Direct Response Marketing

Retail Outlet: Using the 'Factor of 10' as a Guide to Greater Sales and Profits

1 Mar, 2006 By: Donald L. Potter Response

---

The Pareto Principle calls for marketers to concentrate on the vital few and ignore the trivial many. Proven through years of practical application, it is now simply referred to as the "80/20 rule" — meaning that 80 percent of the sales of a given category or specific product comes from just 20 percent of the users. This axiom is the foundation of all target marketing.

Donald L. Potter

Over the years, marketers have discovered other numerical truths that can be applied to many situations. So what about the area of DRTV or taking products to retail — or both? The theory has been postulated that a 10-times ratio exists in many of the elements of the direct response marketing mix. Upon investigation, it appears as if the "Factor of 10" has validity.

Therefore, these ratios can be incorporated into a checklist for those who are considering launching a product through DRTV, particularly those with hopes of landing on retail shelves. Examine the following statements to determine how they apply to your particular product.

• 1.
  Factor 1 — There are 10 times as many new products being introduced today as there were a decade ago. This makes the fight for consumer interest and awareness more challenging and the battle for shelf space much more difficult.

• 1.
  Factor 2 — Less than one in 10 DRTV products are considered successful. Most of these don't make it out of the test phase. Only the winners last a year or more.

• 1.
  Factor 3 — About one in 10 successful DRTV products achieve broad retail distribution and become part of the store schematic plans.

• 1.
  Factor 4 — Fewer than one in 10 products have a permanent home on the shelf after a year. The good news is that many of those that make the cut can expect to be in the stores for years to come.

• 1.
  Factor 5 — Less than 10 percent of consumers have bought products in response to a DRTV commercial, but this still represents big bucks.

• 1.
  Factor 6 — An average of 10 units within a given category will be sold at retail for every one sold on a direct basis, so the potential is enormous.

• 1.
  Factor 7 — A selling price (including upsells and continuity plus shipping-and-handling markups) that is 10 times the cost of goods is ideal for a DRTV product. The margin is also sufficient to finance the transition to retail.

• 1.
  Factor 8 — A cost-per-call of $10 is considered very good for most DRTV products. This assumes the MER (media efficiency ratio), conversion rates and back-end sales are in line.

• 1.
  Factor 9 — Return rates of 10 percent or more indicate serious customer satisfaction problems. Check the product quality, and then check the reality of the advertising claims.

• 1.
  Factor 10 — The combined cost for telemarketing and fulfillment should not exceed 10 percent of the gross unit sale. This means that marketers must find more effective and efficient ways of handling these functions such as IVR (interactive voice response), directing more customers to the Internet, and promoting higher-priced rush shipping programs to offset costs.

In addition to the "Factor of 10," there are complementary factors using other ratios that can be applied to this business. For instance, MERs of two-to-one or better are destined to be profitable. Optimal telemarketing conversion rates are one sale out of every two calls. And, most retailers will take an item that cost them $1 and sell it for $2. Perhaps you should consider the axioms of the 2-to-1 ratio, as well.

Whatever guidelines you consider, remember that each business, each product and each marketing situation is different. So, the best bet is to develop your own set of assumptions, prove them in practice, and then build a model that allows you to reap the financial reward each time the disciplines are applied. Besides, the exercise will do you good.

Bookmark it: digg del.icio.us technorati yahoo facebook twitter