For this post, I will be discussing a not-so-well known way to supercharge growth in a CPG or consumer product startup, which I had the opportunity to use in a few different start-ups with great success.
Which set of results would you rather have?
Exhibit B is looking a heck of a lot better, isn’t it? In fact, its multiples better across all metrics except investment. Sure, it required more investment, and that might be a problem. But, if you are raising the money, going from one to two million is not a big stretch.
The sources of these results come from two different companies in very similar product categories, both of whom were raising follow-on rounds from investors. How could one company do so much better than the other, especially when they had similar products? The answer is analog (TV, radio, national print) direct response marketing. DR marketing can provide leverage to grow a brand that manifests through free marketing dollars. Would you like free TV or radio advertising for your product? Yes, there is a catch (actually several), but read on.
Direct Response Defined
This type of advertising is defined by a call to action, asking the buyer to do something right now, which is to purchase the product or get more information by calling an 800 number or going online. There are long-form ads that are up to 30 minutes long, while short-form infomercials are 15, 30, 60 or 120 seconds long.
Most TV ads are branding vehicles that create exposure between the brand and the consumer so that the consumer will purchase the product at retail. Branding ads don’t include a call to action asking the consumer to purchase. DR ads sell direct to the consumer. Many companies use them because they do not have a retail presence.
DR ads are driven by metrics, where response rates at all levels through the sales process are measured and captured in order to help the marketer determine where they need to optimize and tweak to make improvements. The only metric that cannot be 100% accurately measured is knowing on which network (TV, radio, or print vehicle) a prospect saw the ad that caused them to go to the website.
Where’s The Leverage
Here’s where the leverage in free marketing comes in. Since the vast majority of consumer product sales occur in brick and mortar stores, the end goal for most consumer products is to sell on shelf. But to do that, you want brand awareness so that consumers will purchase in-store.
DR ads can be used to build the brand awareness, but since they are designed with a call to action to purchase now, the revenue derived will pay for the marketing. Further, the revenue derived from selling a product on shelf has no marketing cost behind it because it’s being paid by the DR operation. It’s that simple.
But aren’t you cannibalizing your DR business with your retail business, or vice versa? No. At least not until much later. At some point, when you reach tens of thousands in retail locations and have built a national brand that people recognize and see in retail, your DR ROI’s will start to drop and the business may no longer prove profitable. But at that point, you’ve built your brand and are selling in retail, so you don’t really care.
You will still want to run analog advertising to reinforce and continue promoting the brand, but at this point, you would switch to standard 15 or 30 second branding ads and close down the back-end operations of your DR business (customer call center, shipping, returns processing, etc).
Or, better yet, come up with a next product that you can advertise with DR and start all over again. This gives you the benefit of continuing to use analog media to promote your brand while using the DR to pay for the marketing.
Catch 1 – Optimization takes time and never really stops
You don’t just create an ad and throw it up. DR ads are driven entirely by metrics and the goal is to optimize the ad by maximizing the revenue against the media spend. Optimization comes through a variety of things, including:
- Tweaking the ad creative or the offer presented in the call to action to maximize calls and website visits;
- Selecting the right networks to run the ad that will maximize the number of calls and website visits;
- Selecting the right day parts (time of day when the ad is run);
- Training the sales agents through a customized script so that they maximize the opportunity to close a sale;
- …and many more.
The catch is that optimization often requires testing over some period of time, which means you will have to spend media dollars that may not provide sufficient ROI until you get it right. You might never get it right, requiring that you re-shoot a new ad and try again or cut your losses and throw in the towel. While your optimization might get you to a good ROI, you will never stop your optimization efforts because you want to keep tweaking things to see where you can find incremental improvements.
Your main goal is to be able to reach some weekly media spend that will, at a minimum, give your ad the reach and the frequency that will build brand awareness and move product off the shelf, while also allowing the revenue from the ad to pay for the media spend and operating expenses (COGS, personnel, S&H, etc.) to run the DR business. Is that weekly media spend $25k, $50K, or $100K? It all depends on a great many factors – you will only know through testing.
