How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne (Part 6)

SM: There is another nuance which is very relevant in your business, which is organic search. Organic search remains relatively unleveraged. What has been your experience with that?

PB: It is a great area if you can get it right. The first people who seemed to get it right were fringe buyers such as porn sites or small retailers. Small retailers have figured out some of the techniques of natural search. Amazon got very good at it. In the early part of the decade they had slowed to 9% growth. They suddenly had a big kick and were back to 30% to 40% growth.

SM: Was natural search a big customer acquisition source for you?

PB: No. We are pretty good at it. There are articles out there that mention us as an example. However, Amazon is still very far ahead of us. To be honest, it does not work alone. It works hand in hand with a brand. You have to have a brand that has gotten around via word of mouth. When people do natural search, the bulk of the traffic goes to the top two to three results. If you are not on the first two pages it does nothing for you.

SM: In terms of your inventory categorization, it seems that there would be specialty online retailers in each category who compete against you. How do you compete with specialty sites like Blue Nile in jewelry?

PB: In general I will say that we compete against specialty shops by not focusing on carrying everything, but what we do have we offer for less. We will sell it for less money than you will find anywhere else. We think that 90% of our product is the lowest price available online. We have a whole team of people testing and measuring our prices.

Blue Nile is a special case. Their average price point is around $5,500. We compete with them more in the lower end of their spectrum at the $1,000 spectrum. In jewelry we focus on very good sourcing. We have created a supply chain that is focused, and we squeezed a lot of the cost out of it. That makes us competitive.

SM: What is the role of vertical search engines and comparative shopping engines in your life cycle?

PB: We have a fair bit of traffic from comparative shopping engines. I like those engines. In a perfectly commoditized market, the low-cost operator is going to clean up. I think that is us. In our experience comparative engines do not give the highest quality customers, but they do give a medium-quality customer. Generally the people doing their shopping through those engines are not loyal to Overstock.com. When they go online to shop, they are loyal to their comparative shopping engine and just take the best deal they can find. The bottom line for us is that they provide a lot of customers and are very good at giving us volume.

This segment is part 6 in the series : How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne
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