SkyMall: The Ultimate Catalog Business Model

Imagine this: You print 16 million catalogs a year that are seen by 500 million upscale prospects (average pass-along ratio is 20-to-1), often cooped up for hours with nothing else to read. Annually, 700,000 orders are placed, typically for 2.1 items at a $110 average order size. Oh, yes, a few more eat-your-heart-out ingredients of your catalog business: You warehouse no inventory, you ship nothing, take no returns and you don’t spend one penny for postage or list rental. Two words describe this model: yum-yum.

If I were writing a novel about a high-powered entrepreneur, strategic thinker and brilliant builder of a multi-million dollar business, I would not give the protagonist a background in accounting. Yet, this was the unlikely career path of Bob Worsley, founder and proprietor of SkyMall—the fascinating, ubiquitous catalog of catalogs you find in the seat pockets of the majority of American airplanes.

The story was related to me by Christine A. Aguilera, SkyMall’s savvy executive vice president, who came over from the law firm that represented SkyMall in its IPO. Bob Worsley, from Boise, ID, with a degree from Brigham Young University, fully expected to follow in his father’s footsteps as an accountant, Aguilera says. But after laboring in the Phoenix office of Price Waterhouse, Worsley quit to form his own business supplying CFOs to small companies on a timeshare basis. The concept was successful, but after several years it became obvious no dramatic growth was possible with a business that billed by the hour. The path to real wealth is through a business that can be leveraged.

On a flight from Seattle to Phoenix in 1989, Worsley found a tiny catalog in the seat pocket in front of him: Giftmasters—a rather offbeat product of Minneapolis-based travel conglomerate Carlson. The book contained low-end merchandise, such as fish ties, at prices that were 20 percent higher than retail. The reason: Carlson was giving the airlines a 20-percent commission on sales in return for circulating the catalog.

Worsley’s brain started to work. It was the year that Airphones were launched, enabling passengers to use their credit cards to call anywhere in the world from the sky. If I can call for home delivery of a Domino’s pizza, Worsley thought, why not use the time in the air to do some shopping and have the merchandise delivered to me when I land?

In quick succession, Worsley wrote a business plan, found two investors and signed on three airlines: Eastern, Continental and TWA by 1991. The carriers were not all that concerned about making money; rather they viewed the catalog as a unique service to entertain passengers during tedious hours in the sky, costing them nothing.

The Old Model

Worsley’s initial plan served seven major airports. A traveler placed an in-flight order and met the SkyMall messenger in the baggage claim area to pick up the merchandise. What appeared to be a great idea turned out to be a logistical nightmare. A complete roster of SKUs had to be stocked in seven separate warehouses. In the confusion of crowded airports, many customers missed the SkyMall messenger and never collected their merchandise. Delivery costs could be as high as $40 an order. Ultimately, Worsley discovered that many travelers did not want to add extra baggage to their already bloated impediments, opting instead to take the catalog and order from their own homes.

In addition, the Airphone concept did not live up to its promise. It was hard to hear over the whine of the engines; calling fees were exorbitant (even though orders to SkyMall were toll-free); and, frankly, people didn’t like screaming out their credit card numbers so that surrounding passengers could hear (and possibly steal) them.

But Worsley was moving merchandise. Carlson took notice. In 1991, Carlson approached Worsley, saying the arena was too small for two in-flight catalogs; would Worsley sell SkyMall? The answer was no. Would Carlson sell Giftmasters? Yes. Carlson decided it should not be in the catalog business and Worsley agreed to buy Giftmasters. In 1992, Worsley added five more airlines to his distribution network—American Airlines, US Air, Alaska Airlines, Aloha Airlines and Delta.

The New Model

In 1994, “Worsley the Accountant” did an analysis of the business created by “Worsley the Entrepreneur” and determined that if SkyMall were to succeed, a dramatic change in the business model was needed. First off, he went to his airline partners and told them that the 20-percent commission was simply too high. Instead, he offered them somewhere around one-third the amount and promised to charge less for the merchandise, which would result in higher sales volume. Next, he scrapped his network of warehouses and let his catalog partners drop ship and take their own returns. Hammacher Schlemmer, which had the largest number of pages in the book at the time, helped the SkyMall team with paper purchasing and order processing. As SkyMall acquired more catalog partners, Hammacher Schlemmer’s presence lessened, but it remains a dominant player.

Today, SkyMall is a virtual catalog of catalogs, sometimes 200-plus pages filled with merchandise from major players, such as The Sharper Image, Frontgate, Improvements, Successories, Lillian Vernon, Lilly’s Kids, L.L. Bean, Orvis, Reliable Home Office, Balducci’s and Plow & Hearth. It also has introduced travelers to lesser-known catalogs, such as Langenbach, T. Shipley, The American Historic Society and InteliHealth Healthy Home.

Although it warehouses and ships very little, SkyMall is the merchant of record on all transactions. When an order comes into SkyMall, it is electronically conveyed to Order Trust—a clearing house that automatically translates orders into the precise format of each cataloger. The order is forwarded to each cataloger, fulfilled and shipped in its standard packaging. On confirmation of the shipment, SkyMall charges the customer’s credit card for the merchandise and the shipping. Multiple orders from different catalogs are shipped separately with the charges split among the participating merchants.

