Company Profile: Monsoon

Monsoon Leverages Online Marketplace Expertise into Software for Small and Midsize Retailers: Product Strategy Positions Company for Ongoing Revenue Growth

By Kate McPherron, technology evangelist

Founded in 2002, Monsoon provides software that enables retailers to load, price and manage items they list on marketplaces like Amazon and eBay. Monsoon was one of the first software companies to leverage marketplace product data and technology platforms to help users improve sales and profits, and it has established a healthy lead as the marketplace management tool of choice for serious sellers. Monsoon’s headquarters are in Portland, Oregon.

Kanth Gopalpur is an e-commerce pioneer. In 1994, he saw the Internet as a new market for Powell’s Books, the country’s largest independent retailer of new and used books. Gopalpur led Powells.com from its inception in 1994 through a period of steady, profitable growth. Thanks in large part to Gopalpur’s vision and leadership, Powells.com now accounts for almost 30 percent of Powell’s sales.

Following that success, Gopalpur joined Django’s as vice president of e-commerce and marketing, where he oversaw virtually every aspect of the company’s online business. Under Gopalpur’s guidance, Djangos.com grew to account for almost half the company’s revenues within one year. Powell’s and Django’s were among the earliest and largest marketplace sellers, and Gopalpur was instrumental in developing the tools that helped them integrate into major marketplaces such as Amazon and Half.com. Gopalpur holds an M.A. in government and international studies from the University of South Carolina.

A quick overview of the online marketplace
Kanth Gopalpur: eBay was the first major online marketplace. When eBay started in 1995, its primary goal was to serve individual sellers who would sell everything they had: greeting cards, clothes, books and so on. The success of eBay, followed by the dot.com implosion, caused retailers to rethink their online strategy. Many recognized that it was too expensive to build their own Web sites. Around 2001 and 2002, Amazon and eBay emerged as the two big “malls.” So, instead of building their own Web sites, retailers thought: let’s just go to the mall where all the traffic is. It’s still primarily Amazon and eBay, for the most part, though there are various others now, such as Overstock.com, Yahoo! Shopping, Froogle, and more. For more detail about the marketplaces, visit http://www.monsoonworks.com/partners/marketplace.

The founders’ experience that led to Monsoon
K.G.: I was at Powells until 2000. While I was there we realized very early on the power of piggybacking on Amazon. When we started, we didn’t have much money to spend on marketing, so we had to be very smart about how we went about getting business. Partnering with and selling on Amazon was great; it was a cheap way for us to get sales. We got onto Amazon very early on, even before they had a marketplace, because we could provide them with books. Of course, this very early synergy was possible only because we were both in the book market.

When I was with Djangos, we essentially followed the same strategy. Amazon had just launched its marketplace in late 2000, which expanded its media offerings, so this was a viable play in the market. Half.com (which was soon to be bought by eBay) also had just launched in 2000. Initially, we didn’t expect much traction from these new sales channels, but online sales, driven mainly by marketplaces, grew to account for almost half of Django’s revenues within one year.

Founding of Monsoon
K.G.: We founded Monsoon with the initial goal of helping small- to midsize media sellers sell online. Three of us started the company in 2002: Clark Hale, Jon Brandon, who left in January 2005, and I. I started talking with Amazon about ways we could help them. They knew my work with Powell’s and Django’s and saw the problems of big new sellers that were just starting to come in. When these marketplaces started, most of the sellers were small, and they had made it easy for small sellers to list inventory and get it on the Web site. But this system just didn’t work for large sellers, because they couldn’t upload inventory one-by-one.

So they said, Why don’t you work with these large sellers? You built tools for Powell’s and Django’s; why don’t you open it up for more sellers?

That’s when I went back to my contacts at Amazon, and they started to send customers to us. Amazon salespeople were contacting book sellers, and in getting them up and running, they saw the problems these guys were having: they couldn’t upload inventory quickly enough, they couldn’t get their orders. Booksellers told them, I’m not going to enter items by hand; there needs to be a tool for this. That’s how we got started. There was really a market need. Amazon would send us customers, and we would build tools for them.

