Thursday, July 21, 2005

Penny-at-a-time brands

ROI-positive online ads are showing up everywhere (even on my blog!). Google epitomizes the robust online advertising sector with its 100% growth rate and billion+ dollars of quarterly revenue, but the impact stretches well beyond Google. I have been impressed by literally dozens of private companies that are building strong businesses in performance-oriented online direct marketing. There are emerging networks and marketplaces like Industry Brains and AdBrite. There are tools and service providers like SearchRev, Efficient Frontier, and Omniture. An entire ecosystem has evolved around Google's and Yahoo's auction-based ad networks, and many of these companies are growing at phenomenal rates.

Of equal interest to me, though, are the buyers/users of these online ads. An entirely new way of building brands has emerged, and I think it will have a major impact on how future consumer products and services are brought to market.

Creating a new consumer brand used to require a ~$50 million marketing budget. You would design a new consumer offering, spend boat loads of money to let the world know about it, and then pray the "dogs would eat the dog food" (that's venturespeak for "consumers would buy your stuff").

In the late 90s when venture capital seemed to grow on trees, many companies were funded to pursue this gutsy brand building approach. A few actually made it (Amazon, Buy.com) but most did not (Webvan, Pets.com, eToys and countless others).

Eventually, the venture capital community adjusted its attitude. No one wanted to make such large, high-risk bets, and in late 2000, capital for new consumer businesses dried up.

Highly effective, ROI-positive online direct response advertising could not have emerged at a better time. You no longer need $50 million to build a new consumer offering. With online direct response advertising, you can start by spending $100 to acquire a few (or even just one) customer. If your offering "works," those customers will generate more than $100 (say, $150) of marginal contribution. Now take the $150 and buy more ROI-positive online advertising. Rinse, lather, repeat. You have a cash generation machine.

It is now possible to bootstrap your way into a consumer business. Companies like Lowermybills (online mortgages), Stubhub (online tickets) and Zappos (online shoe store) are great examples of emerging consumer brands than never burned big dollars on brand advertising. Virtually every penny they spent yielded a tangible, positive ROI.

These penny-at-a-time brand builders represent both ideal early stage and late stage venture capital investments. The early stage investors love them because the core business models can be demonstrated with a small amount of capital. The late stage investors love them because once the models are proven, more capital clearly accelerates growth, and smart entrepreneurs are always willing to part with some equity to increase their growth rate.

So in addition to its profound impact on the online advertising market, Google has paved the way for new consumer brands that might otherwise have never made it off the ground.

2 comments:

Anonymous said...

Interesting... do you think these penny at a time brands are really brands in the consumers' minds?

Josh Kerbel said...

We are actually about to launch a consumer product venture using nothing more than blog ads, google adwords and some swanky search engine optimization.

The goal is to build a company with negative working capital right from the get go.