A Sales Channel They Can't Resist
Home-shopping giant QVC is becoming one of the most powerful forces in retail. Here's the secret to its surprising success.
By Elizabeth Esfahani

(Business 2.0) – She's one of the sweetest ladies you'll ever meet," announces QVC host David Venable. "Bea Toms, let's start with your signature ham biscuits." Hailing from the Virginia foothills of the Blue Ridge Mountains, Toms is one of 10 new merchants selected by QVC for "Decade of Discoveries," a two-hour special broadcast live from Philadelphia's Franklin Institute museum. Forced to leave home at age 13, she began her culinary career by earning her keep on a Maryland dairy farm. After 50 years as a caterer, the 91-year-old great-great-grandmother finally decided to share her gastronomic secrets with the world and penned Recipes From a Country Cook. Her QVC-fanatic daughter persuaded her to bring the book to one of the network's nationwide product searches.

As Toms discusses her applesauce bread, Venable cuts in. "Bea," he says, "we're almost sold out." Toms's jaw drops. "No!" she says incredulously. "In fact," Venable continues, "we are sold out." Toms shrieks in amazement. "That's wonderful," she says, as tears begin to well in her eyes. Her entire inventory--1,413 books--is gone. More precisely, she has done $37,535 in sales in three and a half minutes.

As amazing as that is for an unknown merchant hawking an unknown product, the feat is repeated over and over again during the show. In less than six minutes, Louie Sorrentino takes orders for $39,018 worth of Potpourri Glo, an illuminated fragrance jar. Nicholas Woodman sells more than 3,200 units of GoPro Hero, a $17.73 wearable waterproof camera, in nine minutes and 12 seconds. And in less than five minutes, Sherre McMahon moves $37,128 worth of Shooks--a product she invented that extends the length of any necklace.

Of course, these entrepreneurs are hoping that this is just the beginning, and that QVC can do for them what it did for Jeanne Bice, who makes a special appearance at the end of the show.

Bice was discovered 10 years ago on a similar search; today her Quacker Factory apparel line rakes in nearly $100 million a year, exclusively on QVC. "Everyone asks me," she says, "'Can you remember what your first time on air was like?' And I say, 'Oh, Honey, I remember it like it was yesterday. QVC promised they could take us to glory, and they've done that and so much more.'" Bice's limited-edition Decade of Discoveries sweatshirts sell out so quickly that she has to switch to a backup item for the show's final minutes.

Newbie merchants do little to upgrade the lowbrow image of home shopping, once described by Wired magazine as "trailer-park housewives frantically phoning for another ceramic clown." But look past its reputation for costume jewelry and collectibles and you'll find that QVC is earning a place in the pantheon of the world's most successful and innovative retailers. Last year QVC rang up $5.7 billion in sales and $760 million in operating profit, making the Liberty Media subsidiary nearly as big and roughly twice as profitable as Amazon.com. Its 13 percent operating margin beats those of brick-and-mortar heavyweights such as Federated Department Stores, Target, and Wal-Mart. The quarter ending in August was another blockbuster, with sales up 15 percent over the same period in 2004. Although QVC sells no advertising, it is the third-largest U.S. broadcaster in terms of revenue (behind NBC and ABC), and its sales and profits are larger than those of all other TV-based retailers combined. "I don't think people realize the actual size and strength of their business," says Cathay Financial media analyst Andy Baker. "They continue to get it right and are throwing off tons of cash."

And if you stay tuned for a few hours, you'll see that the same QVC formula that turned Toms and her co-stars into retail celebrities is also moving merchandise for an increasing number of well-known upscale brands. In the past few years, prominent manufacturers such as Estée Lauder, Nextel, and Tourneau have begun selling through QVC. The network's $80 million single-day sales record happened on Dec. 2, 2001, when Dell sold $65 million worth of PCs. (One month later Michael Dell went on QVC, doing $48,000 in sales every minute he chatted on air.) Even couture designers like John Bartlett and Marc Bauer, who wouldn't have been caught dead on a home-shopping network in the past, now sell lines on QVC.