Consulting turns into a product
K.G.: Through consulting, Monsoon soon had about eight different variations of a product that was meeting the same goal: helping sellers get up and running. A key factor here was pricing, because if you’re a large seller you can’t go in and manually adjust prices to meet the changing market. You set a price and upload your items, and that price may or may not be competitive. It’s different from in a retail store, where there’s only one price and there’s no other competition. On Amazon or eBay, there are hundreds of sellers, all selling the same item and the product is listed by price. So in order to be on the first page (which is the equivalent of prime shelf space in the retail world), you had to ensure that your products were priced in such a manner that you were always competitively positioned.

When we decided to add onto the application, we knew there needed to be inventory management, order fulfillment, and so on: the basic tools. The killer application that would make us successful was the way to get prime shelf space: a dynamic pricing tool. So we built it into the software.

Dynamic pricing immediately created a tremendous upside for our customers. It was unbelievable: 400 percent increases in sales overnight. People who had been doing 50 orders a day would launch it and suddenly they would be doing 200 orders a day. We had about eight to ten customers at that time, and for these sellers dynamic pricing became a key competitive advantage. As a result, our early customers didn’t want to tell anybody else that they were using Monsoon.

At that time, we were still in our consulting mode, charging high up-front licensing fees, anywhere from $20,000 to $150,000. We knew there was an actual demand for this product and saw that we were leaving a lot of money on the table, that is, we could see our customers’ sales results. There was also a high entry point for most of these small to midsize businesses. It was a huge risk for them to spend that much money. So we decided to change our business model. We planned to take the eight different versions and make them into one standard software product, lower the price to a nominal sum, anywhere from $300 to $5000, and take a percentage of the transactions.

The product strategy created a need for funding
K.G.: Lowering our prices meant that we were going to have short-term cash flow issues. We still had to keep the same staff, but instead of selling licenses for $30,000 , we would be lowering our license fees to $1,000. In the long term, we would end up making more money, as transaction fees kicked in. But in the short term, we knew that we had to raise money to bridge the expected cash flow issues that would arise.

In late 2004, we started the fundraising and the transformation process. We didn’t want to wait for funding to come up with the standardized software, so we hired more developers at the same time we were out raising cash. In August 2005, we closed the Series A funding, and in January 2006 we released the new “standardized” software. The year 2005 was a period of transformation where we changed from a consulting company to a software company, from a licensing model to a transaction model, and we hired salespeople, something we had not done before.

When we raised our funding, we beefed up our management team. We hired a director of technology, Ken Avenoso, who is now our chief technology officer. I also hired David Nute, who had come on board in October 2004 to write the business plan, as our chief operating officer.

Monsoon’s market strategy
K.G.: The overall online marketplace sells $50 -60 billion in several categories. About six years ago, software tools for marketplace sellers was a very hot space. We have about 15 competitors, all of which are better funded and which must make more money to justify that investment. So they are all taking the gamble of trying to corner the entire $150 million business opportunity.

Right now, we process over 10 million orders per year, and a fifth of the top Amazon marketplace sellers use Monsoon to manage their online marketplace sales. When deciding how we would grow, we stepped back and looked at what made us successful: our media background and that significant chunk of the online media marketplace. We have domain expertise, can talk the talk; even our software drills down deeply into the media business.

If we want to expand, we had two choices: be better or cheaper than our competitors or take a different trajectory. We know we dominate the media market: no one else drills as deep. Also, there are only five or six key verticals that are really big online: media, electronics, apparel, tools/hardware, automotive, and office supplies. We decided to pick one of those to focus on and go deep into it just like we did in media: figure out the actual pain points these retailers have, know their business. For instance, in books, the busiest months are August and January because of textbook sales. In other retail businesses, December is big because of the holidays.

Most small to midsize retailers focus on two or three categories. They want the tools to meet very specific needs of their category. They all need basic things like inventory management, which everybody provides. For us to capture a category, we have to have the killer application for that vertical; for media, that’s dynamic pricing. So, we figure out the killer application and become the go-to company for that category. Our approach, then, is to take it one $2 billion micromarket at a time. That’s how we intend to grow.

