Lessons Learned From a Failed Ivy League Entrepreneur

A "Case Story" By Chris Cononico
 

Chapter Twenty-Nine

All of a sudden, the whole scope of our business model was changing. George was resistant to the national card program at first, and it took Mark and I ganging up on him for a week before he saw the light. I think George had invested so much time developing relationships at individual campuses that he was reluctant to see the big picture. We tried to convince him that we weren’t walking away from anything. We were just expanding our focus. Eventually, the three of us agreed to explore this new approach, which we dubbed “Campus Card.”

We called various mailing list companies and confirmed that we could purchase the list of student names and addresses for 10 cents each or $180,000. The printing costs for the brochures and letters were equally expensive. In such bulk quantities, we could have everything printed for another $180,000. That was not to mention the cost of postage. Even if we kept the weight of the mailing down to a minimum and pre-sorted, it would still cost us an additional $400,000 just to ship it. After adding in the projected costs of new office space, employees, and equipment needed to process the applications, the total investment to start the program was about $1million.

It was a far cry from the $40,000 we had initially invested in the QuakerCard. However, at that stage of our lives, we were not easily daunted and we were confident we could raise the money. We chalked up the setbacks with our earlier expansion plans as bumps in the road, but we didn’t allow them to affect our confidence. We still had no reason to believe we couldn’t accomplish anything we put our minds to doing.

Before we could begin raising money, we needed to revise our business plan. Unfortunately, there was a huge trade off from working with VISA instead of owning our own equipment and charging merchants a negotiated fee. Although we didn’t have to invest in equipment or recruit merchants, our merchant transaction fees dropped from over 10% to 1.5%. Although VISA usually charged merchant fees that were as much as 3%, we had to split these fees with a banking partner to be able to use the VISA system.

We also acknowledged Campus Card wouldn’t have a local office on each campus to promote the program to students. Therefore, the average spending per student was probably going to be less than it was with QuakerCard. As a result, the economics of Campus Card seemed less attractive per campus because the business had smaller margins, so profitability was driven primarily by volume.

As a result, we tried to devise ways to increase the dollars spent per student on the card. Although we wanted to maintain our “restaurant meal plan” focus, like QuakerCard, the “meals, books, and campus expenses” marketing approach and a “necessity account” could enable the Campus Card to be used for larger purchases like textbooks. Books were among the biggest ticket items purchased by students, so we wanted them purchased with our card.

After some brainstorming, we took the idea a step further. What if we opened our own bookstore and shipped the textbooks to students at wholesale prices? It was a random idea that sounded far-fetched, but we already knew of another student business at Penn called Campus Books that had successfully entered the textbook market. Therefore, we knew it was possible to open our own bookstore and source the textbooks.

We did some research and found if we used our web site as the interface for our bookstore, students could do an online query for textbooks, place an order through us, and we could source the books for them from wholesalers. The student simply needed to pay the wholesale cost of the books and any additional shipping and handling costs. We would then pass along the textbooks to them at wholesale prices without any additional markup. The books would be discounted by 32% from typical retail prices.

By offering our own on-line bookstore, we wanted to accomplish two things. First, we hoped it would generate a buzz about our services. It was an amazing benefit for students, so we planned to use the bookstore as a promotional tool to attract more cardholders and to promote our website. Secondly, we could make it a requirement that the textbooks are purchased with the Campus Card. Therefore, we would at least earn the transaction fee from the use of our card.

As it stood, we were offering an alternative restaurant meal plan, a student discount card, and an alternative bookstore. We began calling this collection of services the “College Pack” and we formed a new company for the business, which we named "College Financial Services." As we continued to brainstorm new ideas, we also planned to offer scholarships and writing competitions through our website. We hoped that once the program got a certain threshold of popularity, it would take on a life of its own.

Since we were painfully aware that life on college campuses is seasonal, we wanted to launch at the start of the new school year. Otherwise, we felt it would be best to wait another year before marketing to students. I was dead-set against waiting. I reasoned that my opportunity costs were getting too high. I was going to do everything in my power for an August launch. Working backwards, we needed to launch our initial mailing campaign by May at the absolute latest. Since it was early February, we had only four months to get everything set-up.

Unfortunately, my partners and I were glossing over our biggest risk. It was impossible to gauge how each university would react to our plans. There was no doubt we would be ruffling some feathers. Although Penn had responded harshly to us when we tried to implement QuakerCard, we reasoned it was because Penn had its own campus card plans, so they were defending their turf. Since not every school shared these ambitions, we reasoned many universities would appreciate our services.

From our experiences with the trade organizations, we estimated that less than 100 schools planned to establish off-campus card systems of their own. Of the 4,100 colleges and universities in the US, that represented less than 2.5% of the total market. That’s how we estimated our risk. We assumed that we would immediately lose 100 schools, but the remaining 97.5% of the market would be friendly to us.

Although we were willing to lose 2.5% of the market, the mailing list didn’t identify which schools the students were attending. Therefore, there was no way to avoid targeting students at the 100 schools that were likely to be unhappy with us. From our experiences at Penn, once these schools heard about us, they might put warnings in the mailboxes of incoming freshmen advising students not to participate in our program. There could also be a negative article in the school newspaper about us.
Without an on-campus presence, we wouldn’t be able to defend ourselves like we had done at Penn.

Nevertheless, we reasoned that 2.5% of the market was a small piece of the pie that would be dropped on the floor. We couldn’t complain about throwing it in the trash because we still had 97.5% of the pie to ourselves. Over 4,000 schools remained from which we could build our customer base, customize our services, and dominate the industry. As a result, I was ecstatic when I sat back and imagined the possibilities for our company. Unfortunately, we didn’t realize how much trouble 100 angry schools could make for us.

 

Copyright  2005 by Chris Cononico
All rights reserved. No part of this manuscript may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the author, except by a reviewer who may quote brief passages in a review.