Madison, Wis. – Three years ago, entrepreneurs Nathan Lustig and John Tucker were still in high school, blissfully unconcerned with the oft-criticized textbook exchange at the University of Wisconsin-Madison.
But graduate student Matt Stamerjohn thought that students were being ripped off. He saw students regularly selling used books back to the bookstore for a quarter of their original price, and he saw an opportunity to cut out the middleman.
The website originally provided a trading forum for textbooks and tickets to sporting events, but after purchasing the site for a little over $6,000, Lustig and Tucker completely overhauled it to provide more services for more users.
If they find enough users, they may reach their goal of generating their entire revenue base through advertising, eliminating the need to charge transaction fees.
The new site incorporates the stock market-like feature of bid and ask prices, and use has grown significantly. For the first UW-Madison football game of the 2004 season, only 24 tickets were exchanged on ExchangeHut. But prior to the Iowa game capping off the 2005 season, more than 1,100 tickets changed hands, representing about 10 percent of the student section of Camp Randall Stadium.
During last year’s football season, the site averaged 110,000 hits per day as buyers and sellers checked and rechecked the site. Today, the website has over 5,300 student members at 185 schools, including several University of Wisconsin campuses.
In April, Lustig, a Spanish major, and Tucker, a business major, won the $1,000 fourth place prize at the 2006 G. Steven Burrill Technology Business Plan Competition. After six months of preparation and a 20-minute presentation delivered to four local judges, Lustig and Tucker received plenty of encouraging feedback.
One of those judges was Pehr Anderson, former managing director of Silicon Pastures.
“I was impressed by how easy they made it look to make money on the Web,” Anderson said. “I was impressed with their execution and the fact they were out there doing it.”
Faring well in the business plan competition “got us into gear and got us to take the next step,” Lustig offered. Originally intending to expand the site to a modest 10 campuses, the business plan competition persuaded them to expand to over 100.
They brought in UW-Madison computer programming graduate Jason Sturtz to expand the site and add new features and new universities, and they believe the recently-launched version has improved interface.
Although the site eventually will have ads, its primary revenue generator is the transaction fees charged for sales of tickets and textbooks. Each successful sale costs the seller 4.98 percent of final sale price, less than the fees charged by the likes of eBay.
The 4.98 percent sellers fee on ExchangeHut is typically cheaper because there is no listing fee and because shipping and handling is circumvented by buyers and sellers meeting face-to-face on campus.
Lustig and Tucker estimate that users save an average of $165 for textbooks per semester by using their site. They predict that once students across the country tap into those savings, a huge market could open up.
The company’s overarching goal is to have enough users to attract enough advertising to remove all transaction fees. Lustig estimates that the site needs about 100,000 users “to get even a sniff of national advertising.” With 250,000 members, Lustig believes the site will offer sustainability on advertising alone.
The new site does not yet have data for the current year, but during last year’s football season it was averaging 120,000 hits per day, 4,000 of which were unique views. The alexa.com traffic-ranking page illustrates the cyclical nature of page views on the site with 90,000 to 400,000 hits per day during football season, and lulls between the football and basketball seasons.
The site originally used web-hosting services from Pair Networks before Lustig and Tucker switched to DreamHost.com to add more unique e-mail addresses and sub-domains for unique schools at half the price.
“We think that there are at least 25 to 30 schools around the country that have the same market that Wisconsin does, and since we’ve proven ourselves at Wisconsin – that students like the site, it helps them – that other students would like it too,” Lustig said.
“It’s an easily scalable business model that we thought with some hard work, but with not as much as would be necessary for a brick-and-mortar-type store, we would be able to expand to other campuses.”
As the site expands nationally, the pair hired 18 campus advertising representatives, each at a different university, with the goal of having a presence at 45 universities by the end of the semester. Representatives receive a percentage of revenue from whatever sales they attract from their schools, plus incentives for membership generation.
“We’re constantly adding more campus reps,” Lustig said.
As students return to campus, ExchangeHut has representatives at all the Big 10 universities plus Alabama, Georgia, Texas, Tennessee, Oklahoma State, and Missouri, which is where Lustig and Tucker anticipated they would be most successful. Smaller schools do not have as large a market for sports tickets, so there would be less money coming in.
“We need schools that are going to pay off right away,” Lustig said.