Final Ferrit: The business economics

Part three of  a four part take on the end of Ferrit. We started with Market Space, then  site idea and execution, and governance failure will finish things off.

The economics

The business result had to be razor thin commissions, if any. The site depended upon the larger stores providing volume of products, which they really had no incentive to do. There was also real internal cost to those businesses of providing the feeds to Ferrit, and the power of their brands were also being diluted. It just wasn’t a good deal for retailers, and the resulting revenue for Ferrit was never going to be significant.

I (wildly) estimate that the average commission paid by retailers was 2-4% – that’s a guess really, and it is a critical number that I would dearly like to hear from an insider.

The shonky revenue model was overlaid with a cost structure that was inexcusably large. We all saw how much money that Ferrit blew on often appalling advertising, but what didn’t really come out was that that spend was only a third of total spend. The development and operations/sales spends were also inordinately high, and also fraught with error.

Apparently a lot (or substantially all? – need sources) of the development and marketing was outsourced, which increases costs substantially and reduces control. Telecom would have paid top dollars for top firms, but clearly failed to manage them well, and gave them a technology burden that was just too much to handle. A lot of people made good money from the Ferrit debacle, but they are not necessarily proud of their involvement.

Meanwhile the end game team of 24 employees and another 13 contractors was huge – and I suspect that most of these were in sales/operations.

All of this was simply unsustainable on top of a revenue model that never had any industry credibility.

At the beginning of 2007 Ralph Brayham said that Telecom had spent $24m to date and was going to spend another $12m in the next financial year. It’s now two years later, and so, if nothing changed, I would estimate Ferrit’s total spend in the range of $40-60m. Others have estimated more – around $70m.

The overall economics of Ferrit was pretty appalling. Some numbers flying around twitter and here guesstimate that Ferrit was unlikely to have made more that $500,000 in gross profit throughout its existence, and was in fact more likely to have made substantially less than that.

If we estimate that Ferrit spent $70m then we see that the return on that investment was about 0.7% – a pathetic number. My own estimate of all-time revenues is between $200,000 to $400,000, or a return of 0.28% – 0.56% of a $70m investment. That’s a very rough estimate, and again I would be fascinated to see actual facts.

About Lance Wiggs

@lancewiggs
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2 Responses to Final Ferrit: The business economics

  1. Chris says:

    There’s also a tinge of arrogance, or stubbornness involved. The whole industry panned Ferrit from day one, and it wasn’t because it was Telecom – it was because Telecom spent an obscene amount of money to put together a very average site. The NZ industry were very vocal in dissecting the shortcomings of Ferrit. It could be said that Telecom had it easy – they had money to burn and a willing and knowledgeable choir of industry veterans telling them exactly what was wrong with their business model and execution and how to fix it. All Telecom needed to do was remove the lawyers of bloat and get someone in there who knows the ingredients to a successful online operation. But no, Telecom in their arrogance clearly ignored everything anybody was saying and continued on, determined to put away the $3 commissions until one day it added up to $70m. Someone at Telecom was obviously making it a personal vendetta to prove everybody wrong and continue signing off on appalling advertising and keep spending money in the hope that one day New Zealander’s would catch on and realise that Ferrit was in fact a godsend and how silly we have all been for not spending our precious time there. The sad part is that statistics show people were in fact spending some time there, time spent on site was quite high – it’s just a shame that in the $70m spent somebody forgot to commission some A/B testing and work out how to convert some of these visitors into buyers.

    But no no, somebody at Telecom read that if you continuously pound people with traditional media advertising that you will implant your awful, dodgy sounding brand into the mind of the consumer. Then said consumer will find themselves subconsciously wandering over to Ferrit, buying lots of stuff and telling all their friends what a fantastic site and wow it was all so easy. Alternatively, you could study and learn from NZ’s best executed (and one of the worlds best might I add) online businesses and take a leaf out of their book on how to build a brand and a business. When the advertising didn’t work Telecom obviously reconvened and came to the conclusion that people just weren’t getting it and understanding what Ferrit was, so out came new TV ads with some weirdo and half a face repeating the point that Ferrit was a shopping mall and had many retailers under one roof. What year is it, 1997? Trust me Telecom – people not knowing what Ferrit was was not the problem. People knew all too well what it was and it was that public indifference to it that cut off your life support – you just simply weren’t to get another chance no matter how many small improvements you made.

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