The customer on the phone was confused. Ready with his credit card details, he wanted to buy a £1,500 laptop and yet his custom was refused.

He wasn't the only one either, says Jonathan Wall, sales and marketing director for Dabs, the Bolton-based electronic goods retailer. The firm has been turning away other such perfectly respectable, credit-worthy customers for three years now.

It may sound like madness, yet there is method in it. Soon after Dabs launched its online e-commerce site in 2000 its telephone sales team wound down and customers were asked to order online instead. It was a tough decision, says Wall.

"Everyone thought we were bloody mad but we made the decision that the type of person who wanted to order offline would be the type of person who would not want to self-serve themselves online. It was hard to do but it was the right decision."

Dealing with the same set of customers both on and offline would confound the online-only business model envisaged by Dabs's owner and co-founder, the entrepreneur David Atherton. Hindsight has proven him right and the firm is growing fast: sales last year were £150m and profits were £5m. The company has financed its own growth, has no borrowings and is cash rich.

Things weren't so clear at the time, however, Wall remembers. "When Dave made the decision that Dabs would become an online business, he bet the farm on it."

MAKE OR BREAK

It was a make-or-break time for what was then a mail-order computers and components reseller started in 1987 by David Atherton and Bruce Smith (Dabs gets its name from their initials) who began advertising their wares in the pages of consumer computer magazines on a 'pile it high, sell it cheap' basis, says Wall. "We would buy HP laser printers for £90 and sell them for £91 just to build the revenues up."

Margins, already razor thin, were shaved thinner still as online competition exploded during the fevered months of the dotcom boom. Already late to launch its e-commerce website in February 1999, Dabs faced stiff competition from others trying to buy market share with often ludicrous abandon.

Against this kind of ferocious competition, Dabs offered the relatively modest online incentive of free postage for all orders. Even this was enormously expensive and the company made the only loss in its history, a frightening £1.2m in the website's first year.

Yet it was the strategy adopted by Jungle that made Wall realise Dabs had taken the right decisions. "They were our biggest competitor at the time and just as we had decided to abandon telephone sales they told us were going to introduce an 0800 number with a 24-hour hotline. At that point I knew we were right and they were wrong."

Online sales reached half of turnover by the end of the first year and Dabs switched off the telesales side in September 2001, says Wall. "We probably do lose some business by not having a call centre, but we have got a very rigid business model. It's how we can sell the latest models at good prices."

Taking the consumer business exclusively online (about a third of sales still come from its SME-orientated mail order arm) soon showed through on the bottom line. Dabs turned an £800,000 profit the next year and last year profits reached £5m. "Our aim is to double profit to £10m this year and reach £200m in turnover," says Wall.

Going online has saved a considerable amount from the costs of producing the catalogue, helping Dabs keep marketing costs below 3% of turnover. The big upside of going online, however, has been the massive savings on overheads gained by automating the repetitive work Dabs 40-strong customer service and sales team used to carry out. "In the last three to four years we've gone from sales of £40m to £150m with 235 staff."

GROWING AT BREAKNET SPEED

Such breakneck growth brings its own problems, however. It's a relentlessly high-velocity sector in which the price of hi-tech goods falls almost by the week, requiring Dabs to stay on top of what the competition are doing almost on a daily basis.

It also means Dabs has to shift more boxes more quickly for the same turnover. "Turnover was up 30% last year, but our units shipped through the door increased by about 60%."

"It's not unusual for products to drop by as much as 50% in a year. We are working on very slim margins of around 15-16%. We were at one point running at something like 1.5% net margins, we are now at about 3%, so we are getting somewhere."

Frequent price drops mean margins can disappear quickly if stock turn is sluggish. Fortunately the website was designed so that Dabs staff can change prices themselves instantly.

Selling successfully online has been about more than automating tedious clerical tasks and getting logistics and stock control right, however. Getting the marketing right was key and cost-effective marketing and advertising was always a necessity for a privately-owned company (Atherton owns all the shares) without IPO cash to burn, explains Wall. "Some of our competitors like Jungle and Buy.com had this big tranche of cash to go and buy customers.

"The number one headache when the website launched was the fact that everyone had more money than us and they were chucking it around and buying banner adverts. £90 per 1,000 impressions was the going rate, which didn't make much sense to us even then"

CRAZY INCENTIVES WERE THE ORDER OF THE DAY

There were some insane attempts to buy customers such as the competitor offering £50 off the first online purchase, enabling someone to effectively buy goods worth £51 for £1.

"Buy.com failed because of that in the UK: they did not have the technology to stop people using the voucher for the second time. Jungle were buying prime time TV in the middle of Coronation Street and selling two PCs from it."

