Chapter 8 Infomercial Financial Realities

Anatomy of a Winning Infomercial (DVD)

The ABCs of DRTV
Tim Hawthorne's
Glossary of
DRTV Terms

The ABCs of
Interactive Advertising

CHAPTER 8

Infomercial Financial Realities

Let’s cut to the chase, shall we?

“How much money can I make or lose on an infomercial?”

The good news is that some products have grossed as much as $120 million in just one year using infomercial advertising. Typical successes gross between $5 and $50 million per year.

The bad news is that only one in every 10 infomercials succeeds, partly because the competition is so intense and because many of these marketers are novices with unsuitable products and poorly produced programs. What could you lose? You could lose it all—your entire production and media dollar investment.

But there’s always hope. In this business, most of the participants have a stake in an infomercial’s success. A reputable infomercial agency won’t take your product on unless you have an excellent chance of success using the infomercial format. No credible company wants to pick up a loser; you’ll be told quickly before investing hundreds of thousands of dollars if your product falls into this category. With such learned advice in hand, you have a variety of choices. Listen to the infomercial agency’s rationale, learn about successful products and campaigns, and either correct the problem with your product and get an infomercial made, or market your product differently.

Managing Costs

Elsewhere in this book we’ve covered how to approach infomercials, what is involved and, in some cases, the cost of each step and expected return on investment. This chapter identifies the primary costs of various infomercial components (see the Appendix to this chapter) and provides detailed sample forms and reports you can use to plan, measure, and manage them. The Appendix to this chapter contains a sample Pro Forma.

Creative
What does it take to craft a great infomercial? Remember, writing an effective script is not a simple, quick task. It’s 35 pages of carefully crafted copy. Set aside $20,000 to $40,000 for the scripting phase. (See Appendix E to read the complete script of the award-winning Nissan storymercial.)

Production
Take time to do it right and allot a workable budget. The result will justify your means. Production costs range from $150,000 to $800,000. If you’re doing a studio demonstration or a talk show, it’s going to be on the low end—figure $250,000. Production revisions can run between $25,000 and $50,000.

It is common knowledge that you can shoot a half-hour at the local cable station for $5,000. However, beware! Do you want your infomercial—and more important, your product—to look like it’s being offered by “Crazy Eddie”? Caveat emptor! Some companies advertise in the Wall Street Journal and in USA Today promising to produce a show and buy 30 infomercial media time slots, all for just $15,000. As far as I know, these companies have never produced a success.

Media
In the U.S., approximately $650 million per year is spent on infomercial media on broadcast TV stations and cable networks. Infomercial media buyers usually pay $300 per 1,000 viewing households per half hour or $5.25 cost per thousand (CPM) per 30 seconds. Infomercials allow you to buy more time for less on a per-minute basis than spot advertising. That’s why they’re so efficient.

The approximate price of media tests range from $30,000 to $50,000. Once evaluated as a success, an infomercial will “roll out” at from $50,000 to $500,000 per week and make a profit on virtually every media dollar spent.

Celebrity Talent
Celebrities can cost from $5,000 to $1,000,000. The average cost of a celebrity ranges from $25,000 to $100,000. In addition, celebrity talent may get royalties of 1 percent to 3 percent (average) on net sales. For these substantial fees, celebrities also may commit to representing their infomercial clients’ products in retail, print, and other promotions.

A celebrity’s status and going rates depend on what’s happening with him or her at the moment. For example, Cher reportedly did her hair care infomercial for a guaranteed $1,000,000; Meredith Baxter received $500,000 guaranteed; Tom Skerrit earned a guaranteed $50,000. But note: these figures came well before Meredith Baxter starred in a new sitcom, and Tom Skerrit hadn’t gained his “Picket Fences” acclaim. Cher was in the spotlight daily, which is not the case right now. So, check with your producer or celebrity broker for current rates. And, remember, a celebrity is not necessarily the best choice for marketing your products on infomercials.

Duplication and Shipping Costs
Every station or cable network that runs your program needs a copy of the infomercial. This means there will be tape duplication and shipping costs. Depending on whether or not every tape needs special editing for a specific 800/888 number, these duplicating costs can vary from $50 to $300 dollars per station. But remember, once a station has the tape, the successful show tape can run repeatedly for many, many months.

Program Refreshing
There have been programs on the air selling the same product with no production changes for as long as two years or more. Those are the exceptions. The rule is that most infomercials need a new version at least every 12 months. So count on additional production and tape duplication costs every year, and perhaps some changes or additions to your product in the form of new bonuses, premiums, and price discounts.

The Appendix to this chapter is a complete sample pro forma showing revenues, expenses, and profit calculations.