The SkyMall Engine

The heart and soul of SkyMall is its world-class telemarketing operation, housed in the former company warehouse five minutes from Phoenix’s Sky Harbor International Airport. One hundred in-house telemarketers operate the proprietary, state-of-the-art SkyMall Integrated Order System (SIOS), which was custom-designed and implemented by IIS. Entirely Web-based, the telemarketing operation is supplemented by 192 additional “cyber agents” of WillowCSN’s CyberCenter Network in Miami who can handle up to 20 percent of total orders. The Phoenix operation is able to monitor each call, regardless of where it is handled. Most items are shipped within seven to 10 days.

In the world of SkyMall, Monday is the busiest day and orders trail off through the week. The reason appears to be that customers—most of them traveling on business—shop in the plane and take the catalog with them. After spending the weekend with their family, they unpack their briefcase and place their order Monday morning from the office. Seventy percent of the orders come in by phone; mail and fax account for 5 percent. Only 2 to 4 percent of orders come in via in-flight Airphones. One fascinating statistic: In fourth quarter 1999, 37 percent of SkyMall’s orders came in over the Web. The Web site is a masterpiece and well worth checking out (www.skymall.com).

The SkyMall telemarketing operation also handles complaints, and each TSR is empowered to take the necessary actions to guarantee the customer is satisfied.

The Merchant Partners

For catalogers, whose prospecting costs are horrific, SkyMall represents a minor godsend—right up there with the ingenious cooperative database. Worsley has handed catalogers the extraordinary opportunity of reaching a captive audience of 500 million affluent prospects—many of whom are stuck in a plane for one to five hours and probably bored out of their skulls. His model leaves a catalog merchant with absolutely no circulation costs, no printing, no binding, no list rental and no postage—just orders from self-selected customers. Given the horrific cost of prospecting, merchant partners are delighted to give SkyMall a huge percentage of their markup—sometimes all of it—in return for a new customer who purchases 2.1 items at $110 on order.

According to Bill McCoy, director of trading partner sales for SkyMall, the catalog receives as many as 30 to 40 calls a week with requests to include merchandise in the catalog, often from start-up entrepreneurs who have one or two items.

Guys operating out of a suitcase need not apply. To be considered, a new merchant must have a proven, efficient order fulfillment system in place, impeccable financial credentials and have a product that doesn’t directly compete with one of SkyMall’s 200 active trading partners. With 10 years of experience, the SkyMall merchandising team has a good fix on what does—and does not—work in this non-traditional catalog to this unique audience. What’s more, McCoy’s team will give new catalogers realistic sales projections on a SKU-by-SKU basis. If SkyMall decides to give a non-cataloger a shot with a single SKU, a single page can be purchased for $25,000 a month with a three-month minimum.

As McCoy says, “Half our job is to entertain the passenger. If it’s not interesting, even a captive audience won’t buy.” For new catalogers unsure about what merchandise to offer, McCoy will send a catalog marked with notes on which items have done well over the years. SkyMall, however, is sensitive to exclusivity. It would be suicidal to allow two catalogers to offer the same product, and worse if the same product were offered twice in the book at different prices. In general, if a merchant has been continuously running an item, no one else can duplicate the offering until it is dropped.

Catalog Production and Distribution Logistics

SkyMall is a logistical bear with separate editions for 19 different airlines, plus Amtrak four times a year. Maximum catalog weight is 12 ounces; for the holiday books SkyMall gets a variance for more pages. Before creating the covers, SkyMall’s design team talks to each airline to see if it has a concept in mind (e.g., “Give us an outdoor look” or “Show a laptop in use”). Several versions are rendered and sent for approval and then put into final form. Each major airline has its own cover with its own logo, plus, if it wishes, it can have pages of its own in the center wrapped around the order form. SkyMall creates 12 different covers four times a year for a total of 48 different covers.

Here’s how it works. Let’s say the fourth quarter book is scheduled for distribution Oct. 1. The sequence of events would be as follows:

120 days out: Request product list from merchants.

75 days out: Layouts due. These are generally black-and-white pages and spreads that the airlines want to see. Merchant partners work from individual page templates with a section at the top reserved for SkyMall’s logo and toll-free numbers. Just before the book is put to bed, SkyMall adds the pagination.

50 days out: Film due.

30 days out: Printed by Quad/Graphics in Georgia and trucked to warehouses at the various hubs. The contract with the airline dictates that catalogs will be replenished in seat pockets once a day at the hub where the plane remains overnight.

Each book delivered to a seat pocket costs roughly $0.60—far cheaper than if postage and list rental were added in. For tracking purposes, each catalog and order form has a unique code which might read 0GCO320:

0 = Year

G = Issue (Summer)

CO = Airline (Continental)

320 = Hub

SkyMall’s Downside

Customer names are jointly owned by SkyMall and its merchant partners that fill the orders. The SkyMall business model is designed to help catalogers solve the problem of high acquisition costs by taking them to audiences at virtually no cost. However, the traditional catalog model is turned on its head in that SkyMall cannot aggressively market to its own customers, because it would then be in competition with its merchant partners. The result is that only 15 percent of SkyMall’s business comes from repeat customers, a number that would put any other catalog quickly out of business. But, because of Worsley’s unique distribution system and business model, SkyMall is flourishing.

SkyMall is one of a kind—a brilliant win-win-win-win entrepreneurial concept: win for the airlines, win for passengers, win for the catalogers and win for SkyMall. What is amazing is that the wizard of SkyMall, Worsley, is only 44 years old.