Sunday, January 30, 2011

Calling all Consumer Goods people...

I work for a software company in which each enterprise deal tends to run 6 or 7 figures. Each "thing" we sell is used for years by hundreds of people.

Meanwhile, I might use... 3 bottles of body wash a year. I buy a new razor once every 2-3 years (and replace the heads regularly). I have curly hair, so I may be atypical, but I buy about 8-9 shampoo bottles a year. I definitely don't buy more than 2-3 mascaras a year. Let's say each of these items costs $10. It doesn't - and it's brand dependent, but that's a good overall assumption.

The Target where I buy these takes no more than $1 on each of these goods. There are no margins in retail. So, I know $1 is a lot. I imagine it can't cost more than about $2 to make any of these. Some less, some more. Let's assume another $2 in handling and transportation. I bet the company that makes each of these goods pockets about $5 - on a bad day. 

Software is basically all-margin, so let's pretend we do a nice deal worth $100K. To make $100K on shampoo, you have to sell 10,000 bottles. If I'm typical, that means you need 1000 annually-committed customers. 5 times that, if this is mascara.

So, riddle me this? Why is my annual marketing budget less than the cost of a superbowl add bought by these very consumer-goods companies? How does that even work out?

I know plenty of CG companies don't advertise like that... Burts Bees. Or many categories are print-only, like nail polish. Still... can someone help me understand?


PD said...

To exist in a low margin business, purchase frequency counts, as does brand equity (which makes customers less price sensitive). Advertising helps with a lot of that and Superbowl ads cost the most since they have the widest audience reach and attention paid. Advertising is actually a form of competition between mass market brands, too, so that escalates the spend that people do on marketing. And last, Advertising is a highly formulaic industry, with a whole series of middle men and service providers with very set guidelines for how to write copy, do ads and buy media. It is an industry unto itself.

There is a theory that says business people who make decisions are consumers, first. Perhaps you need to start marketing your wares at suburban hardware stores, golf pro shops and Walmarts. I would love a good enterprise software section at Costco.

Lilac - Like The Flower said...

Well, sure. But where is the money for these ads coming from? These business are profitable, but advertising is eating significantly into their profits. I suppose I should count myself lucky to be in a world with larger profit margins and lower brand expectations.

by the way, the reason we don't do ads is simply because when there are 50,000 potential customers world wide, you don't have to hit millions of eyeballs with branding.