Issue #9 - Marketing Channels Through A Funnel
Direct to Consumer, Part II
Elvis Costello & The Attractions - I Can’t Stand Up For Falling Down
In Issue #8 we talked about how great the Direct-to-Consumer relationship can be. We did some math and, in our example, found that it can actually more than double your top-line profit!1 We left with a somewhat ominous portent of riptides in the beautiful ocean water of Direct-to-Consumer business models.
Today we explore the “softer” side of the Direct-to-Consumer channel [ed note: we’re learning all kinds of new words today!!]. While it will bring you closer to your consumer, generate loyalty, and create brand ambassadors, managing the channel will take time, money, and effort.
First, we should talk about “channels.” What is a “channel”? Specifically we are talking about sales channels. We can also talk about marketing channels. Often the two are related, but they don’t have to be.
As a brief aside2 it might help to know the difference between sales and marketing (and advertising). Marketing is your strategy for attracting and maintaining your customers. Sales is how your customer purchases a product or service. Advertising is the specific message you convey through your marketing strategy.
So, right, what is a Channel? A “channel” is a specific mode of implementation of marketing and/or sales from producer all the way through to the target - usually either the user or the customer depending on who you are trying to reach and why.3
An example. You decide that your marketing strategy is to focus on selling whole lambs direct-to-consumer. You decide that you should target customers through Facebook and Google Ads4 and sell through your website’s store. You decide to focus your specific message (advertising) on the sustainability of pasture-raised lamb. You complete the sale with an online store on your website. You then mail the order to your customer using FedEx.
In this example, your Marketing Channels are Facebook and Google Ads. Your Sales Channel is your website. Your Distribution Channel is the mail/FedEx. If you sell through a bricks-and-mortar retail store, that is a Sales and Distribution Channel (and potentially a marketing channel).
In the Direct-to-Consumer relationship, you - the producer - have to manage all of these actions.
To round out our discussion, one more concept. The Marketing Funnel.
The basic idea is this: repeat customers are more profitable than new customers. I promise by the end of this you’ll know why,5 but for now, just take my word for it. The goal is to have repeat customers buying your product.
Before a customer can buy your product, they need to be aware of it. Then, in a normal purchasing environment, customers then consider their options. Then, the customer converts their decision to a sale. Finally, the customer enjoys the purchase so much, they come back and purchase again (and maybe tell a few friends along the way).
Why is this a funnel? Well, a lot of people that are aware of your product will not consider it (maybe they aren’t interested in lamb). Then of those that consider it, they won’t convert to a sale (maybe they like your competitor better). Then of those that purchase, maybe they won’t make repeat purchases (maybe they didn’t like the product).
I could go into much more detail about this (and maybe I will in later posts), but I think you see where this is headed. Direct-to-Consumer is just one marketing/sales strategy. You will have marketing funnels for each strategy or even each channel.
In a commodity sales environment, this funnel is very short. Is a processor/distributor aware of you? Do you meet their requirements (their basis for consideration)? If so, you’re in (conversion). As long as you keep providing meat, they’ll buy it (loyalty). Easy peasy. Getting the meat to retail and off a shelf to a consumer is someone else’s problem. Your customer is the processor/distributor, the end user (consumer) is not your customer.
Direct-to-Consumer is a much longer marketing funnel.
To raise awareness you need to do some general advertising so potential customers just know who you are. Generally, on a per eyeball basis6 you should pay very little for this kind of marketing, but want to maximize volume of eyeballs reached. Social media is good for awareness (and loyalty) and it’s free, but you still need to be active on social media and get people looking at your posts. While cheap in dollars, social media is expensive in time and effort. Maybe you’ll post signs along a road near your farm. Maybe you put a billboard up on the side of a highway.
To help people make decisions you need to educate your potential customers on why you are better than your competitors. What is it about you that is special? This can also be done with social media, but this kind of messaging often needs more nuance than a social media post can contain. Comparison advertising, influencer reviews, and in-store samples are examples of Consideration-based marketing tactics. As you can see, on a per eyeball basis this is going to be more expensive than simple awareness tactics.
Converting to a sale can be a challenge because you need to be in front of the customer (or Top of Mind) when they want to purchase your kind of product. This means having clear Calls to Action, being in the right stores, and having a clear line of sight from your ad to your website. It also means, likely, credit card processing fees to simplify online transactions. These all cost money (e.g., 2.5% of the total transaction to the credit card processor).
Finally, loyalty takes time and effort. Keeping in touch with your customers through mailing lists and loyalty programs is its own kettle of worms. Toeing that very thin line between keeping people informed and spamming them is grotesque and difficult. It can also be very rewarding when your customers start sharing pictures of your farm with their friends. Why? Because you didn’t pay for that customer outreach!
You just got a potential customer straight through to Consideration or even conversion without paying a dime and the personal referral is a really heavy finger on the scale when a customer is considering the purchase! Not only do you have a loyal customer, but they are advertising for you - shortening your marketing funnel and lowering your average cost of customer acquisition, thereby decreasing your marketing expenses and increasing your bottom line profit. Phew! How’s that for fancy business words for ya?
The catch is, of course, that in Direct-to-Consumer, you - the producer - have to do all of this for each marketing and sales channel. In addition to running a farm. And dealing with processor shortages. And employees. And retail stores. And equipment problems. etc. etc.
And, it does cost money. Each stage of the funnel costs real money and real time. Is it $1,400 per head (remember our cattle example from Issue #8)? Depends how good you are at it.
Even if it’s worth the time and money is it worth the effort? Only you can decide that, but a lot of farmers/producers know all of this, and they still choose not to engage in Direct-to-Consumer because this is HARD work (not a Hard Problem, though) that doesn’t look much like farming.
Believe it or not, this was all related to meat processing for a sheep farm Erin and I are starting. Next time we’ll look at how this all applies to our farm.
Compared to top-line profit of the commodity market. By top-line profit here, I mean “gross profit” (Revenue minus Cost of Goods Sold). Everything we will discuss today is “bottom line” expense - part of General and Administrative Expenses on your Profit and Loss Statement.
If an entire article is nothing but brief asides, are the asides actually asides or is the article just a rambling mess? Meta-philosophy of blogging, FTW!
In short, a user is a person that uses the product/service, and the customer is the person that pays for it. These are often, but not always, the same person.
You might also sell some of your lambs through a commodity market. This will help provide some diversity in your sales (perhaps because it is steadier/easier sales), but may lower your overall gross profitability (stated differently, Direct-to-Consumer might raise your overall profitability because it is often the smaller - lower volume - of the two channels for many farmers).
The short answer is that the cost of customer acquisition (getting someone to buy your product) is highest for the first sale to any given customer. You will not spend as much getting a prior customer to buy a second product as you will getting a new customer to buy a first product (usually) because their awareness and comparison costs are already realized; they already know where to find your product, so conversion costs are typically much lower, too.
In online advertising speak we call this “reach” or “impressions.”