[Originally published on crowdsourcing.org, 20 May 2013]
What would the new K-Tel “22 Original Hits” collection be for Crowdfunding? Chances are, it would include must-have (and top-funded) presale products like a fly-killing salt gun, a 3D doodling pen, a networked video doorbell, a robotic insect toy, spring-cushion shoes, migraine-relieving eyeglasses, a gourmet cooker that clips onto any pot, stickers that prevent you from losing things, and little clips that mean you’ll never have to tie your shoelaces again.
As a lifelong admirer of such clever things, I love how crowdfunding has unleashed a wave of ingenuity in consumer products. The immediacy of their appeal reminds me of some products advertised on TV, like the Robo Stir or Rollie EggMaster. As with crowdfunding, these Direct Response (DR) products are sold directly to consumers from the entities that make them. That’s why I consider online “pretail” crowdfunding, in which backers fund production runs of products as a way of hopefully buying them in advance, as a new, indie, riskier form of DR. The crowdfunding portals have discovered that campaigns fare much better if they include a video, but the DR people have known this all along.
Dan Williams serves on the board of directors and chairs the Internet and Emerging Media Council of the Electronic Retailing Association (ERA), the main trade organization for the DR industry. ERA member companies spend about 3 billion dollars per year on advertising, mostly television, including both spots (“short-form”) and infomercials (“long-form”). I recently spoke with Dan about crowdfunding and DR. Here’s part one of a three-part conversation:
Direct Response and Crowdfunding
Paul Spinrad, Crowdsourcing.org: What are some examples of ERA member companies or their products?
Dan Williams, Electronic Retailing Association: Some of the larger companies include Guthy-Renker, who make Proactiv and Meaningful Beauty skin care products; Beach Body, known for the P90X workout kit; Euro-Pro, who make Shark vacuums and Ninja blenders, and Telebrands, who make the Flip Jack pancake pan and RoboStir pot stirrer. Electronic Retailer magazine publishes lists in every month for the top 25 spenders in both long form and short form categories, and you can go to the website of each of those advertisers to see the video and ecommerce experience that the users are having.
Is anyone in the industry using crowdfunding, for example to test interest in prototype products?
I don’t know of anyone in the Direct Response space doing this yet. But for indie inventors and product developers who are using crowdfunding themselves, I think there’s an opportunity at ERA conferences. That’s where people with ideas and new products can pitch direct response marketing companies and agencies who can help them on the manufacturing and media sides.
With crowdfunding, I’ve noticed that the campaigns that raise the most funds are often clever gadgets or other things that demo well, and you can buy them in advance. It’s the hardware. You see a video and you say, that’s something I want– it would be great for my kitchen, or great for my house. And you buy it direct from whoever makes it. So I think crowdfunding for products like that resembles traditional electronic retailing.
Yes, but I think there’s a bit of a gap. On the crowdfunding side, it’s mainly inventors. But if you want your new product to succeed at a large scale, you also need people with other expertise: how to get the item manufactured and packaged right, how to market it, how to buy media, ship it on time, offer customer service if someone calls. Inventors typically don’t want to worry about those things. But all of these suppliers and experts who are part of the ERA membership or the direct response community in general– that’s what they do. So I think there’s a great opportunity on both sides.
Yeah, I agree! One thing I’ve seen on the crowdfunding side is that there seems to be a whole ecosystem of companies growing up to support crowdfunders in parallel ways. For example, a company called Dragon Innovations helped the Pebble watch developers get their product manufactured after they were swamped with orders. Companies like Crowdhut, Wrappled, Swish, and Crowd Supply are also helping crowdfunders develop new products or sell them once they’re funded. And I can’t help but think that the wheel is being reinvented here, know what I mean?
You guys are a mature industry. You already have all of the pieces in place for direct retailing; you have it down. Meanwhile, crowdfunding has been great on the new idea and innovations side, and maybe all of these companies that are looking to support crowdfunded consumer products can learn from you. So I think we’ve got to get our folks together.
