For Internet printer, path to profit was free
At a meeting in 1999, Gwyn Jones pitched what he thought was a winning idea to the CEO of his Internet printing company: Why not offer first-time customers a box of 250 business cards, custom-printed just for them? And what if the business cards were free?
Jones and Robert Keane, CEO of Lexington-based VistaPrint Ltd., thought that if the deal could lure enough customers to their printing service, the volume would eventually drive their printing costs lower than any competitor's. While giving away business cards would cost the company about $20 an order at first (not including shipping, paid by the customer), if they could get to hundreds of thousands of orders, the cost would drop to about a buck or two.
"If the free offer could get customers to come," says Jones, a former VistaPrint vice president, "we'd get big and eclipse the other guys trying to do Internet-based printing start-ups."
It was exactly the same lose-money-on-every-order-and-make-it-up-on-volume strategy that torpedoed hundreds of dot-coms. Yet in VistaPrint's case, giving something away for nothing built a profitable company that today has 1,600 employees and is expected to generate $500 million in revenue this year. And Keane, who has expanded beyond business cards and letterhead into digital services like website hosting and e-mail marketing, now talks about trying to follow the path of great business growth stories like Staples, FedEx, and Intuit.
One of the most anticipated business books of the year is "Free: The Future of a Radical Price," by Wired Magazine editor Chris Anderson. Out next month, it delves into some of the ways companies have built businesses around giving their products away. (Google, which sells billions of dollars of advertising around its many free Web-based services, is one example.)
So how did "freeconomics" - a term coined by Anderson - work for VistaPrint? Keane admits that he was concerned about the cost of setting up the Web servers that would enable customers to design their own cards online, and the losses the company would incur as it tried to drive production costs down. "If we sold 1 million orders for free, at a $20 loss on each one," Keane writes via e-mail, "we would've been out $20 million."
That was money the company didn't have at the time, but Keane was confident that given the wads of cash practically spilling out of investors' pockets in the late 1990s, he wouldn't have trouble raising enough money to survive.
It was a miscalculation that nearly killed VistaPrint. A promised round of venture capital evaporated after the Nasdaq crash of April 2000, even though Keane had already signed a term sheet with the investors. He managed to scrape together a $10 million bridge loan, but the company shrank from 50 employees to 20 in order to reach profitability in mid-2001. In 2003, the company got some breathing room when it received $30 million in funding from Highland Capital Partners, which coincidentally was located just across a parking lot from VistaPrint's Lexington offices.
Several factors made the free business cards so effective for the company. First, many customers chose more expensive options (nicer paper, raised printing) for their cards, and they were willing to pay extra. Since the website stores their designs, people tended to reorder cards from VistaPrint once they ran out - and reorders aren't free. VistaPrint also offered other products that customers could add to their order, from pens to rubber stamps to hats to signage. Finally, on the back of every free business card is the text "Business cards are free at VistaPrint.com." Today, there are more than 4 billion of those little wallet-borne viral advertisements in circulation.
VistaPrint now runs two large printing plants, in Canada and the Netherlands, which crank out 44,000 custom orders every day. (And when VistaPrint went public in 2005, it became one of Highland's most successful investments ever. Last week, VistaPrint's stock was trading about 230 percent higher than its initial offering price.)
Perhaps the biggest mistake the company has made, in terms of producing negative buzz, is pushing a $14.95-a-month "membership rewards" program on its customers as part of their checkout process. VistaPrint receives a referral fee from the company that runs the program, which is pure profit. (On the first page of Google results when you search for "VistaPrint" is a consumer site that has collected dozens of complaints about the program's recurring charges.) Wisely, Keane seems to be slowly backing away from the rewards program.
In the 10 years since it began offering free business cards, VistaPrint has come to dominate online printing services - and there's still plenty of room to grow. Cowen and Co. analyst Jim Friedland estimates that small- and medium-sized businesses spend about $25 billion on printing annually in North America and Europe, and that VistaPrint has only captured 2 percent of that market so far.
"We think it is a category-killer in the space," Friedland writes via e-mail, noting that behemoths like Hewlett-Packard and Kodak have both tried to compete with VistaPrint - unsuccessfully.
Keane says that today he sees more growth potential in Europe and Asia. As of next month, he'll be based in Paris (where the company was founded in 1995, and where Keane has always spent a chunk of his time). That office will then become the company's official headquarters.
"Being in Europe enables us to touch the US and Asian time zones during the workday," he says. "Asia is a single-digit percentage of our business today, but it is growing more than 100 percent a year." Keane says he expects that the company's Lexington facility, which houses software development, North American marketing, finance, and other activities, will continue to add employees - and that aside from his own relocation, the designation of Paris as the new headquarters won't have much of an impact.
Will we one day mention VistaPrint in the same breath as the "transformational" companies Keane admires, from Dell to Staples to Starbucks, which changed their corner of the world in some significant way?
I suggested to Keane that each of those companies have built high-profile brands by spending millions on campaigns that targeted consumers, splashed across billboards, radio, magazines, and Super Bowl ads.
His answer? "To us, free business cards are better than a Super Bowl ad."
Scott Kirsner can be reached at kirsner@pobox.com. 