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When is the right time to think about Television for a digital startup?

RDesign - 22 Febbraio 2018 - 0 comments

Photo by on Unsplash

By Toni Moreno Planas, Managing Director at Ad4Ventures Spain (Mediaset Group).

Ad4Ventures is the venture capital arm of Mediaset Group (leading free to air television broadcaster in Spain and Italy), focused on television media for equity deals. Ad4ventures has become the largest media for equity player in Southern Europe.

Every time we meet with digital entrepreneurs two questions come up: 1) is television the right way to communicate my business in a cost efficient manner? and 2) when is the right time to launch a television advertising campaign? I will try to give some light on this.

Let me start being a bit theoretical by referring to the Gartner Hype Cycle, which enlightens us about the way an emerging technology or application evolve over time from the early promises to actually solving real business problems.

This theory drills down into five phases, starting from an early proof of concept that attracts publicity but with unproven commercial viability, leading to a peak of inflated expectations. But then, reality comes as implementation fails to deliver, and only those who manage to evolve by listening to their early adopters, finding solutions to actual problems survive. In other words, only those businesses who adapt themselves to customer needs and pivot as many times as needed can bring the company to the next level.

Let me introduce another chart that I find quite illustrative of the matter. I refer to the Technology Adoption Life Cycle described by Geoffrey Moore in his book “Crossing the Chasm”, which can be applied to any emerging technology, from the invention of the wheel to computers:

Moore makes a distinction between the visionary early adopters and the pragmatic majority, calling “the chasm” the invisible barrier between the two groups. The first ones are enthusiastic about everything that is new, take risks, enjoy complexity, and adore new features. On the contrary, the mainstream majorities are more conservative, look for real solutions to their problems and simplicity. While the first ones like to have the ability to control every aspect of the product (in a photo camera: different optic lenses, ability to adapt aperture, white balance or the shooting speed) the latter will want easy to use solutions and convenience (the best image possible out of an automatic focus button). All of this becomes relevant when assessing the marketing strategy and best media approach. While in the visionary phase, product differentiation and technology are the cornerstone, once crossed the chasm, communication becomes critical.

Coming back to the Hype Cycle chart, those businesses that do not manage to retain their enthusiast users and early adopters (who are, by nature, not the most loyal users as they will always prioritize the latest gadget) will come to an end. Those companies who manage to solve a problem for an enthusiastic niche will move forward, but those who cross the chasm and hit the early majorities in a sustainable way will have very good chances of becoming the precious home run.

If you have managed to read so far, you may still be wondering why I am telling you all of this, not having mentioned the word television yet. Let’s go for it, then. What factors should we consider when assessing whether television advertising is appropriate for your business:

1. Target population:

The first question we should ask to ourselves is whether our target group is large enough. Obviously for a B2B business that sells to 500 potential customers, it is probably cheaper to knock on 500 doors. If the business targets a niche population such as yacht owners, it is probably more efficient to deliver flyers at a marina or at a golf club.

Geographical presence is also very relevant, as if you are only present in the big cities, you may end up paying for the total country reach, not only wasting part of your marketing effort and resources but also disappointing users from smaller towns.

2. Business/technology maturity:

Television can be expensive or cheap and great for the business or a killer, having the maturity phase of the business a lot to say about that. A digital business needs to have solid and proven conversion rates, customer repetition or engagement ratios, based on a large enough customer base (first cohorts are not really representative of customer behavior). The reason for this is that if those ratios are not good enough, the business will have to introduce relevant changes or pivot to find their market fit (remember the Hype Cycles).

Once you go for mass media advertising, you need to make sure that you are not disappointing your potential users or you will lose them forever.

3. Mainstream:

Is the business actually solving a problem for the majorities? Is it a MS-DOS type of product for computer freaks (sorry, I guess millennials may have no clue of what I am talking about) or is it a “Windows for Dummies” product? Are users willing to pay to get that problem solved?

4. Unit economics and target market:

We need to take into consideration what the margin contribution per transaction is together with the repetition profile of the users. It is difficult to justify a television investment in cases where the company obtains low margin per transaction with no or little repetition (LTV will never justify such investment).

It is true that television helps to improve conversion rates and repetition once the campaign is over but it does not perform miracles.

Once said that, each case has its own story and smaller size television campaigns can be of great help for certain type of businesses which may not meet all the aforementioned criteria. Among others I would mention:

– Businesses that require strong credibility: television traditionally inspires trust to the customer, who gains confidence on the advertised platform/product. This is key in new fintech or e-health businesses (e.g. ING, Fintonic).

– Businesses that propose unknown solutions or which are difficult to be communicated: users will not search in Google for a product/solution that they do not know that exists.

– Marketplaces: this type of businesses require building in parallel both demand and supply, requiring large liquidity to benefit from network effects and have the ability to monetize as well as trust. Television can bring all of this in one go (e.g. Wallapop, La Nevera Roja)

Our view about when a digital startup should think of TV advertising is summarized in the following chart:

We believe that a native digital business should grow up in the online marketing world, acquiring early adopters and niche users, interacting with their customer base, adapting and improving the product and engagement metrics, pivoting if needed as much as required to consolidate conversion and retention metrics.

Once product market fit is proven, limited budget offline marketing initiatives (such as radio or TV) can be tested by following a focused and prudent approach, closely monitoring CAC and optimizing the second screen impact (i.e. focusing on certain time frames or a very explanatory and direct spot creativity). This can be very useful to scale the business to larger audiences, improve credibility or attract supply in a marketplace, helping to fine tune the model but it will not be very transformational.

There is a certain point in time when it is clear that the product/business is here to stay as it is solving an actual problem and mainstream users are willing to pay for it. At that moment, the company should seriously think about a real branding effort which will allow the company reach scale, become “top of mind”, strongly reducing dependence on online acquisition, becoming a market leader, while creating barriers to entry to new or foreign competitors. This can become very relevant in venture capital, as a willing buyer will most likely pay a sensible price for a company that is market leader with a solid and recognized brand, in a market with large barriers to entry.

In any case, and as mentioned, the nuances of each particular company are relevant and worth analyzing to assess whether you are ready to cross the chasm. Feel free to contact us on contacts@Ad4Ventures.comand we will be happy to give you our views.