QVC makes its money the same way other retailers do--by buying merchandise from suppliers and selling it at a markup. (Its gross margin hovers around 38 percent, on par with that of department stores.) But instead of leasing retail space, QVC pays cable operators 5 percent of sales, a kind of rent that not only secures coveted low-number channels but also motivates cable companies to promote QVC on other stations. The resulting boost in viewership begets volume: Last year 7.2 million people, 90 percent of them women, made a QVC purchase in the United States. And the network has developed intense loyalty among its clients, with 93 percent of its annual revenue coming from repeat customers. A decade ago many predicted a bleak future for home shopping--retail consultant Alan Millstein told the New York Times in 1996 that the format was "a vehicle for broken-down movie stars ... a soufflé that never rose"--but QVC has proven skeptics wrong, growing sales about 14 percent annually since 1996.

The secret to QVC's continued expansion has been honing the art and science of TV retailing to a point where it is every bit as powerful--and profitable--as Internet-only e-commerce. While Web retailers analyze data to make the most of each mouseclick, QVC line producers also react in real time, adjusting camera angles, lighting, and dialogue to maximize sales and profits. Remarkably, the company's website, QVC.com, is already the nation's sixth-largest general merchandise Internet retailer, and thanks to shrewd coordination with TV programming that drives buyers online, its sales grew 30 percent in the first half of this year. And with more and more retailers realizing that they can't compete solely on price, QVC is attracting attention as the gold standard of "entertailment"--the blend of entertainment and retailing. "We aren't really in the business of selling," says Darlene Daggett, QVC's president for U.S. commerce, whose comment is particularly ironic given that she, more than anyone, is credited with turning the company into a dynamic merchandiser. Explains Jeffrey Rayport, a former Harvard Business School professor and author of Best Face Forward, a book on customer service that uses QVC as a case study, "Daggett has transformed QVC into a company that uses products to build relationships with customers."

Daggett has perfected QVC's folksy but analytical style over a 16-year career at the company. She arrived in 1989, just three years after QVC (which stands for quality, value, and convenience) was launched by Joseph Segel, founder of collectibles marketer the Franklin Mint. In those days QVC--like many of the home-shopping channels launched within a year of the cable debut of Home Shopping Network (HSN)--was all about jewelry, which made up 50 percent of the network's sales. But in contrast to HSN's aggressive sell, Segel fostered a softer approach intended to nurture loyal viewers. As director (and later head) of merchandising, Daggett steadily moved the business away from dependence on bangles and studs (jewelry is now just 22 percent of sales), and in 2002, QVC CEO Doug Briggs tapped her to oversee the company's $4.1 billion U.S. operation, where she has continued to shift the mix toward home decor, beauty, and fashion. She believes that the ideal QVC product is what she calls a "deep" brand--one that makes an emotional connection with viewers. "We will never be good at selling commodities," she says. "This is a business about want, not need."

That approach to selling is evident almost everywhere on a recent afternoon at QVC's 20,000-square-foot studios in West Chester, Pa. At 3 p.m. host Rick Domeier is a whirlwind of energy as he roams about the studio looking for his "guest experts"--manufacturers' representatives who will appear on air with him to sell their products. Backstage, he greets Cathie Marie Georges, who will be presenting a decorative wall rack. "So what's your QVC story?" Domeier asks.

A 10-year QVC veteran and former star of The Young and the Restless, Domeier says he's looking for a story line that will resonate with viewers. Often it's an elevator pitch conveying what's unique about a product, plus an inspiring tale of how it came to be. Georges says that she and her husband wanted to turn a functional item into a piece of art. "I love that you designed this," Domeier says. "Feel free to play that up on air."

Part of why such stories connect so powerfully with viewers is that the network always broadcasts live. There are no scripts or prompters; hosts rely on live demonstrations, impromptu banter, and call-in testimonials to build trust. It's reality TV from before the term existed: Watch long enough and you'll catch hosts dropping products, setting off fire alarms, and tripping down stairs. "The element of not knowing what's going to happen next is key," Domeier says. QVC folks call it the "backyard fence" sell--the feeling that the merchants are neighbors visiting from next door.

