Leapfrog Series: The 1% Rule

If you've engaged a big, high-powered consultancy to evaluate your retail media business potential, you have likely been sold the idea that you can generate somewhere in the realm of 2-5% of your gross revenue from ad dollars. When your teams see that report they will quietly balk at the idea but they know that, regardless of their opinions, a senior partner with 'experience and purview into the whole industry' has convinced your CEO that it's possible, and there is no going back. They have their new target.

In this post in my retail media leapfrog series - articles that serve to help new and emerging retailers surpass the challenges that incumbents have or are facing in the retail media businesses - we look at how much your business can actually generate from retail media based on multiple factors.

Trade vs. Shopper vs. Retail Media vs. Brand

This is a whole other topic that I'll talk about in a future post but it's worth a bit of a baseline thought here. THEY ARE DIFFERENT!

But there are a couple of things to note for when you're starting out:

• If you don't have a retail media or shopper marketing business today (a mechanism to collect dollars in exchange for promotion), SOME of the dollars that are likely captured in 'trade' today will be reallocated to shopper or retail media. These are the dollars that should have never been there in the first place - dollars that were secured in exchange for some type of promotional activity.

• You will NOT be able to push all shopper or retail media or brand dollars entirely into trade. If you don't have a separate mechanism to collect these with a baseline of an offering outlined below, those dollars are going to help your competitors grow. Full stop.

Baseline: Having Ads to Sell is Important

This seems like an obvious statement but one that is often overlooked. If you don't have ads to sell, you cannot make money. Similarly, ads have a ceiling in terms of what you can charge for them. In very simplistic terms, if your ad only reaches 1000 people, and each ad is only worth $0.008, then your retail media business can generate $8 (a realistic ceiling on what you can charge).

In this it's pretty easy to determine a reasonable carrying capacity of your business today - at least in a digital sense:

• Total Website Traffic * average # of ads on a page * average # of pageviews * 0.7 (a reasonable fill capacity) / 1000 (how ads are calculated) * 8 (revenue per 1,000 ads displayed) = revenue potential

If you have 3,000,000 people visiting your website or app, and they look at 3 pages per visit and you have 2 ads per page, your media business is worth a maximum of about $100,800.

Note: for those that know this space well, I recognize it's way more complicated than this - this is not for you.

A similar model works for stores but the revenue per ad is lower and the initial cost of implementation (i.e. the cost of installing digital screens), can be more expensive to set up.

If you have 30,000,000 people visiting your stores and you have 3 ads per store, a good range is about $189,000 in gross ad revenue.

There you have it, you've built yourself a media business with a total gross revenue potential of $290,000. If someone tells you your ad business is worth $10M, you should ask questions.

What are the other Baseline Requirements of a Decent Retail Media Business

In a previous post, I talk about some of the initial challenges that retailers face in retail media. But let's look at some baseline requirements to be able to effectively play in this space:

• Internal Buy In: merchants, marketing, user experience, store operations, and more need to be bought in to the premise AND willing to support it outwardly (this is at all levels of an organization). One of the biggest challenges that all retail media businesses face is a merchant telling a supplier not to spend their money on retail media (with the belief that the money should be theres in the form of trade).

• The Right Product Mix: if the majority of your business is in private brand, there's no one to invest in advertising besides yourself.

• The Right Talent Profiles: this is a challenging one because the space is so new and talent is still being developed here. The right profile for an early leader in the retail media space seems to be someone with a strong entrepreneurial spirit, 10+ years' working experience, a customer obsession, a good understanding of media and marketing, a strong understanding of retail. Am I missing anything? It's likely not someone in your company today - treating retail media as a special project for high performer has its risks.

• People: you need people. This isn't a one or two or four person team.

• How you Deliver Ads: a systemized way of delivering ads using an existing toolset is key here. We're past the point where manual tools or approaches are acceptable.

• How you Measure Ads: baseline measurement requirements include impressions, clicks, delivery of ads, and return on ad spend. The market has become much more sophisticated but this is what you need to start.

• How you Partner: you will likely not be able to do this yourself and there are excellent partners out there that can help. Look for the consultative offerings first because diving into a technology solution only gets you so far. You need to set up the business properly before you can start selling ads.

The 1% Rule

Now, here's your number. IF you do all of the above in a market competitive way, AND you keep innovating, it is safe to assume that you can generate about 1% of your total gross revenue from advertising in about 4 years. These monies CAN come in at a 50-70%+ margin, and serve to drive the mutual growth of your business and your supplier's businesses. In that, it is worth the time.

The way to look at this business is, say you have a $10M media business operating at a 65% margin ($6.5M in net income). If your overall business is operating at a 3% margin, you would need to sell $216M in merchandise to generate the same net income.

The good news is, short of a small initial investment to get the strategy right, this 1% can come almost entirely as a reduction in margin. You still need to invest as a percentage of sales, and those investments can serve to accelerate the business, but your risks are minimized.

Accelerating Growth Beyond 1%

This is where real investment comes in. The RMNs that have surpassed the 1% threshold have chosen to invest in their business, not as a percentage of sales but real capital expenditure. And if you want to stand out in this business, it's best to start early.

Regardless, this money doesn't just appear as some would have you think. It takes a complex effort of change management within your organization as well an investment in a strong partner to get you there - a partner who has actually done the work in a real retailer.