August 22nd, 2008

Marketing to Millennials

By Dan Macsai
BusinessWeek

Teens are historically difficult to reach, but small businesses are finding some success online through Facebook and "preward" gift cards

Ask Dan McDonald about millennials—those elusive 12- to 26-year-olds raised among text messages and Twitter—and he’ll chuckle emphatically. “They’re the perfect customers,” says McDonald, 51, who owns seven Jersey Mike’s sandwich shop franchises in Nashville. “They travel in packs, they eat like fiends, and they have tons of disposable income.”

Indeed, America’s 80 million millennials (and their folks) shell out roughly $200 billion annually, according to Chicago-based investment firm William Blair & Co.. Yet they’re tough to reach through traditional marketing: Despite the prominence of Jersey Mike’s billboards, flyers, radio spots, and newspaper ads, McDonald says he struggles to attract teens and 20-somethings.

Samantha Skey, an executive at Alloy Media + Marketing, which specializes in younger demographics, is not surprised. Weaned on cell phones, e-mail, and round-the-clock Internet, millennials are just as media-savvy as the marketers who target them. Occasionally, they’ll flip for a viral marketing campaign: Last year, Folgers’ (PG) bizarre “Tolerate Mornings” ad logged more than 500,000 hits on YouTube (GOOG). But more often, Skey says, they’ll just “ignore messages that don’t seem relevant.”

A Refined Approach
Edo Interactive, a Nashville-based firm that deals with Web 2.0 technology, is trying to change the game. After spending a year studying young consumers, they developed Facecard, a prepaid credit card aimed squarely at millennials and the businesses that court them.

Launching nationally Sept. 1, Edo’s gimmick works like a fiscal Facebook: After applicants create profiles on Facecard.com, they get a card in the mail that allows them to borrow, lend, or give away money to buddies electronically. For a fee, retailers can send them “prewards,” small denominations of instant store credit, based on their age, location, and personal interests. Because the $2 to $3 gifts are redeemed via credit card, tracking consumer response is a cinch.

Such niche marketing is “a hot idea,” says David Robertson, publisher of the Nilson Report, a newsletter that covers consumer payment systems. Unlike billboards, TV spots, and neighborhood flyers, prewards allow advertisers to reach a specific audience, in a specific location, at a specific time. It’s “a better way to attract prime customers,” says Jonathan Dyke, Edo’s chief operating officer.

Profit Potential
During a June test run in Nashville, more than 5,000 millennials signed up for Facecard, including 16-year-old Ben Sutter. Sutter likens prewards to “free money,” and he says he’s more inclined to frequent outlets that offer them, such as Jersey Mike’s. “I usually bring my friends, too,” he adds.

The benefits work both ways. When Jersey Mike’s McDonald sent prewards to 300 high school seniors, his expectations weren’t high, since 18- and 19-year-olds are notoriously nonresponsive. But the gamble yielded an “overwhelming” 17% return rate, he says, which is “way above” the numbers direct mailings produce. Moreover, it cost Jersey Mike’s less than $150: $2 for each redeemed preward, plus a 5% processing fee. (As of press time, Edo’s final pricing plan was still being fine-tuned.)

Meanwhile, Colt Hothorn, one of McDonald’s competitors, found similar success at his two Which ‘Wich? sandwich shop franchises in Nashville. Of the 300 seniors he prewarded, more than 40 redeemed their $3 credits—an impressive 15% return rate. And since the average customer spends at least $7 per visit, Hothorn sees plenty of profit potential. “From my perspective,” he says, “the strategy is seamless.”

The Facebook Factor
Of course, Edo’s concept is not entirely original. Last November, Facebook—home to 21.4 million U.S. millennials—began courting small businesses with Social Ads, a target-marketing tool that gleans information from user profiles. Several years ago, this “deep pull” marketing would have been impossible, says Skey. But the rise of social-networking sites like Facebook and MySpace (NWS) and blog hubs like LiveJournal and Blogger (GOOG) has normalized the publication of personal facts.

Tim Kendall, Facebook’s director of monetization, calls the ad service “highly efficient.” Once small businesses pay a premium, which usually ranges from 48¢ to 62¢ per click (or 22¢ to 29¢ per thousand impressions), they can advertise to ideal demographics. If you own a toy store, for example, you can market Star Wars gear to sci-fi junkies. If you’re a jeweler in Atlanta, you can target local women, ages 18 and over, who list “diamonds” as an interest.

Does it work? According to Andy Dunn, CEO and co-founder of Bonobos.com, an online trouser store, “there’s no better marketing tool.” In March, Dunn spent $64 peddling royal blue pants to Facebook’s 50,000 Chicago Cubs fans. (Official Cubs colors are royal blue and red.) Within days, Bonobos had sold 12 pairs and netted $1,300. The company’s follow-up campaigns—red pants to Boston Red Sox fans, orange pants to Syracuse University alumni—brought even bigger success.

Crafty Consumers
For better and for worse, Skey says, millennials are willing to “share themselves” with the world—and, more important, advertisers. That said, they’re not easily exploited. The second Edo’s preward notifications start to resemble spam or Facebook’s über-ads become too intrusive (BusinessWeek.com, 11/30/07), young adults will readily shut them out. As Skey explains, “This isn’t a very forgiving demographic.”

Kendall isn’t too worried, though. As millennials gain spending power, he says, these “granular” marketing tactics offer a viable alternative to TV spots and neighborhood flyers, especially for small businesses. Sutter, the 16-year-old Facecard user from Nashville, couldn’t agree more. “I don’t mind coupons,” he says, “but I’d rather use a preward.”

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