website show that the company raised two rounds of financing, and VentureBeat explains that the company raised less than $10M total. A $60M all-cash return in less than two years from formation and less than one year from the December 2005 Series B financing is a superb result.

Food for thought

StepUp located a specific pain point local retailers felt as a result of the internet boom and the rise of big-box chain stores- lack of visibility to prospective customers- and figured out how to help retailers ease that pain. Chain stores frequently let consumers see which items are available for local pickup. StepUp let smaller retailers show their inventory as well. The fact that it let them do so without having to build a web presence and at rates that compared favorably with static print advertising (StepUp’s website points out that a year’s subscription costs the same as a yellow pages ad) clinched the deal.

Another way of looking at this is that StepUp figured out how to address a nascent market profitably. The local search space is still relatively new. Merchants and consumers alike still haven’t figured out how best to use local search data. StepUp’s business model helped retailers get their wares online in a way that didn’t depend on specific consumer behavior- i.e. clickthrough to advertisers’ links. It is a variation on the chicken-and-egg problem: content drives consumer behavior, which leads to more content. StepUp provided the content in a way that didn’t first require high levels of consumer demand.

The other important point is that you can’t always predict where opportunities will come from. StepUp was and is an online search tool and Intuit wouldn’t come to many minds as a natural partner for such a business, but the pieces fell into place in such a way that StepUp was able to fill an important role in QuickBooks’ online expansion.

References and further reading

[2] The Kelsey Group
Article describing prevalence of online research leading to offline purchases

[3] VentureBeat
Description of acquisition

[4] Clickz
Early discussion of business model