HOW TO EXPAND YOUR MARKET REACH WITH SPEED
In this article we will talk about how you can expand your business through joint venture. In our prior article, we talk about how joint ventures can be easy to set up, the benefits of joint venturing, how to create new revenue streams for your business, Front-End vs Back End sales funnel and whether you should consider joint venturing for your business.
Let’s say you are a manufacturer for a beauty product here in Malaysia. Your product name is Everest Beauty Cream that promises to make young ladies look youthful and younger after 30 days of use.
Firstly, you have invested a lot of time (hundreds, probably thousands of hours), money (hundred thousands of dollars if not millions) and emotional capital (high hopes, not giving up, stress) into Research & Development, production facilities (machinery, factory, raw material, etc), overheads (staffs, workers, office rentals, utilities) and the opportunity cost of these investment. Opportunity cost is simply the best alternative use for your resources if you had not use it into the current project.
And let’s assume you have created a great product that really helps young women keep their skin looking fresh, moist and younger. Now you are at next stage which is the marketing stage. What are your options? Let’s list all of the conventional way that a business such as this would market its product.
- First, maybe open a flagship shop somewhere hip and fashionable as an anchor for the product.
- Invest a lot of money on media such as advertising on radio, magazine, newspaper, TV ads, billboard, etc for branding.
- Create a website where customers can find out more information on the product and set up an ordering system online.
- Hire a sales force to hit the pavement and approach all of the potential prospects such as beauty salons, spas and the like around the country.
In all of the examples above, it is obvious that you would require further investment of your resources which is money. Even with such further investment of capital, there are no guarantees that any or all of it will work. The mindset here is to “spend and hope and pray we get some results“.
Depending on the overall marketing strategy, the final outcome may vary as there are a lot of other factors at play here. Assuming that your business monitor closely each of these marketing channels, and invest more into what works, and cut out what doesn’t after doing initial test, let’s assume you are doing well.
However, is there a better way?
While it is not wrong that you do all of the above, and in fact, you probably should do them to a certain degree, you could also set up another department specifically to arrange for joint venture deals which will cost you less in capital, less risky, produces results faster and can potentially produce better results than the conventional way above.
Let’s explore some ways in which you can market Everest Beauty Cream through joint venture effectively. There are many possible joint venture arrangements for this example but I will be talking about 1 types of partnership strategy only so that I can keep this article within a reasonable length. We will talk about more joint venture partnership possibilities in our other articles so look out for those.
- Create a joint venture partnership with people with existing distribution network.
- Create a joint venture with endorsers for your product.
- Create a joint venture with the media and get favorable terms for advertising.
Strategy 1: Create a joint venture partnership with people who has existing distribution channels.
The first strategy is obvious, straight forward and produces result fast. However, only smart business owners take advantage of this strategy. Let us look at who are the potential prospects who has the distribution network for a product such as Everest Beauty Cream.
- Multi-Level marketing companies (Amway, Avon, Cosway, etc)
- Beauty care salon chains (The face shop, Body shop, etc)
- Pharmacy chains (Caring Pharmacy)
- Self care product chains (Guardian)
- Supermarket chains (Parkson, Tesco, Aeon, Giant)
- and many more.
First of, the advantage of getting your product onto the shelves of these existing distribution network is obvious. They already have stores spread out across the country and they have existing customers who buys from them on a regular basis. I am assuming that your your product, in this example, Everest Beauty Cream has been clinically tested and proven to be effective.
Secondly, many of these distribution networks have an affinity relationship with their customers. This means that they already have an existing positive relationship with their customer base which they have carefully cultivated with a lot of investment in capital and marketing which you will be able to leverage on, for little or no money on your part.
Leverage off your JV partner
Let’s take The Body Shop as an example. Let’s say that The Body Shop agrees to sell your product for certain terms and conditions. We will cover the terms and conditions later. The Body Shop currently already has a customer base of, lets say a few hundred thousand people that buys their products and trust their recommendations. Throughout the years since its inception, The Body Shop has invested millions of dollars to build up their brand, image, credibility, trust, positioning, relationship, marketing, etc. Because Everest Beauty Cream is a new product, and your company is relatively unknown, it would take you years of effort, equally millions of invested capital, time and energy to achieve what The Body Shop already has.
However, because you are able to secure a partnership with The Body Shop to sell your product, you are able to leverage off all of the investment The Body Shop has made throughout the years and gain tremendous benefits off it. Let’s say that The Body Shop agrees to write a letter of endorsement for your product and send it out to their customer base in a letter form recommending the product for their next purchase.
