Lateral Capital Management, LLC

Direct Response TV: Promises and Pitfalls

Vince Shlomi, with ShamWow!

The late Direct Response Television (DRTV) veteran Gene McCaffery provided Lateral Capital with his rules for launching a successful DRTV product in 2010. Gene was the CEO at Shop NBC, part of the Guthy-Renker organization and chairman of the Gibson’s Restaurant Group in Chicago. To say the least, he really understood consumers and their shopping behavior in person and on TV. What he said then is more than true now:

Making a product successful through DRTV is very difficult. We are all very familiar with the success stories in DRTV, most of which trace back to one very inventive entrepreneur: Ron Popeil. Most people remember that he was behind Pocket Fisherman®, the “set it and forget it” cooker, etc. But what most people don’t know is that several of Popeil’s companies ended in bankruptcy. The reason is that there is no such thing as a great DRTV company – only great DRTV products.

Further proof: Guthy-Renker, the largest direct marketer with dozens of products, produces most of its sales and (by some estimates) almost all of its profits from one brand: Proactiv®. With this in mind, Early Stage companies are unlikely to succeed by forcing all their marketing onto DRTV. Rather, DRTV is a distribution channel which can work incredibly well; but only for specific products that fit to the very fickle DRTV consumer.

The DRTV industry is driven by research. Very expensive research. With media costs at perhaps 40% of the advertised price of the product, no one can afford to have a single word out of place. So everyone tests extensively – up to a dozen rounds before “going national” with an offer.

  • Concept Testing costs around $100,000, including creative work, consumer focus groups etc. This work is essential to learning what expressions of your product benefit are even worth quantitative testing.
  • Pilot Testing costs about $50,000 and can be done on radio to save money.
  • Creative Development for the television spot costs about $200,000, depending on the length and complexity. You only go there after you are sure the idea works and that it will pay out.

Guthy-Renker’s Proactiv is generally regarded as the most successful DRTV product of all time.

The economics of DRTV are set in stone. Bend them at your peril:

  • Price to product cost ratio has to be 4 or 5 to 1 – e.g., the product cost can’t exceed 20 to 25% of the expected “TV Retail.”
  • Media cost to TV retail can’t exceed 40% – e.g., you can’t have the cost of paid media exceed 40% of gross Sales.
  • Admin costs can’t exceed 20% to include creative development, testing, telemarketing, shipping and returns.

This leaves 15 to 20% net profit, before paying a sales commission of 5 to 10% for a “star” presenter should you decide to use one. It should be noted that shipping and handling can be turned into a profit center, but also that returns are often 20 to 30% of your sales.

Product is everything, but product life varies significantly by category.

  • Knock off operators who see your DRTV product can beat you to bricks and mortar retail at much lower cost, so you need to be sure your product is defendable.
  • Cosmetic product can last forever, especially if they are linked to celebrities. Bill Guthy, Greg Renker and Proactivâ are proof positive of how this can work.

The ideal product has a core benefit which can be expanded to multiple items. Proactiv® is a great example. Proactivâ sales are about $750MM per year. They are still in DRTV, but they have kiosks in malls that do $100 to $200MM per year in continuity sales. They are now finally moving after many years to retail. Their use of celebrities (“A” list stars) is expensive, but differentiating.

Continuity is a key opportunity for success. Negative option credit card agreements on refills and ongoing delivery charges can be the key to infomercial success. If the “lifetime” value of the customer is greater than a single sale, it helps support higher media spending which adds more customers.

The DRTV industry is ethically challenged. Everyone will tell you they can do everything and they all have a long list of (questionable) claims to success. Most DRTV development companies know that the failure rate is about 95% and given that, are fee based. They will get theirs whether or not you ever get yours. And along the way, they may well misrepresent their ability to provide you the best shot at success. There is a whole industry of these companies looking at the creative you paid for that did not work, assuring you that only they know how to tweak it or provide you the one that does work.

Again, the most successful and ethical company is probably Guthy-Renker. They spend up to $500MM per year on media. They plug in products based on productivity and have proven testing and creative skills. If the product looks to be successful, they will simply buy it out. If it looks risky, they will do it with you on a fee basis or not at all.

The Best DRTV Ideas – Here’s a list of items believed to be the most successful single products in the DRTV world. This list may not be accurate or complete; many other items were successful on a unit basis but had retails under $10.00, producing very little “penny profit.” Several new items in rotation now (like the new “reverse open Better Brella Umbrella” look promising to join this list. And, of course, Phil Swift at Flex Seal products has made his own industry, albeit from 20+ SKUs.