Live broadcasts also allow the company to respond quickly to sales trends to stoke demand. High above Domeier in an off-camera nook, line producer Alan Massaro's eyes dart among six flat-screen TVs displaying images and graphs. As Domeier talks up a 114-piece Reed & Barton flatware set, Massaro reminds him to emphasize the number of pieces in the set. Six minutes into the pitch, Massaro patches through a call from a viewer named Pat, who says she is buying one for her son. During the testimonial, call volume doubles. Three minutes after Pat hangs up, Massaro tells Domeier that only 100 sets remain, and Domeier relays the information to viewers. In another two minutes, all 977 of the $117 flatware sets have sold out.

The network's most rigorous analysis, however, is reserved for the product chosen each day as "today's special value," or TSV. These items are QVC's all-stars: They've already proven that they can generate high dollars-per-minute activity. QVC buys the TSV in bulk, offers it at a rock-bottom price, and promotes it eight times during a 24-hour period. A TSV can generate as much as 20 percent of a day's sales.

"So what did you guys think?" asks Jack Comstock, VP for TV sales strategy. Every day at 9 a.m., Comstock leads a meeting of QVC execs to analyze results from TSV footage recorded hours earlier. This time the TSV is a battery-powered scented candle that flickers like a real flame without the risk of accidental fire. The candle fared well, and everyone agreed that the host made an effective presentation. However, the group decided that the product could have been displayed on a hutch in the background and that viewers might have reacted better to more visuals of the candle's inner workings.

Although seemingly minor, these suggestions spark immediate action. First the candle is rushed to QVC's online studio, where close-ups are shot and posted on the website 10 minutes later. In the next TSV spot, the host turns the candle on its side, allowing the camera to zoom in. The changes pay off. While the candle did well in the early segments, it flat-out kills later in the day, selling out QVC's inventory of 61,620 units--a total of $1.7 million in sales--four hours ahead of schedule. A summary of the TSV's segments and results is stored on the QVC intranet, where, for instance, analysis shows that the candle sold better when lights were at 80 percent strength than at 45 percent. "Too dark to see the product," Comstock concludes.

The combination of soft sell and data-driven rigor has been a boon not only for QVC but also for the many formerly unknown brands it has turned into superstars. In a sense QVC acts as a venture capitalist, investing airtime in a portfolio of promising startups. It's not an easy path to success: Less than 4 percent of the 20,000 inquiries QVC received last year resulted in appearances. (See "How to Get Your Product on QVC," page 96.)

In fact, the screening process can be brutal. Even if a vendor makes it past quality-control tests (many fail several times), a lackluster initial performance can mean the end of the road. Products that generate customer complaints totaling more than 1 percent of shipped units land on a list circulated weekly to QVC execs. ("You don't want to be on that list," says John Hunter, QVC's senior VP for customer services.) There's also a continuous weeding out of underachievers: During the morning analysis meeting, Comstock and his crew identify the poorest performer of the day, Tranquility Yoga Wear. Everyone agrees that the host did a great job pitching the brand, but the hour-long segment missed its $350,000 sales target by more than $100,000. There is discussion about the price point being too high. No matter: The line will be liquidated at a discount on QVC.com.

But for products that can demonstrate demand in their initial eight minutes of fame, it's the chance of a lifetime. Take Leslie Blodgett, CEO of cosmetics company Bare Escentuals. When Blodgett pitched QVC on a line of natural cosmetics in 1997, her company had sales of less than $10 million and about a dozen stores concentrated on the West Coast. After months of waiting, she got eight minutes of airtime and promptly sold out. On her third appearance, she racked up $400,000 in sales in 20 minutes, about as much business as one of her stores did in a year. Today, Bare Escentuals is QVC's No. 1 cosmetics brand, having sold $212 million in the past eight years. On her TSV day in June, Blodgett's 24-hour sales total hit $9.3 million. The exposure has allowed her to expand to 23 stores nationwide, with another six opening by the end of the year. "Suddenly I had a customer base that spread from Hawaii to New York," she says.