Yes, for a lot of our companies, it’s formulaic– it’s like “here’s something new, let’s stick it in the machine and see if it works.” Sometimes it does and sometimes it doesn’t. Most of them are good on the ideas and great on the execution. You can have lots of money and implode, right? A good idea and money don’t necessarily mean success. But a bad idea and good execution often can be very successful. We see that often– you’ll see a television ad and think, “who would buy that?” Six months later, you see the same commercial and you know that people are buying it.
I think the missing piece that the Direct Response community has is the expertise in bringing a product to market and having the channel expertise to do it right. Some people are really good at health and beauty, others are good at housewares, or at fitness. And sometimes companies that are very successful in one vertical don’t do well when they go to another vertical, because it’s a different methodology. There’s an art and science to it, it’s not just whether you’ve raised some money.
Dan Williams: Claims, for example, require a lot of attention in Direct Response. You need people who can navigate the legalities and evidence pertaining to any claims that you make about what your product can do.
Paul Spinrad, Crowdsourcing.org: So, if you have a claim for a product, there is a recognized authority that vets it?
There is, and I can get you more detailed information on that, because it’s not my area of expertise, but it is very interesting. The ERA partners with other organizations to do this. There’s the Electronic Retailing Self-Regulation Program (ERSP) and NAD, which is part of the Better Business Bureau, and a few other organizations. For how it works, I’m gonna give you a bad example, and I’m not a lawyer, so you need to seek proper legal counsel for real answers on any of this. But let’s say Starbucks makes the claim, “We have the richest coffee on the planet.” There’s a forum where other coffee companies can say, “Prove it,” and then the claim has to be demonstrated. The ERA works with marketers to solve issues within the self-regulation infrastructure, so the FTC does not have to get directly involved themselves, and there are no lawsuits.
Or let’s say someone says, “9 out of 10 people who use my product found better results than they did using my competitor’s product.” Obviously they had to get that information somehow. Maybe it’s from a study, in which case your competitor can challenge the claim and say, “let’s see the study.” If you’re just starting out as an inventor, that’s valuable information to know.
Yes, definitely! So let’s say you’re an indie inventor or product developer who’s coming from crowdfunding, and you want to get your product out there. What’s the process or whom should you approach to have your claims validated? And in your industry, what’s type of company and what’s the title of someone there where it would be good to knock on their door and say, “I’ve got this new product I developed, it has social proof, thousands of people have already bought it, and I want to take it to the next level. Are you interested?”
The product development team is always looking for new ideas, and there is absolutely a validation if you can get some crowdfunding; I like the term ‘social proof,’ some sort of traction, interest level.
I have 10+ years of product background in health and beauty, and at the companies I’ve worked at, we were approached all the time. The number one question we always had was: Can you make any claims?
To answer the first part of your question, there are professional clinical trial companies that you can go to. With money from crowdfunding and if you have a product that claims it does something, you need to commission a professional clinical study from an unbiased, third-party research company. They will conduct the study however necessary– like placebo, double-blind– and then you have a document that says, we did this, here are the results.
How would you find a company like that, and how much would it cost? I know it’s a huge range, depending on a lot of factors.
Yes, from tens of thousands of dollars to hundreds of thousands or millions of dollars, depending on the size of the clinical study and how it’s conducted. At the low end, you can do one where research subjects simply fill out a questionnaire asking “how does your skin feel?” In a more sophisticated study, they could come in and have photographs taken, or have their skin elasticity measured using lab equipment, for example.
How can you find a company to do this?
You could just Google “clinical study.” If you have a weight loss or fitness product that you claim makes people lose weight, obviously you need to substantiate that. But a lot of DR products in the housewares or kitchen categories don’t need as much substantiation. If you say “This thing sucks up a lot of water,” that doesn’t require much substantiation and will probably receive very little scrutiny. And there’s probably different levels of scrutiny depending on the medium. Television and the internet have different rules.
You mentioned that the FTC works with the ERA and others to oversee claims. Do you think the FTC would crack down on claims made through crowdfunding? Because it seems like they should be watching.
Again, I’m not a lawyer, but my opinion and my observation is that the FTC probably doesn’t have time to look at inventors. It’s really when you’re spending significant amount of advertising dollars, then you’re on their radar. And that’s just because of the amount of time that the FTC has. It’s up to the inventor, the product development team, to vet all the claims. There’s no window at the FTC where you can walk up and say here, this is my claim, and they say, “nope, nope, nope.”
