MARKETING MONDAYS: Overstock's Patrick Byrne Explains How He Turned A Bankrupt Surplus Goods Vendor Into A $1 Billion Business

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Patrick Byrne overstock.com

Publicly-traded Overstock.com has 1,500 employees; last year it raked in $1 billion in sales.

Overstock is very successful now, but it was created from the carcass of a company that died. 

Back in 1999, now-CEO Patrick Byrne bought the majority share in D2: Discount Direct, a company that went bankrupt.

D2 tapped into an ultra un-sexy industry — flea markets. But Byrne and his partners saw value in bringing that heavily discounted sales model online.

Byrne (who formerly worked under Warren Buffet and also trained to become a professional boxer) spoke with us about how he made selling stores’ leftovers a billion-dollar business, the marketing strategies that have made Overstock an overwhelming success, and why he’s toying with a major rebranding to O.co.

I read you wanted to be a professional boxer. How'd you get from there to CEO?

'I was boxing while writing my PhD dissertation. I needed to break up my days, so my motto was half the day is thought, half the day is fought.

'I was always involved in small, entrepreneurial things as a teenager. I also worked on Wall Street for a year to learn the game.

'Then I went to work for Mr. Buffett for a couple of years. After that I retired. I was going to take life easy and do some teaching. Then a business package came along about the flea market industry and the possibility of going online with it.

'I thought, 'I'll un-retire and do this for about 6 months, then get back to my hiking and fishing. It's Al Pacino in Godfather . Every time I start to get out, they suck me back in.'

Overstock was formerly a bankrupt company, D2: Discount Direct, that you bought, gutted, and transformed. What was that process like?

'That company was in the flea market industry. The day we acquired D2 it went bankrupt. Everyone was being laid off, so we stepped in, bought a majority stake and said, 'Let's take the infrastructure and build a transactional website.

'It took about 6 months to take the carcass of that company, re-build it, and re-launch it as Overstock.'

What was it you saw in the dead company that had potential?

How are you getting all of the discounted inventory for Overstock?

'The original business model was to have a dozen jobbers supplying the products.

'Then it progressed into two other phases. First, the dot-com bust was really good for business. It happened six months after we launched Overstock, and we were able to liquidate a bunch of dot-com inventory, which really got us momentum.

'Secondly, we started doing so much business with jobbers that we changed the model. Instead of us buying the products and them shipping everything here, we opened our database so they could post products on the site in a way that was indistinguishable to the consumer.

'Overstock handles the credit card, returns, and customer service. Each time we get an order, we send it to the jobbers who then ship it. That 'partner program' has become 80% of our business.

'It all looks like Overstock, but really the suppliers are scattered all over the country. We do have a million square feet of warehouse in Salt Lake City with a lot of items, but most come from drop shippers across the country. We homogenize the front end for the consumer. As far as their concerned, they're just getting it from Overstock.'

Was there a moment when you realised Overstock was going to work?

'Yes, I would say it was just the amazing growth we had. We were able to grow from $2 million to $70 million to $115 million to $200 million.

'The fact that we were getting so much consumer adoption that quickly made think that we had built a better mousetrap, and it was just a matter of fine-tuning it.'

Overstock's shipping is notoriously cheap. Is the $1 shipping a marketing strategy?

How does Club O fit into Overstock's marketing strategy?

When most people think of Overstock, they think of discounts but not cheap products. How have you taken unwanted inventory and spun that into a sexier business?

What's with O.co? Is Overstock rebranding?

'O.co is a shortcut to Overstock.com, with a different logo and layout. It has become our international name too.

'In television ads, we've introduced it as a shortcut to our domestic site, and if you type it in, you get free shipping. The percentage of people who are typing it in is going up substantially, so you might see a new brand emerge. Or, you might see a brand morph from Overstock to O.co depending on how receptive the public is to it.'

'O.co is more consistent with how we're trying to brand ourselves now, as a savings engine. It's the simplest way to explain what we do.'

How does Overstock advertise and create awareness?

Will there ever be an Overstock store?

'No, Overstock will always remain online only. That's what makes sense for liquidation.

'Liquidating and steep discount shopping really wants to be online. You can pay rent at a mall so people can come in and touch the product, try it on, and all that stuff. But that adds cost in the supply chain.

'For the people who are really focused on value shopping and getting the most for their money are better suited for the online model.

'Plus a store wouldn't really work because we're only getting 200 or 300 of the products. Well when you build a chain of stores, getting only 300 of something it doesn't make sense. What are you going to do, put three in each store? When Walmart buys something, they buy 200,000 of it.

'The sort of liquidation and steep discount model of Overstock is better off online than in brick and mortar.'

You grew the company from $1.8 million revenue in 1999 to $1.1 billion today. How?

'I used to be a value investor, which means an investor in the school of Warren Buffett. And a principle of that school is that you only buy stock on the assumption that you will hold it for 10 years.

'Well, when you run a company, you run a company as if there is no marketplace. You're not worrying about the price of the stock, you're just trying to build value. And the way you build value is, as corny as it sounds, is on old-fashioned business principles.

'Give great value and treat your customers well. If you do that and watch your expenses, everything takes care of itself.

'That's pretty much the secret, although it's not much of one. I wish there was some secret formula. What I did is the same thing your grandfather would have taught you about running a hardware store.'

To read about how marketing made other companies successful, check out:

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