We all fail at some point. Some may fail more than others and some failures are more costly. Learning from those failures can lead to future successes, clarity in strategy, and motivation.
But what happens when businesses try to expand into new markets without working out the kinks in their systems? Every mistake they make is magnified. Yet businesses do this all the time in trying to meet revenue or unit goals or simply the desires of the owner.
One such example is a small manufacturer of a high-end consumer audio device. Having developed an (admittedly cool) device and been awarded four patents, they set out to market across the United States. They entered seven markets in the first year and sales were on the rise. The problem? The marketing had not been tested. While the profit margin on the product itself was a solid 36%, when marketing costs were taken into account, the business was losing money. Website conversions hovered in the low single digits, store sales in most markets were in the single digits per month (not per store, per market), and online advertising was pushing people to the website with little hope of turning them into customers.
While they had sales in years one and two, they did not have a clear understanding of who their customer was. They knew their customers were sports team enthusiasts, and they needed to have discretionary income to afford the product, but they had not taken the time to delve into their perfect customer. Every dollar they spent on marketing returned just over $0.05 cents in revenue. The outlook was bleak with the owner coming out of pocket month after month to make ends meet.
This may sound familiar. You don’t have to be a manufacturer to feel this kind of pain or make this mistake. Single store retailers do it all the time launching specials and products that flop on a large scale. Often the losses are hidden at first since the easy-to-see vanity metrics of product profitability make us feel good. But once the Profit and Loss Statements come in and we take in costs of marketing, sales, and staff, we can see that our plans resulted in a flop. Service organizations are prone to launching new lines without testing in a small batch first. They simply add it to their website and begin promoting it. The losses can go hidden for months or longer as many human resource costs in service organizations can be hidden in other work, making it hard to detect the “profit leaks”.
As for our manufacturer friend, the solution set was fourfold:
- Consolidate to a single geographic market. Exit other markets quickly, cutting all marketing efforts immediately.
- Develop a multi-channel marketing program to build brand awareness and product desirability in that market.
- Learn who the customers are at a nuanced level through extensive A/B testing of ad copy, market segments, and website landing pages.
- Always be testing! Learn and revise, continually optimizing the marketing mix and product presentation while monitoring the numbers closely.
Every business is different but our friend is on track to turn their business around, likely in less than eight months. If you are having issues with market strategy, contact us to discuss your options.