Smarthome Direct Growth the Smart Way

By Matt Griffin

Exclusive product availability, proprietary technology and an energetic response to customer feedback provide Smarthome Direct with the keys to successful growth.

The concept of home automation may call to mind futuristic visions of robotic butlers and a retinal scanner for your home security system. But for Smarthome Direct, real-life home automation products have helped create a multibillion dollar business that's seen its 12-month housefile double over the past four years.

And Smarthome has done so by leveraging its unique and growing line of electronic home automation products against the home improvement craze that's engulfed the nation in the past few years, says Rajeev Kapur, president of the Irvine, Calif.-based cataloger.

Kapur notes that the company has sought to capitalize on the popularity of the ABC-TV program "Extreme Home Makeover," as well as myriad other home improvement shows, by treating home automation as electronic home improvement.

"People are looking for new ways to enjoy their houses and their home life," he says. "And electronic home improvement can offer the same thrill of improving your environment as painting a room or replacing your countertops."

SmartLabs' five catalogs, including its flagship title Smarthome Automation, contain such items as home lighting, home security and home theater products, among other gadgets, all of which offer a home improvement experience that customers can't find in retail stores. This exclusivity, combined with an increasingly proprietary product line and strict attention to customers' desires, has been the driving force behind SmartLabs' recent successes.

Serving a Narrow Niche

Smarthome's catalogs serve a narrow niche. Consumers interested in home automation traditionally have had few choices in where to buy these products, with big box home improvement stores carrying a small selection of products, says Coy Clement, president of catalog consultancy Clement Direct Marketing. "One of the things Smarthome does particularly well is that it packages a wide variety of home automation products, which you wouldn't find if you went to a Radio Shack store or Home Depot," he says.

That's a philosophy that Smarthome has espoused from the very beginning. In 1992, the company initially only distributed home automation products and parts under the proprietary Smarthome name. But customers began to clamor for more types of products. Kapur points out that the customers' collective desire for a one-stop shop for home automation products led the company to begin selling third-party products just a few years later.

Working now with nearly 1,000 suppliers, including such heavy hitters as Uniden, Samsung and Sony, Smarthome cycles new products into its catalogs regularly, with nearly 1,500 to 2,000 products added during the past year, Kapur says.

Smarthome's Jason Root, vice president of merchandising and product acquisition, stresses that having a good relationship with suppliers has been a key part of the company's growth in the past few years. While Root and his team often find new products at tradeshows, most new products are offered by the vendors themselves. Good communication has allowed these supplier relationships to grow. He's active in requesting and selling products from all these suppliers, encouraging suppliers to notify Smarthome when new products become available.

In addition to suppliers and tradeshows, other key sources for new products have been Smarthome employees and gadget and tech blogs on the Internet. "Our employees are all big fans of our product line," Root says, "and when they find fun things online or elsewhere, they'll send me an e-mail saying this is something we should carry."

And in the past 10 months, Root and his team have developed a global sourcing effort that has added to Smarthome's product assortment and bottom line. After noticing greater demand for a number of third-party products in the Smarthome catalogs, Root began looking for direct sourcing options for those items. His theory was that bigger margins would allow Smarthome to lower its prices on specific items, without necessarily reinventing the wheel. It's been an effective strategy, he says, because, "Most of the products that we've sourced have resulted in increased sales through lower pricing, not so much through a redesign or something completely different about it."

Kapur openly calls it "The Sharper Image model," referring to the growing number of Sharper Image store and catalog products branded with the private label Sharper Image Design logo.

Brand New Solutions

While third-party products based on the popular X-10 protocol (the language that allows home automation products to talk to each other) provided the basis for Smarthome's early success, the company's customers began to request products that were more reliable. Knowing it couldn't control a product's reliability without manufacturing it, Smarthome began to acquire several small engineering firms beginning in 1997.

At first, Kapur notes, the company focused on supplementing its existing product line, developing and manufacturing items that supported the existing X-10 home automation protocol or made X-10-based products better. For example, since the X-10 protocol uses household wiring to communicate between devices, Smarthome developed products to boost X-10 signal strength. But as the Smarthome customer base shifted from automation hobbyists to home improvement do-it-yourself (DIY) types, customers became frustrated with the unreliability of X-10. Most of the time it would work, but sometimes it wouldn't.

For instance, because DIY customers wanted to walk into a room, flip a switch and be sure of the outcome, Smarthome gave its engineers a new task. Rather than simply making X-10 products better, Smarthome wanted to create a more reliable protocol.

So in 2004, Smarthome unveiled INSTEON, a proprietary technology it hopes will become more widely used in home automation products. Much like its earlier efforts to encourage customer feedback on X-10 products, customer requests dictated the new INSTEON products, which also resulted in an improved product line.

