How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne (Part 5)

SM: When did you first see significant decline in your growth?

PB: Our growth slowed dramatically in 2006 and remained that way in 2007. We lost a lot of money those years. It took us a little while to figure out that it was not just computer malfunctions.

SM: Can you compare your methods for getting traffic to your site in 1999 versus 2005?

PB: Early on, all we did to get traffic was advertise online. We spent 100% of our advertising revenue online.

SM: Was that search or display marketing?

PB: Display marketing. We had deals with MSN, Yahoo!, and AOL. We were among the first to the game for search marketing. We figured it out early and hit it hard, but we were not doing any branding. We also did a lot of email marketing. We were early to that trend as well.

In the middle of 2003, we switched and started doing television. Since then a significant part of our budget has been our television, radio, and print advertising. A fair amount has been spent on the branding side.

SM: Do you believe that was a good switch? It seems as though your earlier strategy was a much more cost effective way to acquire new customers.

PB: When we went public, we thought all we would ever do was online. We laughed at people who did offline. We have since found ways to do offline. We found ways to do TV advertising and measure it. We developed tricks of measuring offline advertising. That led us to verify that there are ways to pull off offline advertising that do work.

Stormy Simon developed a wonderful TV campaign which talked about discovering the secret of the ‘Big O’. That was a very catchy campaign and was very effective for us financially. The timing for that was good. Many other companies had been overlooking online advertising, and in 2003 and 2004 they realized their mistake. They came online and a lot of the arbitrage that had been there for us was squeezed out.

SM: The cost of keywords had gotten really high.

PB: Keywords went very high. MSN makes an interesting argument that the cost of keywords has gotten very high. Suppose someone was advertising beer and they had TV, radio, magazines, and a sign at the bar itself. People go into the bar and order that brand of beer, an action which someone observes. That observer could say, “That sign really sells a lot of that brand of beer,” which would illustrate their misunderstanding of the relationships. The real selling of the beer was all the other times it hit the customer in the head with TV and radio.

MSN was making that argument about search marketing a year ago. You can measure it very well. You can measure the return. It then becomes too easy to attribute all the sells to search marketing. Maybe the selling is actually being done by a combination of radio, TV, and display advertising. Some people can say that MSN is just jealous of Google. We have actually tried to quantify that argument. To the extent that we can quantify it, there is something to it. The actual sell does not just take place at the search engine.

This segment is part 5 in the series : How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne
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