Cindy Arzola

The Fashion Channel: Brief Case Analysis

Marketing Policies—370

Professor Raji Srinivasan

February 20th, 2011

How would you Interpret the Consumer and Market Data?

The Fashion Channel (TFC) was a highly successful TV network that was targeted to a broad
audience. TFC was successful without much segmentation or detailed information about viewers.
The rapid growth of the company, however, gave way for other cable networks such as Lifetime
and CNN to implement similar types of fashion-related programs in blocks. Hence, TFC sought
to boost segmentation, positioning, and advertising in order to out-compete the latter networks
and continue to remain relevant to viewers and advertisers. According to viewer demographics,
females within the 35-54 age group represented the majority of TFC’s audience with a 61%
rating. In comparison, Lifetime commanded a 63% rating in the same category and also attracted
a respectable 43% in the 18-34 premium age group. Both Lifetime and CNN managed to outdo
TFC in the “average households” category with 3.3M and 4.4M respectively (Exhibit 1).
Survey data on customer satisfaction with cable networks, revealed low consumer interest,
awareness and perceived value for TFC, which directly impacted attractiveness to cable
affiliates. Attitudinal research findings suggested segmenting consumers into clusters that would
allow TFC to target its most loyal audience and hence improve advertising revenue; fashionistas,
planners/shoppers, situationalists, basics. All research data suggested a move towards targeting
TFC’s most loyal viewers and concentrating on the 18-34 age group, which advertisers deemed
worthy of higher pay for ad space—CPM price increase of approximately 25-75%.

What is the Expected Outcome of each Targeting Scenarios?

In determining the expected outcomes for each targeted scenario, note of the current and 2007
base years must be taken into consideration in order to determine credibility of new marketing
strategies. The ad revenue/year for the Current and 2007 base years were $230,630,400 and
$207,567,360 respectively. The net incomes for the 2006 Actual and 2007 Base years were
$93,711,488 and $54,640,339 (See Appendix). Average ratings for mentioned years is 1.0%.

According to Exhibit 4, Scenario 1 offers an increase in average rating of 1.2% with a higher
average revenue/ad minute of $2,376 than what the projected 2007 Base year allows.
Incremental Programming Expenses total $0, CPM decreases by .20 but ad revenue/year is
$249,080,832. Net Income for this Scenario totals $94,908,407 which is a substantial increase
from the current and base outcomes. Scenario 2 allows for an increase in average CPM with
$3.50 but a .2% reduction in average rating from the current year. Incremental Programming
Expenses total $15,000,000 per year to maintain ad revenue/year of $322,882,560. This scenario
yields a net income of $151,496,083, which is also greater than the Current, Base and Scenario
1’s outcome. Scenario 3 manages to maintain both a higher average rating of 1.2% and average
CPM of $2.50 than the current and base years. Ad revenues/year are $345,945,600 which
account for the increase in average revenue per ad minute. Incremental Programming Expenses
are higher than the Current, Base, Scenario 1 and 2 with $20,000,000. However, net income for
this marketing strategy of $168,867,232, supports the Incremental Programming Expenses. A
high margin of 39% is also observed for this option.

Evaluate the Pro’s and Con’s of each targeting scenario

To differentiate its programming from the competitor’s, The Fashion Channel can choose from 3
scenarios which include 1) investing on major marketing and advertising 2) targeting the
Fashionistas—highly-valued consumers 3) targeting the Fashionistas and Shoppers/Planners.

Scenario 1 takes into account the low consumer awareness and perceptions that were ultimately
affecting TFC’s ratings. Significant pro’s for this scenario include: increasing brand awareness
via ratings by 20% and appealing to a broad segment of viewers (clusters). Although this
scenario improves ratings, it does not take into account the average cost per thousands which
would decline by 10%. In addition, broadening the audience scope might not address the current
limitations that TFC faces and actually detract viewers. Scenario 2 would allow TFC to devote
its marketing efforts to the Fashionistas, which is the highly-valued 18-34 female demographic.
This strategy would increase the average CPM to $3.50 and tap into a stronger audience. Ratings
would decrease to .8% because focusing on this demographic would only account for 15% of
households. Also, the incremental programming expense would go from $0 to $15,000,000 to
attract this segment. Scenario 3 would focus on attracting the Fashionistas and
Shoppers/Planners. The latter would achieve both an increase in CPM and Ratings with 1.2%
and $2.50 respectively. Not only would TFC be targeting the loyal consumers (15%) but they
would be bringing in an additional 35% of households via the Planners and Shoppers. The cost
of implementing this program would yield an incremental programming expense of $20,000,000
and leave out the other 2 clusters; Situationalists and Basics. Therefore sacrificing the sum of
50% of total households.

Recommendations

The overall goals set forth for The Fashion Channel’s marketing strategy to be successful and
oust competitors revolved around 1) increasing ratings and 2) increasing advertising. With that in
mind, Scenario 3 fulfills the goals that the company seeks to accomplish. With Scenario 3, TFC
is able to increase both CPM and ratings, target two segments which have substantial impact on
cable affiliates’ perception of ad cost, and achieve a revenue of $345,945,600. Furthermore, this
option is still taking into account the female demographic between 18-34 which is highly valued
by advertisers. Other clusters such as the Situationalist and Basics are not needed to differentiate
the network because they are disengaged and low on the interest index.
 Appendix

Exhibit 4: Ad Revenue Calculator

Ad Revenue Calculator        
  Current 2007 Base Scenario 1 Scenario 2 Scenario 3
TV HH 110,000,000 110,000,000 110,000,000 110,000,000 110,000,000
Average Rating 1.0% 1.00% 1.2% 0.8% 1.2%
Average Viewers (Thousand) 1100 1100 1320 880 1320
Average CPM* $2.00 $1.80 $1.80 $3.50 $2.50
Average Revenue/Ad Minute** $2,200 $1,980 $2,376 $3,080 $3,300
Ad Minutes/Week 2016 2016 2016 2016 2016
Weeks/Year 52 52 52 52 52
$230,630,40 $345,945,60
Ad Revenue/Year 0 $207,567,360 $249,080,832 $322,882,560 0
 
Incremental Programming Expense    ---  ---  $15,000,000 $20,000,000
           

* Revenue/Thousand Viewers
** Calculated by multiplying Average Viewers by Average CPM

  2006 Actual 2007 Base Scenario 1 Scenario 2 Scenario 3

Exhibit 5: Financials          
Revenue          
Ad Sales $230,630,400 $207,567,360 249,080,832 322,882,560 345,945,600
Affiliate Fees $80,000,000 $81,600,000 $81,600,000 $81,600,000 $81,600,000
$427,545,60
Total Revenue $310,630,400 $289,167,360 $330,680,832 $404,482,560 0
           
Expenses          
Cost of Operations $70,000,000 $72,100,000 $72,100,000 $72,100,000 $72,100,000
Cost of Programming $55,000,000 $55,000,000 $55,000,000 $70,000,000 $75,000,000
Ad Sales Commissions $6,918,912 6,227,021 $7,472,425 $9,686,477 $10,378,368
Marketing & Advertising $45,000,000 $60,000,000 $60,000,000 $60,000,000 $60,000,000
SGA $40,000,000 $41,200,000 $41,200,000 $41,200,000 $41,200,000
$258,678,36
Total Expense $216,918,912 $234,527,021 $235,772,425 $252,986,477 8
           
$168,867,23
Net Income $93,711,488 $54,640,339 $94,908,407 $151,496,083 2
Margin 30% 19% 29% 37% 39%