Infomercials

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INDUSTRY SNAPSHOT

Entrepreneur.com defines the infomercial, or direct response TV, as a commercial with a toll-free telephone number that allows the consumer to buy the product being advertised. The infomercial industry has generally grown away from its often tacky late-night spots hawking novelty items and get-rich-quick schemes, though its former tendencies still periodically manifest themselves. Production values have grown slick and sophisticated; products have become mainstream and functional. By the mid-2000s, the medium's reputation was considered stable enough for well-established giants in major industries. Indeed, by this time, Fortune 1000 firms accounted for roughly 20 percent of all new infomercial production.

The most intensive and "intimate" of the more than 500 commercial messages absorbed by the average American each day, infomercials were marketing roughly 1,000 products worth a total of $14 billion per year by 2003. During the mid-2000s, media billings for infomercials, or direct response television (DRTV) spots, reached an estimated $3 billion, according to Advertising Age. While only a small percentage of infomercials are profitable, the Electronic Retailing Association (ERA) reported that revenues from DRTV reached $182 billion in 2005, reflecting a growth rate of 9 percent from the previous year. Of the 2,036 different infomercials that aired, 714 were new productions.

Infomercials also made increasing sales in supermarkets and discount stores through "as seen on TV" sales. Analysts noted that while only 10 percent of consumers actually buy directly from an infomercial or other television advertisements, the infomercial medium develops pent-up demand that releases itself in standard retail channels. In fact, "as seen on TV" has developed from an occasional novelty promotion to a standard in-store marketing scheme, with some outlets even opening entire departments devoted to "as seen on TV" products. Although only about 1 in 20 infomercials proved financially successful, a hit could have producers rolling in money.

An infomercial is usually a 28.5-minute block of programming that resembles a television show and is designed to explain and sell anything from kitchen gadgets to advice from psychic friends. An infomercial's purpose is to show consumers how a product would satisfy a need, benefit their lives, motivate them, or solve a problem. Fitness devices are among the most successful infomercial products because they are easily demonstrated by fit, photogenic people. The more sophisticated infomercials often have a celebrity spokesperson, testimonials from satisfied customers, location shooting, a musical soundtrack, and a well-developed script. Production costs vary widely, depending on the amount and quality of special effects, talent salaries (which for celebrities can be astronomical), and a host of other considerations. Infomercials cost a minimum of about $150,000, but the price can rise as high as $1 million.

The industry's history is littered with its share of hucksters, prompting the creation of an organization to regulate it and project a professional image. The Electronic Retailing Association (formerly known as NIMA International and the National Infomercial Marketing Association) represents the electronic retailing industry in the United States and overseas.

ORGANIZATION AND STRUCTURE

Most electronic retailers do not invent products themselves but instead scout trade shows and fairs or accept submissions for easily marketable, new inventions. For instance, Guthy-Renker Corp. and e4L Inc. often buy the rights to a product from inventors and pay them a 10 percent (or less) royalty fee. In return, infomercial producers assume all the financial risk—and most of the payoff—for launching a product.

After finding a prospective product, the company produces an infomercial. Costs vary widely, depending on quality, but general estimates run between $100,000 and $600,000. These costs could include $4,000 to $20,000 for the script and the same range for a director; $3,000 for props; $30,000 to $60,000 for editing; and $25,000 to $50,000 for crew and equipment. For kitchen items, a chef and a food stylist are also necessary, and live audiences add even more expense. Costs for location and a host (who may be a celebrity) are vastly divergent and can run into the hundreds of thousands of dollars.

Industry firms usually test finished ads on focus groups before airing infomercials in specific markets. If the product generates enough response, industry firms buy more media time in diverse markets. Because response is so rapid—customers either call in or the phones are quiet—industry firms know within days if the infomercial is working or if it needs rewriting and reshooting. If the product receives positive responses, it eventually goes to home shopping channels, the Internet, and, finally, to traditional retailers. If the product receives negative responses, industry firms often pull it from the air and move on to promoting other products. Due to expanding television markets, the largest firms have plenty of media time available and can launch 30 or more products per year.

While major success stories are few and far between, the potential payoff can be great. Once an infomercial's product generates good sales, electronic retailers display the product on television, usually on the home shopping channels. Some products may also be shown on channels related to the product, as when a fitness machine and exercise video are featured on sports channels. The final sales venue is the retail store, where the original infomercial runs on a store's videocassette player, repeating and reinforcing the product's benefits to potential buyers.

Fortune 500 companies such as Lexus, Microsoft, Apple Computer, Magnavox, Sears, AT&T, Volvo, Fannie Mae, and Fidelity Investments added infomercials to their marketing strategies during the late 1990s, but they worked with industry firms differently than did struggling entrepreneurs. Major corporations typically contract with a direct-response marketer to produce the infomercial or spot, establish both the supporting telemarketing...