Ridiculous times, says Wall. "We were in the unfortunate position of having to compete with that but it did also make us stop and ask the question: does it make financial sense and can we measure it? Everyone was saying "it's about getting customers to your site" but at the end of the day it was about showing a return on your marketing money."

MEASURING RETURNS ON ADVERTISING EXPENDITURE

Being able to accurately measure your marketing efforts is the defining advantage of the Internet and something Dabs always demands, says Wall. "We've always paid for performance-based marketing. As a marketeer I can now report and measure on every single thing: the cost of acquisition, the return on investment on a campaign."

Vendors can also see the results of their joint campaigns. "We can show them how a particular campaign has worked, how many products it has sold, how many customers have seen it. Not many of our competitors can go to that level."

Wall claims Dabs was also the first online retailer to form successful online shopping partnerships with the manufacturers, most notably the concept of stores within stores. "It was a huge driver of growth. About 30% of our turnover comes from the manufacturers sites now."

"The next stage will be to host the shopping basket on the manufacturer's site. They don't want people to leave their site, they want to hold them."

Search engines and the use of affiliate sites such as Kelkoo have rapidly become the other main driver of growth. Affiliates are now driving about 50% of our business and Google has been the biggest recent thing for us.

Making best use of the search engines and their pay per click model is a branch of marketing that's evolving fast, says Wall. The challenge is just to stay on top of it. Search engines are already driving about 25% of our business, six months ago we weren't advertising with search engines at all. Product names and codes are auctioned off and it costs more the higher up the list you are. We've bid for 30,000 keywords.

Is a headache that's partly alleviated by outsourcing the legwork to a marketing company. That's one of the only outsourced marketing companies we work with. It's paying off handsomely for us as well."

PERSONALISED WEBSITES

But Dabs is not resting on its laurels. The September 2003, £500,000 website relaunch has introduced a range of new features including the facility to personalise the site to the user, ensuring more accurate merchandising.

The new site has been exhaustively tested for usability with customers after some serious problems were found with the old site. We discovered that only 10% of the customers could complete an order without there being some kind of blockage or problem.

It scared us but it also made us think of the opportunities for sales growth with a better website. The old site was designed by our systems team and passed to our marketing team. It was the other way round this time.

The new site should enable Dabs to market its new, fast-growing consumer product lines such as computer games, software, digital cameras and home entertainment more effectively and appropriately without customers having to wade through irrelevant information. Channels are the main thing for us now. We used to be a computer reseller, we are now a technology reseller.

Better search tools and the use of its streaming TV site Dabs TV are also going to be important new features. Our biggest problem going forward is that although we are market leader, if the market place is not that large, where do you go from there?

AIMING FOR HIGH STREET CUSTOMERS

The answer is to poach high street customers. Surprisingly perhaps, a mere 5% of sales in the sector are made online and although Dabs is the leading online UK retailer in its sector, it's a midget compared to PC World, John Lewis or Comet. To get those customers, we have to be a lot more user friendly and try to mimic some of the benefits high street retailers have in terms of being able to demonstrate the product.

Dabs's new weapon is streaming TV and the manufacturers love it, says Wall. It improves on the high street retailers ability to demonstrate a product because streaming TV ensures each product demonstration is the one the manufacturers want and not the half-hearted variations given by disinterested shop assistants.

Next year Dabs will take this to the next stage when it launches its own technology satellite TV channel. Manufacturers should cover the cost of producing the programmes and customers will be able to order online, enabling Dabs to reach customers without a PC. For a low seven figure sum the move will give Dabs access to 6.7m digital households.

It's also one solution to branding such a relatively small company with little exposure and reach outside its traditional techy marketplace. Dabs is sponsoring players shirts at Fulham FC this season and the players tunnel at its local club Bolton. There will also be some seasonal national press advertising this year and a focus on driving business from the big portals like MSN and Yahoo by paying to be in the computing section.

EXPANDING INTO TRADITIONAL RETAIL AND OVERSEAS

Perhaps most surprisingly Dabs has also opened a retail store and has plans for about five in all if the pilot at Liverpool Airport shop works. It's a counter-intuitive strategy given its desire to be an online retailer, but in essence its a marketing ploy.

The idea is to get brand exposure by opening retail stores in specific areas of high footfall (4.5million customers pass through Liverpool Airport each year). The stores should break even, engage with passers-by and, most important, give them an incentive to buy online.

The final plank of Dabs' growth plans will be overseas expansion. It will begin selling to French consumers in October with the aim of taking the French business to E100m within three years.
It's the most important part of Dab's expansion plans, and the highest risk. Benelux, Austria, Italy, Scandinavia are among the next targets.

Getting Continental expansion right is key to achieving the value Wall thinks Dabs can reach. At some point we will float or launch a trade sale, but we are not at maximum value yet. We feel we have to conquer the rest of Europe first."

www.dabs.com

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