Paul Spinrad, Crowdsourcing.org: Another issue I think many crowdfunders are naïve about is patents. I was at a conference where an IP lawyer spoke and said that many crowdfunders should be applying for provisional patents before they launch their fundraising. She explained that provisional patents are a cheap way to protect your idea, or at least give you the option later, even if you want it to be open-source. If your campaign doesn’t reach its goal, you’re not out that much money, and if it does, then you have 18 months to apply for the actual patent. Meanwhile, if you ignore the whole thing, you could develop something, crowdfund it, manufacture it, deliver it, and think you’re doing everything right, and then get sued later by someone who holds a patent that you didn’t even know existed.
Dan Williams: That’s a good point. I authored a patent, so I’ve been through that. There are a lot of rules for inventors, pitfalls to be avoided and resources that are available.
Yes, and as far as I know, there are no hooks into any of this in any of the crowdfunding sites. You can post your project, raise money, do the whole thing, and nothing in the interface is going to raise these issues for you. There’s nothing that guides you to consider protecting your intellectual property via a patent or trademark or Creative Commons license or anything like that.
“Let’s Get These Guys Together”
You know, there might be an opportunity, if it’s not too late, for some kind of crowdfunding panel at the ERA conference in Las Vegas this September. We have two annual conferences: D to C in Vegas in September, that’s the big one, and the Great Ideas Summit in Miami in February. At both of them, we run education sessions for direct marketers on a wide range of topics, like how to do Hispanic radio advertising or customer service. In Miami this year, I did a landing page optimization session with four experts that I thought was very good. Just to brainstorm, we might have a competition for crowdfunders, and the winner gets free access to the best marketing minds, all of our education, and the opportunity to meet investors for further funding.
That would be really interesting– I would love to just get some of the crowdfunding gang over to your conference. Because if you look at the top-funded crowdfunding campaigns, almost all of them have been gadgets that demo well in a video, as in “As Seen On TV.”
I’ve seen a lot of those myself and thought, “I’m gonna see this on TV any day now,” but I have not.
If the ERA folks are interested, I would be happy to try to get some of the most relevant people I know in crowdfunding to participate in that. If not this conference, then hopefully the next one. Like, there’s this company in San Francisco, CircleUp, that specializes in curated “accredited investor crowdfunding,” which is legal now, specifically for consumer product companies with revenues between 1 and 5 million dollars. I think they’ve mostly handled packaged foods so far, but also some health and beauty, and they’d like to broaden their portfolio. Meanwhile, they have deals to hook up relevant companies they’re helping to grow with Procter & Gamble and General Mills. So I think that one of the CircleUp folks, for example, might be interested in what’s going on at the ERA conference and also bring a valuable perspective to the people there.
I think the Vegas conference would be an opportunity to get something going, We are planning for that conference now, so we should move quickly.
I didn’t realize there was a new FTC chair. Do you approve?
There are people who live in that world, they’re consumer protection lawyers, and they might think in those terms. But from a marketer’s perspective, I don’t see it as approve or disapprove. It’s more a matter of what has that person done in the past and what areas do they seem most concerned about, so you can make sure you’ll be buttoned up and doing everything right, rather than start showing up on the FTC’s radar.
A similar thing is going on with the crowd investing crowd. The SEC has a new chair, and once she was appointed, people started looking at her background and making guesses about how high of a priority she’s going to make the JOBS Act rulemaking, against all of the other backlogged things that the SEC needs to do.
I can’t imagine that at the FTC or the SEC, there’s any one person who knows every nook and cranny. Regulators will always have more expertise in one particular area of their discipline than others. So they focus more on that, because it’s what’s most important to them, and it’s where they’re comfortable. So then we try to learn what that is.
Addendum: Since this interview took place, the schedule for the 2013 ERA D2C conference in Las Vegas has come out, and it turns out that there will be a 15-minute presentation on crowdfunding there: “How to Successfully Raise Money Through Crowd-Funding,” by Chas Salmore, on September 25 at 10:45am.