In the mind of their loyal customer, a recommendation from a source they trust will likely produce a better response than one where you are trying to sell as an unknown entity. Makes sense so far? In this case, you are riding on the credibility and trust that The Body Shop has with their customers base for no investment on your part except to probably fund the letter campaign and probably a generous share of the profits on the sale with them.
On the topic of compensation, on this first sale, you could split 50% / 50% profits with The Body Shop, you could split 30% you and 70% them, or even to give 100% of the profits on this first sale simply for recommending your products to their customers. You have got to give your JV partners great incentive to move on your behalf. No one likes to be taken advantage of and The Body Shop isn’t stupid either. They can smell from a mile away if you are simply trying to ride on their coat tails and giving nothing in return.
Let’s say in this example you are giving The Body Shop 100% of the profits of the first sale after cost, and 50% of profits on all subsequent repurchases for the rest of the of the product lifespan. As your product is new in the market, and your company is unknown, sometimes you would have to offer such great terms just to have your JV partners agree to promote your products. In the future, once your product has acquired the recognition and stature which you will in time by using joint venture principles, you could then negotiate for better terms. However for now, let’s say we are working with these terms for this example.
Now in your mind, you are probably thinking that it is crazy to give 100% of profits after cost for the first sale. Why not split 50% / 50% or get better terms for yourself? The reason you probably could not is because your company and your product is unknown in the market. By trying to negotiate too hard, the deal may not even get off the floor and you would have killed it before it even has a chance to blossom.
But why does giving 100% profits on the first sale make sense? – Lifetime Value of a customer.
The answer to that question is understanding the principle of Lifetime Value of a customer.
Let’s use the same example above. Let’s say that your beauty cream is priced at RM30.00 and can be used for a whole month. This means that for every single lady that wants to keep their skin looking great, they would have to buy one a month which translate to 12 purchase for a while year.
What this means is that for every customer that likes and uses your product, they are essentially worth RM360.00 to you per year (RM30 X 12 = RM360.00) for as long as they use your product. Let’s say on average, each customer that uses Everest Beauty Cream will continually use them for 10 years. This means that each customer that you have converted as a loyal consumer actually is worth RM3600.00 (RM360 per year X 10 years = RM3600.00).
Now let’s say the cost of producing this cream is RM10.00 which means that your profits for each cream sold is RM20 (RM30 selling price – RM10 cost = RM20 profits). Remember we talk about giving The Body Shop 100% of profits for the first sale? Wouldn’t you be happy to give The Body Shop RM20 for all of the first purchases made by their customer knowingly that you will be making more on the back-end as each of these customers are potentially worth RM3600.00 to you over 10 years?
The answer to that is obvious. The Body Shop has earned the right to those generous share of the profits and also the subsequent share of future profits. They have agreed to promote your product, putting the weight of their brand, reputation, relationship with their clients, and all those cumulative investment made in their business and brand behind your product.
As for you, your product has now acquired a new base of sustaining customer overnight from doing nothing on your part, gain some stature and credibility from the endorsement, gain crucial cash flow to continue your business operations, and you are solidly placed to use this successful campaign with The Body Shop to gain new joint venture partners on similar or better terms with other joint venture partners.
How’s that for powerful leverage of joint venture?
Are there any down side to this?
Let’s look back at the example with The Body Shop. Unlike all of the conventional strategies that we have listed above, you have not sunk in a lot of investment in capital so your risk of loss is minimal.
What if the promotion by The Body Shop to their customer base did not work as expected? In this case, all parties would have learn a valuable lesson especially for you. You would have gained important feedback on your product and how to improve it further. As for The Body Shop, they would not get paid unless the product sold which means that you are only paying on performance. So the downside risk to you is minimal.
So far we have used only one of the joint venture strategies to build this case study by leveraging on existing distribution network. We will cover more on the other strategies on subsequent articles.
It is clear that a well designed joint venture with the right partner can produce tremendous benefits while keeping the downside minimal. You don’t have the risk of huge capital investment such as going for traditional advertising with no guarantee of success. In great joint venture deals where you structure it right, you can usually only pay for performance, meaning you only pay when you make a profit or a sale. You do not have the heavy sunk cost of traditional advertising and marketing strategies.
We will give more examples in our future article.
Thank you for reading until the end. Please leave a comment about your thoughts and if you have any joint venture ideas that you would like to explore with us, please leave a comment or get in touch with us via our contact form or via Facebook.
Looking forward to serve you further.