Clement notes that this strategy not only has resulted in better margins, but it gives other catalogers the opportunity to show that they understand customers' needs better than general merchants. "In that sense," he says, "being able to develop your own product is a pretty powerful way of expressing your brand."

The company's main conduit for generating these requests is its tech support staff. Available to Smarthome customers seven days a week, the company's 14 tech support staffers provide free product selection advice, as well as post-sale troubleshooting and programming. These staffers also take note of which customer needs and desires are not being fulfilled. Root explains that the engineering staff then works with marketing to determine which of these needs and desires will be turned into INSTEON products.

Smarthome also has made it possible for customers to make product recommendations on its Web site. At the bottom of each page of the Smarthome Web site, there's a "Suggest a Product" link that opens up a short form customers can use to recommend a product they need that Smarthome doesn't carry, Root says.

Focus groups have been another source of customer insight for the company, Root notes. But more narrow, and in some ways more valuable, is something Kapur calls "the customer advocate meeting." As Root explains, "We've actually contacted a customer who has had lots of activity with us, but isn't necessarily upset or satisfied. And we've had a conference call with that customer and our entire executive team. We gave him the floor for 30 minutes, and we sat and took notes feverishly. We learn a lot by doing those types of things."

Businesses as Customers

While hobbyists and DIY customers make up the majority of Smarthome's customer base, a significant source of sales are generated by the company's business-to-business catalog title, Smarthome Installation.

To differentiate the two sides of the business, Smarthome operates a separate Web site for dealers and installers interested in using home automation products. That Web site is password protected to prevent customers from the consumer side of the business from seeing the reduced prices on wholesale products.

Root notes that because many of Smarthome's business customers are installers working on site in homes and offices, they have specialized reps who handle order placement and technical support. A higher percentage of dealer orders are placed on the phone than consumer orders because of the on-site labor, Root says, so Smarthome makes sure these customers have the necessary support available to them.

Dealer catalogs are printed separately from the consumer catalogs, and although Smarthome repurposes the majority of the content from the consumer books, new dealer prices are dropped.

Two Future Challenges

Smarthome continues to deal with what's perceived as an extremely technical product line. With products based on both the older X-10 protocol and its new INSTEON technology, Smarthome struggles to ensure that these products are accessible and understandable, not just to hobbyists and technologists, but to average consumers looking to improve their homes, Kapur says.

To overcome this hurdle, Kapur and Root have directed their teams to keep catalog copy less technical, touting the benefits of the technology rather than individual product specifications.

Also, earlier this year, the company launched a new catalog, Smarthome Style. In the past several years, Smarthome's customer demographics have gone from 80-to-20 male to female, to 55-to-45 male to female. So Smarthome Style addresses that shift by arranging products by living space, rather than product category. For example, rather than page after page of lighting controls and universal remotes, the book features a variety of products for use in the kitchen, followed by products for the backyard.

In addition to educating his customer base about the company's product line, Kapur wants to be sure to recognize future shifts in customer demographics. "A lot of companies don't realize that their demographics are changing or have changed," he says. "They just wake up one morning and realize their customer base isn't the same. For me it's about always making sure we have our eye on the ball, making sure we know who our customers are."

As Smarthome's history suggests, Kapur and his team plan not just to keep an eye on their customers, but an ear on them as well. "You can get so wrapped up in your day-to-day work that you forget what you're doing," Kapur says. "We want to continue to listen to customer feedback and improve on that feedback."

SmartLabs Corporate Timeline

1992: SmartLabs is founded as Smarthome by Joe Dada, a formally trained engineer with an interest in home automation products. The company's mission is to provide customers with simple, convenient and inexpensive products to customize and automate the home.

1993: The first catalog mails. It's eight pages and features products based on the X-10 protocol, an automation industry standard that uses household electrical wiring to send digital data between electronic devices.

1995: Smarthome launches one of the first e-commerce sites on the Web, complete with shopping cart and internal site search capabilities.

1997: Smarthome starts developing and manufacturing products in house.

2004: Responding to customer feedback for more reliable home automation products, Smarthome introduces its own home automation and control protocol, which it dubs INSTEON. In December, the company ships its millionth product.

2005: In Q4, a new parent company, SmartLabs, is created. Under the SmartLabs name, there are three divisions: Smarthome Direct, the direct to consumer group which includes Smarthome.com; SmartLabs Design, creators of home automation and control products; and SmartLabs Technology, the architects of the INSTEON wireless home control technology.

About SmartLabs

Headquarters: Irvine, Calif.

Year founded: 1992

Merchandise: Home automation products, including lighting control, security/surveillance, and home theater products

Price point range: $10 to $4,000

Average order size: $150 to $200

Annual circulation: 4 to 6 million

Mailings per year: 12 to 16

# of SKUs: more than 7,000

# of employees: 100

Customer demographics: 55-to-45 male to female, homeowners

Sales channels: Web, catalog, factory store, retail, dealer/installer and wholesale