Optimization also takes management focus. You want to dedicate 20-30 man-hours hours per week on the DR business, where you outsource everything but serve the role as QB. Regardless of whether you are spending $25K per week or $200K per week, management time will still generally be in the 20-30 hour range to effectively manage the business and stay on top of the metrics.
Catch 2 – Investment and Cash Flow
Traditionally, short-form ads have cost $25K and up to produce, and adding in the expenses to set up the operation, you may be in the hole for a good $50K before you start spending on media. Long form ads can cost $150K and up to create. While this is the way it is usually done, I always start much cheaper than that and only spend the money to create professional ads when they prove out.
Another catch is that you generally have to pre-pay three times your weekly media spend in buying ad time. This is a cash flow intensive business. Plus, there is a lag on your product returns, which is why you really need a good 3-months testing to factor those into your ROI.
When you first start out, you are spending a low amounts of cash to minimize losses while you optimize. If you optimize in the right direction and your ROI improves, then you start upping your media spend while you continue to optimize. At some point, you start to see diminishing returns on your media spend, where greater spend results in lower ROI.
If you want to maximize profitability, you hold your media spend at this level just before you start to experience diminishing returns. If your goal is to maximize your brand building efforts and move product off the shelf, then you spend until your DR business gets to break-even. At this level, your marketing is paying for itself and the profits come through retail sales.
Another thing about DR is that there is real risk of losing your investment. You can do all the right things to prepare – doing the market research, hiring the right partners and really staying on top of your metrics – and still fail. You just will never really know if your ad and product hit their target until you try. But, there are cheap ways to test before you invest, which is what I do before I spend a lot to develop ads and the backend to support the operations.
Not every product will work for DR. In general, products that solve a clear and pressing pain or need, versus ones that create delight, are much more apt to succeed. It’s best if the products have features and benefits that are magnitudes better than what is already available in the marketplace. Think revolutionary benefits versus evolutionary benefits – it is much harder to get a customer to differentiate in their mind if the differences are not dramatic. You are hoping to appeal to a potential customer’s impulse buying behavior. If they see something with dramatic benefits, they are more likely to purchase in the short-term rather than think about it over a longer period of time and decide against a purchase.
Pricing, Margins & Configurations
Pricing for a product can be all over the place: for short form ads, 10-$40, with upsells thrown in to get the average order value; long-form range from $30 to $200, with many products spreading the cost out in multiple payments over several months.
Product margins sold via DR can be better than retail, but not always because it depends on your goals. If you want to achieve brand recognition, you might drop the price and maximize media spend to breakeven, relying on the retail business to bring in the profits. If you are not in retail or have limited presence, then you would want to find the optimal balance between maximum product price, maximum media spend and net profits.
The industry looks at a multiple of sales to media spend as a common benchmark for performance. Assuming all your variables are optimized, you want around a multiple of 2 to achieve break-even. Star performers achieve multiples of 3 and higher and sometimes a lot higher.
Product configurations will likely need to be different from those sold at retail, so as to minimize channel conflict, with large quantities/packaging sold via DR and smaller quantities/packaging sold at retail. In general, your goal is to maximize the amount that you get on the first order; don’t assume that you can sell a customer on a small purchase now with the goal that they will like the product and come back for more.
One final element about DR is the retail channel. DR ads are a mass market promotional vehicle, not a grass-roots or guerrilla-style marketing vehicle. As a result, any company growing in retail that wants to use DR will probably have to focus on traditional mass market retailers and not on specialty or niche market retailers.
For example in food, the specialty/niche markets are natural/organic retailers, such as Whole Foods and Trader Joe’s. Mass market retailers are Walmart and mainline grocery stores like Kroger.
That might sound counter-intuitive, as start-ups and small consumer product companies think first to establish their reputation in niche markets and among early adopters before expanding to mass. But if you use DR, you won’t be maximizing your brand building efforts through the media if you are not in mainline retail. And, if you are advertising on analog and it is working, mainline retailers are much more likely to bring you in. Focus on mass market first, then go into specialty/niche later.
DR ads really do work and it’s my recommendation for any consumer product company to take a hard look at using this marketing strategy. It won’t work for every product, but the brand building potential may be worth the effort to develop a product or tweak an existing one for a DR ad.