I want sustainable, profitable growth, and the management team and the board are all on the same page. We have some strict guidelines: one, we’re not going to raise more cash, two, we’re going to keep a cash reserve, just in case things go south, and three, we’ll never risk the company on one big bet. We have media up and successful and profitable. We have started looking at the next categories and know what we’re willing to risk on each expansion. Three years from now, we hope to be in three or four verticals, each doing as well as our media business is now. We will have grown four or five times, and we can look at other areas where we want to expand.

Another growth avenue: ancillary services
K.G.: For a lot of our customers, we are the complete business solution: except for accounting and human resources, they use Monsoon to do everything. We are the core of their business. However, our software is just one piece of the overall business; there are many ancillary services we can provide them that benefit everyone. For example, we distribute scanners at cost because eventually every customer has to have one. The sooner they buy a scanner, the sooner they get more inventory up, and end up paying us more money in recurring transaction fees. So selling scanners helps us grow, too.

Another example is aiding in international selling. Sellers want to be on Amazon U.K., but to do that they have to have a bank account in England. A small player cannot do that easily. So, we partnered with a bank in the United Kingdom to open accounts for all of our customers. When they get bank accounts opened, they can sell in a new marketplace and get more revenue, and we end up getting our take on that. Another example is that all our customers send lots of packages, but they’re all sending them individually. If we can aggregate them, we can keep them competitive, and keep them in the Monsoon ecosystem. These are just a few of the things that they have to do anyway, and if we can help make it easier for our customers to make more revenue, it benefits us in the end.

Challenges Monsoon has faced
K.G.: Our biggest challenge has actually been finding just the right people for sales, even though there are plenty of people who apply. It could be because this market is a little different: we’re selling to small to midsize businesses. A lot of them are owner-operated; you get directly to the decision maker, but they know nothing about technology. It’s not a technical sale. The sales force really needs to listen to and talk the language of that industry. There are not a whole lot of book software salespeople, so we’ve picked good people who can really listen, and trained them.

Our second biggest challenge is constrained resources; we didn’t raise that much money, so we have to be very cautious with it. A third challenge is satisfying customer expectations, which have to change when you shift from consulting to a pure software product. Existing customers have to learn to let go so that we could help them better by developing more and better programs. That was big. But there are also new customers that were expecting the same level of service, even though they only paid $300. That was a big challenge.

On finding financing in Oregon
It’s interesting to compare Oregon with the Bay Area. I think there are more people here who would take funding and use it in a much better way, but there isn’t enough money around locally. It’s kind of a chicken-and-egg thing with funding: people say, “Portland is too small so we don’t want to invest money,” but because there’s no money, you always stay small.

On the other hand, you don’t need much money to succeed here. Take us for example: we were in an odd place: we set out to raise $1.2 million. It is hard to find funding in that range. Angels fund startups, people who want $200,000 to 300,000, and if you’re out to raise $8 to 10 million, you have a chance. But we had a business, customers and products. We needed only a little amount of capital. We got lucky and raised it, but not in Portland. We had to go out of town to complete our round.

Monsoon’s relationship to Portland and Oregon
K.G.: My story is that I came to Portland and a friend took us to Powell’s. I figured that if a city could support such a good bookstore, it must be a good city. I truly like Portland. In the dot-com days, I got a lot of job offers, but I stayed here. It’s not just lifestyle; there are also a lot of really smart people here, in a lot of niche areas.

All but one of Monsoon’s 25 employees were hired from Oregon; that one person is from the Bay Area. Here in Portland, we’re able to be very frugal with things like office space. We’re on our third sublease; the first I took furnished and the second, when the lease was over, they sold us all the furniture in that office for $3,000. We have that furniture here at Jantzen Park Plaza now, and will probably move it when the sublease is up in December 2007. We expect to have outgrown this office by then. Right now, we plan to hire eight more people in the next six months, and we’re starting to fill up.

How the company culture has changed with growth
K.G.: Until we had 12 employees, we would all take a coffee break every day at 3:00. Everyone went out every day, and it was so regular that customers knew this. It was simple, and a great way to keep up in an informal way. But we can’t do that anymore, with 25 people and contractors. We still think it’s very important to maintain good, open, channels of communication across the company.

About the author
Kate McPherron, a technology evangelist, has helped technology and industrial firms manage and market their products and services for the past 20 years. She can be reached at klm54@cornell.edu.