Q: Can you explain the concept of direct-response TV to me?
A: Enter the world of direct-response TV, and you quickly discover what an infomercial is. Direct-response TV is just a fancy description for a commercial with a toll-free number that allows you to buy the product. Infomercials, as they're called, became popular with TV time slots that weren't being utilized. These time slots could sometimes be purchased for as little as $500 for an entire hour of programming, simply because nobody was using the time.
From the get-go, late-night infomercials were designed to feed on emotions. Typical subject matter focused on three areas: need, greed and vanity. These three things are still at the heart of most of today's infomercials. You know the story: "Get a great body in 30 days, or your money back...guaranteed!" "Buy this make-up, and look like a movie star!" This type of advertising drives consumers to retail shelves for that "As Seen On TV" logo. This formula works wonders-if you can afford the air time.
The price for half-hour infomercials has gone dramatically skyward compared to those early days, though. Today, larger companies purchase blocks of time, which are resold for profit. That same half hour that cost $500 15 to 20 years ago costs five times that amount in today's larger markets.
Now let's talk about the margins that drive the retail price points you see on infomercials. As a rule of thumb, retail margins are established on a 5 to 1 formula, meaning if the product is sold for $29.95 on TV, you can expect to sell your product to direct-response companies on an average of $6 (5 x $6 = $30). These margins may vary based on owner participation and rollout of the actual infomercial. Typical price points for products on long-format infomercials are $29.95 and more; anything from $19.95 to $24.95 would typically get a short-format spot and utilize a smaller version of the same formula.
Done right though, direct-response TV can be very profitable. Consider the George Foreman Grill: This item has sold 16 million units to date via a large direct-response media campaign, which drives the consumer to any Sears in the country. For every single unit sold on TV, retail will sell five to seven. So if you can weather the financial storm of direct-response TV, it just might be worth it.
Dave Dettman founded Mr. Product LLC ten years ago and currently serves as president and CEO.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.