CHECKLIST

• While some products have grossed as much as $120 million in just one year using infomercial advertising, other successful shows are grossing between $5 and $50 million per year.

• One in every 10 infomercials succeeds.

• A reputable infomercial agency won’t take you on as a client unless your product has an excellent chance of infomercial success.

• The average cost of quality infomercial production is $250,000, though production costs can range from $150,000 to $800,000.

• The approximate price of media testing ranges from $30,000 to $150,000. Media roll-out costs range from $50,000 to $500,000 per week.

• Celebrities can cost from $5,000 to $1,000,000 guaranteed.

APPENDIX

Sample Pro Forma

Using the Pro Forma

The attached pro forma was developed by hawthorne direct to project revenues and profits for our clients’ infomercials and certain aftermarkets. As in all pro formas, it’s only as good as the assumptions it’s based on. The following commentary will guide you in preparing your own pro forma. Note: any c with a circle around it (to the right of a column) indicates that the number is automatically calculated by the spreadsheet software.

General Information page 1

Production cost: infomercial production only--the pro forma will amortize this cost over an 18-month period.
Multiple payments: the number of months to collect full payment in any installment plan you may consider offering (usually two to four payments).
Product development cost: all costs to bring your product to market, including packaging. The pro forma will amortize this cost over an 18-month period.

Direct Sales

Revenues

Retail price per unit: your infomercial offer price.
Shipping and handling: what you will charge, not your costs.

Expenses

Cost of goods: cost of manufacturing (or your cost for purchasing the product(s) at wholesale) for core product and packaging.
Inventory costs: warehousing expenses on a per product basis.
Premiums: cost of manufacturing (or your cost for purchasing the product(s) at wholesale) for any premiums or bonuses you’re adding to the core product.
Returns and bad debt percent: can range from 1 percent to 10 percent; 5 percent is a reasonable average.
800 service: depending on what services your telemarketer provides, this can average from $1.50 to $2.50 per unit sold.
Order processing: your cost to pick, pack and ship your product, including shipping customer service.
Bank card fees/check processing: your credit card merchant account percent and prorated costs per order for electronic check debits and checks by mail processing fees.
Credit card order percent: typically 90 percent.
Check/MO order percent: typically 10 percent.
Customer service: additional customer service personnel or subcontractor costs to handle problems, inquiries and returns. $.50 to $2.00 per unit, depending on your experience.
Dub cost: every TV station and cable network requires its own 1-inch or Beta SP infomercial dub (duplicate). Depending on how long the infomercial plays on a station, the dub cost will be amortized to an even smaller cost; $.25 is probably more reasonable.
Royalties: includes royalties on total retail price for celebrities, production partners, product developers, etc. Royalties should never exceed 10 percent; 5 percent is preferred.

Retail Sales

Revenues

Wholesale price per unit: your wholesale revenue in sales to retail outlets.

Upsell Units/ Direct Units Ratio (page 1, right column)

For every 100 units sold directly from the infomercial, 10 upsell products are sold by the inbound telemarketers. Depending on the nature of the upsell product and price, this percentage can be as high as 80 percent, but averages 25 percent.

Revenues

Retail price per unit: of the product(s) sold in the upsell.

Expenses

Same calculations as above.

Outbound Sales

Inquiry percent of total inbound calls: if 100 viewers call the 800/888 number, 50 will order the product and 50 will be inquiries (request for more information, problem calls); this can be as low as 20 percent, but 50 percent is conservative.
Inquiry conversion percent: of those 50 inquiries, 20 percent will order the product when called back by the outbound telemarketing company.
Credit card decline percent: percent of all purchasers using their credit card whose bank will not honor the charge amount.
Credit card conversion percent: percent of declines that will eventually purchase the product with another credit card or by check, after being called by the outbound telemarketing company.
Outbound telemarketing: the amount earned per unit sold by the outbound company, usually between 25 percent and 35 percent of the product retail price.

Media Efficiency Ratio (MER)

A MER of 2 means for every dollar of media spent, $2 of sales will be generated strictly from direct TV sales (not including upsells, outbound, or retail sales).

Media Buy

The assumed amount of media that can be spent per month at the projected MER. Media spending rises and falls according to season and age of the infomercial. Successful infomercials can spend anywhere from $100,000 to $2,000,000 per month.

Retail Ratio

The Infomercial Retail Multiple (IRM): for every product unit sold direct via the infomercial, 1 (100 percent), 2 (200 percent) or more units will be sold at retail. This multiple can go as high as 5 (500 percent).

All of the above assumptions and their impact on revenues and cash flow are played out on subsequent spreadsheets.

Click chart for larger imgage.

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