QVC has also found success with its own brands. In the past few years, the company has ramped up development of private-label products, which now constitute a third of its sales. A bedding line called Northern Nights brings in more than $50 million a year, and Dialogue, QVC's sportswear brand, is among the network's top sellers in apparel. After noticing customer interest in Dialogue's Modal natural-fabric items, Daggett spun off Freelance--a clothing line made entirely of that fabric.

Skeptics point out that QVC is nearing full U.S. penetration--it now reaches 90 million of America's 92 million households with pay TV--implying that future growth is limited. Daggett counters that, with less than 10 percent of households that get QVC currently making purchases, there are plenty of potential new customers. The key, she says, will be to offer a wider array of merchandise and more well-known brands. "We've been on the cusp of being a very sexy place to shop for a long time," Daggett says. "National brands make us easier to trust."

Nevertheless, she admits that luring big-name companies has not been easy. Many believe that an association with home shopping will taint their brands: Dean Factor, grandson of makeup mogul Max Factor, reportedly said that Saks and Neiman Marcus refused to carry his Smashbox cosmetics line because it appeared on QVC in the 1990s. Others fear that QVC will cannibalize traditional sales channels. "I've been politely told 'no' more times than I care to count," Daggett says.

But thanks to a growing library of case studies illustrating QVC's positive impact, the tide seems to be turning. Since Michael Dell's 2002 on-air debut, his company has been doing $100 million in sales on QVC annually. And Daggett scored a major coup in 2003, when, after years of pursuit, Estée Lauder agreed to test its high-end Prescriptives cosmetics brand on QVC. Of the first 50,000 viewers who purchased Prescriptives products, 76 percent were new customers for Lauder. In addition, traffic to Prescriptives counters in stores jumped 5 percent in the week after the brand's QVC airing.

In fact, what may be most attractive to national brands is QVC's value as a marketing tool to increase sales through traditional channels. It provides a forum for product demos, and QVC estimates that for every 10,000 orders it receives, 1.5 million people are watching. In 2004 the network gave away $1,000 rebate coupons for GM's Saturn division, driving $60 million in new car purchases. Birkenstock, which first appeared on QVC in 1996, estimates that its QVC airtime is worth at least $8 million in traditional advertising. The shoemaker even alerts its brick-and-mortar stores in advance of on-air appearances to allow them to stock up: Some stores have seen demand jump as much as 5 percent the following week.

Daggett has also pursued a host of branding partnerships to lure those who might otherwise flip past QVC. In June, QVC introduced the Antiques Road Show collection, an exclusive line of vintage jewelry inspired by the eponymous public-TV program, and in August, Condé Nast's Lucky magazine shipped a special "Lucky Shops QVC" edition to 80,000 viewers who bought subscriptions. Daggett made an appearance last October on The Apprentice, in which the hit TV show's two teams tried to sell products on the air. More recently, in a tie-in with the Bravo reality show Blow Out, celebrity hairdresser Jonathan Antin sold more than 35,000 units of his hair-care line, making his the most successful hair product launch in QVC's history.

Of course, Daggett recognizes that it will take time to shed home shopping's historical baggage. She says the challenge will be to attract new shoppers while not alienating the current clientele. "The last thing we want to do," she says, "is to change the brand and not have our customers travel along with us."

If the live audience for "Decade of Discoveries" is any indication, QVC's loyal fans seem ready for Daggett's ride. As the show ends, 64-year-old Becky Lawson of Newark, Del., pops out of her seat to have her picture taken with any QVC employee she can find. Known to her friends jokingly as the "QVC queen," she says virtually everything she owns--clothes, furniture, cookware--was bought from QVC vendors. "I almost never go to the store anymore except for groceries," she says. "It's entertaining. They're like friends."