Case Study: How Pets.com Failed Product Development

By NICK COSTER

If we reflect back on the noughties (2000-2009) through the lens of today, we’ll see plenty of high-profile cases where businesses that were built on high expectations failed to deliver with their product.

Many of these are cases where products were developed with little or no understanding of the actual market demand for them. In other instances, it was a case of growing too big too soon. For some products, the ideas were just ahead of their time – in a bad way.

For this case study, we’re taking a closer look at a much-publicised disaster of the dot-com era – Pets.com.

Build It And They Will Come… Won’t They?

An all-too-common error at all levels of business – from small garage inventors to mega-corporations – is the tendency to create products and services in a state of isolation and then task marketing and sales teams to “go out and find a market”.

This would be like gluing a toaster onto a skateboard, calling it the ‘Roadtoaster 5000’, and then asking a friend to find a few thousand people who’d like to buy it.

The vast majority of successful products are developed after undertaking a market analysis.

A market analysis should answer the following questions:

  • Are there any needs or problems that people are facing?
  • How important are these needs?
  • How big is the target market?
  • Will people actually pay for something that meets these needs?
  • Are any competitors already serving these needs?
  • If so, what would it take to offer a more compelling proposition?

Throw in a bit of basic segmentation, targeting and positioning, and you would then have the beginnings of a business case to look into developing a product to meet those needs. That in itself is a multi-step process because it may not be financially viable or even technically possible to meet those needs.

It’ll Make Squillions

Launched in August 1998, Pets.com was created to sell pet food and accessories via the internet. The premise was that you could buy online and ‘cut out the middleman’ and take advantage of Pets.com’s ‘strong buying power’.

Users of the site could browse through different categories, choose products they like and have them conveniently delivered to their home. Think Amazon’s original premise, but for pet products instead of books.

Interesting concept, right?

Sure, but Pets.com did no market research before launching, and made the following assumptions:

  • That pet owners would want to buy online and knew how to (remember, this was 1998)
  • That selling pet products alone was compelling enough (as opposed to say an online supermarket that could sell pet supplies and other groceries)
  • That people wanted to have such pet supplies delivered and were happy to wait a few days, rather than going to the shops and getting them now

But market research and validation of ideas seemed to be unimportant back in the heady early days of the internet. Within a year of launch, Pets.com had been acquired by venture capital firm Hummer Winblad and industry executive Julie Wainright. They even got Amazon.com on board as an investor.

Here’s The Product – Start Marketing Now!

With cash in the bank and fire in their bellies, the Pets.com owners spent big in marketing communications and developed a brand around a sock puppet character that was regarded as either hugely entertaining or incredibly irritating.

They then poured cash into a massive advertising campaign, launched in January 2000 with a Superbowl TV commercial with a media price tag of $1.2 million. This was followed by intense online, print, television and radio advertising as well as a massive publicity push that saw their sock puppet mascot make an appearance in the annual Macy’s Thanksgiving Parade in New York City.

Awareness skyrocketed. Everyone was talking about Pets.com. Their website was hit with traffic as people began to place orders. A month later, Pets.com went out and raised over $80 million dollars in its IPO.

There must have been a lot of back-patting and happy Friday afternoon drinks as Pets.com was on a roll. Surely the money would start pouring in?

A Flawed Business Model

Pets.com’s owners soon noticed some issues. They discovered that demand wasn’t anywhere near as high as they had estimated. They may have been perplexed – why wasn’t ‘Joe Sixpack in Suburbia’ placing orders?

Didn’t he realise how awesome Pets.com was?

Pets.com had obviously not heard of the simple AIDA model.

chart

Their massive marketing campaign certainly generated a lot of Awareness and some Interest, but it wasn’t translating into sufficient Desire – and certainly not enough Action. Not enough people were ordering products, and those that did were only ordering small amounts.

Had Pets.com done enough research and investigation they could have known this in advance.

Pets.com didn’t offer a compelling enough value proposition. There was simply no market need or desire for home-delivered pet food at that point in time.

Whilst this meant revenues were much lower than expected, it also meant that costs were higher than necessary. Pets.com had invested in massive warehousing facilities to store all the dog food they figured they’d sell. This was a fixed cost that could not be avoided, and it made a serious dent in their sales profitability.

To make things worse, Pets.com went so far as to offer discounted and even free delivery – which given the physical size and weight of the product was hugely expensive.

Sales did grow as a result of aggressive pricing and the massive marketing spend, but this only meant that Pets.com was losing money on most sales. The model was unsustainable.

It was argued that this was just the nature of building a new business, but even a fifth-grader running a lemonade stand knows you need to charge more than you pay – otherwise, you won’t be in business very long.

RIP Pets.com

In November 2000, Pets.com folded after having burned through $300 million in less than two years. Over 300 people lost their jobs, and the site was shut down.

CEO Julie Wainright said in a statement that “It is well known that this is a very, very difficult environment for business-to-consumer Internet companies. With no better offers and avenues effectively exhausted, we felt that the best option was an orderly wind-down with the objective to try to return something back to the shareholders.”

While Pets.com was one of the more high-profile casualties of the dot-com bubble, it was by no mean an isolated occurrence.

Sadly, Pets.com’s entire business model was flawed from the beginning.

What Would A Product Manager Do Differently Today?

The market conditions have changed dramatically since Pets.com’s demise.

In the 2020s we have many successful online specialist pet supply stores, with online shopping having grown a hundredfold since 2000, and similar growth in the market appetite for specialist pet goods. Along with a 1.5x increase in pet ownership, this business model would now be in a market that works for it.

So while in some big-picture ways Pets.com was actually ahead of its time, it’s also sadly an indicator that its failure was due to an inability to accurately read the market of the day.

When products are developed without preliminary research, analysis or investigation to see if there is any real need or demand, we’ll inevitably see a waste of money, time and effort.

But it doesn’t have to be this way.

The lesson of the story is simple:

Don’t build a product and then look for a market to sell it into. Look for a valid market requirement or need first. Then you can go about developing a product.

About The Author

Nick Coster

Chief Operating Officer - Brainmates

Nick has over 20 years of experience as a product management practitioner, and has been teaching other product professionals since 2007 – passing on his deep knowledge and experience. Nick regularly speaks at global industry events and conferences, and is a highly-regarded thought-leader and author in modern product management practices.

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