You Can Be Skeptical of MagicJack – But Not How They Got Retail Leverage

By Ben Smith

HOW TO GET 250,000 NEW CUSTOMERS A MONTH – OVERNIGHT

I guarantee that if you haven’t seen / heard of MagicJack by now – you must have given up cable and are avoiding retail.  How many other consumer electronics products have gained distribution in over 10,000 stores in the last 12 months?  In fact they aren’t far from being on the shelves in 20,000 stores.  While it isn’t a cultural phenomenon like Snuggie, MagicJack has pulled off something that any brand marketer worth their salt has to respect – let alone a challenger brand marketer desperate to break through.

Behind MajicJack is a privately held company largely driven by the efforts of a handful of men with roots in the telecom industry. Remember the 10-10 dialaround numbers? That was one of the founders early successes.  Little is known about the company besides the fact that they’ve built a proprietary network that runs MagicJack – probably how their cost structure is able to work.  It is also hard to get a handle on their finances, but I’ve seen articles projecting over $100 million in revenue in 2009, based on estimates on their install base and quoted sales of over 250,000 new customers a month.

I won’t bore you with the details of “what is” MagicJack beyond saying it is something similar to Vonage, or other voice over IP (VOIP) services out there.  There are some technology and business model differences, but the end result is you are getting phone service via your high speed internet.  It is legitimate, and even Consumer Reports has weighed in on MagicJack, as is one of the most searched terms on their site.

The hook to MagicJack is the pricing – Under $40 the first year, and under $20 each additional year.  Do the math (or they’ll do it for you) – that’s under $2 per month for phone service.  Compare that to what you pay monthly today – if you are lucky $33 via a triple play bundle from your cableco, or $40ish from AT&T.  You can pretty quickly see the value prop.

So the essence of this article is to discuss how MagicJack got to where it is today – and provide inspiration that illustrates potential paths for others to follow.  Challenger brand marketers / agency strategists – take note.  While the path they have taken isn’t necessarily glamorous – it does make sense for the story that they had to tell.  Follow along with us.

FROM HUMBLE BEGINNINGS:

2007: Launched via Drive Response TV (aka infomercials):

Late nights / early mornings.  MagicJack came up on TV the hard way – without Billy Mays or Anthony Sullivan.  Instead all they had to rely on was their value proposition.  You’ve got to start somewhere, and for a consumer electronics / technology related product you don’t just call up 1-800-2BestBuy, sweet talk the receptionist to get thru to the buyer, and bam – your product is on shelves across the country.  They had a story to tell and they used one of the best mediums to tell it.  Direct Response.  Direct Response is even better if you don’t have an ego to get over.

2008: Gained 2^nd Tier Retail Distribution:

Radio Shack has its place in the world and they do certain things right.  This is the kind of product you’d expect to find at RadioShack.  With 5000 locations they can put a product in front of lots of people and add retail credibility.  So it is no surprise that a product like this made its first tangible appearance at retail at The Shack.

GOING BIG TIME – HOW MAGICJACK LANDED THE BIG BOXES

Not sure whose phone rang first, but here’s how we think it went down:

MagicJack Salesman: Your customers are already asking about my product, and  I sold 2 million units alone in 2008.  I ran over $10 million in DRTV ads last year – perhaps you’ve seen it once or a hundred times?  I’ll tag my infomercials telling customers they can now find my product at your store.

Retailer Buyer: I’m thinking about taking a chance and listing this MagicJack thing that everybody’s talking about.  Growth is hard to come by, especially in this environment.  It’s a risk but there is lots of upside …

Note – Risk is the enemy of the retail buyer.  Minimizing that risk in the buyer’s mind if your key job if you are trying to get over the hump.  MagicJack did a great job of minimizing the buyer’s risk.

2009: Gained 1^st Tier Retail Distribution via DRTV tagging.

Best Buy started carrying the product early in 2009.  Almost simultaneously the traditional magicjack infomercials morphed to a version that tagged Best Buy where the normal call to action would appear.  MagicJack was sending its customers to Best Buy stores (or customers could still figure out they could go direct to MagicJack.com).  Note – Without having tangible sell thru data, I have to guess that the product has done okay at Best Buy.  MagicJack has 126 reviews on Bestbuy.com, with 3.6 out of 5 stars.  The fact that it is still on shelf after almost a year is proof enough for me.

In methodical fashion throughout the rest of the year, MagicJack has appeared in retail at Walmart, Staples, OfficeDepot, Walgreens, and CVS.  I’ve seen Walmart, Staples and OfficeDepot tagged in similar fashion as Best Buy.

[youtube=http://www.youtube.com/watch?v=cIRcWKa8CG8&hl=en_US&fs=1&]

MAGICJACK: RETAIL AND DIRECT IN PERFECT HARMONY:

So you might ask yourself wasn’t MagicJack giving up something by tagging retailers, effectively pointing potential customers to stores?

Well they can start dialing back their Direct Response spend, or at least keep it flat.  Plus after 2-3 years of hitting the airwaves hard with the same product, there are diminishing margins of return on the number of people who will buy your product direct.  Chances are they saw the ad – if they were going to buy it direct they would have done so already.

Retail represents an untapped market.  There are people who won’t buy direct, or maybe never even saw it on TV.  And there is a good chance the retail margin they’ll pay is probably close to the cost per order to sell direct (media costs + fulfillment.

LESSONS LEARNED:

1A) Infomercials are a great vehicle for telling a story and building demand at retail.

1B) Marketers with a holier than thou attitude towards Direct Response TV (DRTV) are ignoring a viable tactic.

2) Take risk away from the retail buyer. This makes it easier for them to list / support your product.   MagicJack wouldn’t be at retail if they didn’t have a success story from their direct experience, as well as ongoing aircover in the form of their DRTV spots they continue to run that in effect are ads for their retail placements.

3) There is less risk in balancing a direct and retail strategy than ever before. The battle lines have been blurred by retail consolidation, and the growth of private label.  I don’t think the retail buyer spends much time worrying about where you are selling your product, as long as it is selling well in their stores.   We spend way too much time worrying about who we compete against, versus just selling.