The Fashion Channel

Case Analysis I

September 12, 2011

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Index

I. Introduction and Background

II. Analysis

a. Company and Market Data Analysis

b. Scenario Analysis

III. Decision

IV. Recommendation

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I. Introduction and Background

The Fashion Channel is a 24/7 cable TV network which exclusively serves a fashion

interested audience. Since its founding in 1996, TCF has experienced a steady, above

average growth both in audience and revenue. Although TCF is still the only pure

fashion channel, new entrants in the fashion segment like CNN and Lifetime have

increased competition and threatened market share. Because of this, Dana Wheeler, the

senior vice president of marketing, has been chosen to develop a new brand strategy. To

convince management of the strategic change she developed three scenarios: a broad

multi segment approach, a focused one segment approach, and a two segment strategic

approach.

The first strategy option provided involves continuing on the company’s current

marketing approach with special focus on women aged 18-34. The target

clusters involve Fashionistas, Planners & Shoppers, and Situationalists.

The second scenario identified offers a narrow strategic approach exclusively

focusing on Fashionistas. Although this cluster only accounts for 15% of the

accessible households, it is most valuable to advertisers.

The final approach described narrows down segments and includes only

Fashionistas and Shoppers & Planners.

Regardless of which scenario will be chosen, TCF is in need to actively defend and

increase their current market share, reputation and awareness in order to stay

competitive and profitable. Although it was quite popular among its viewers the

competition was able to gain remarkable numbers and satisfaction rates recently.

So far, TCF relied on its competitive advantage as the only exclusive fashion so

occupying a niche market. Strategies and advertising were not based on actual research

but on supposed knowledge and assumptions of the market and the demand.

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II. Analysis

a. Company and Market Data Analysis

Conducting a SWOT analysis as base for selecting the appropriate strategy, more

concrete conclusions about the company’s internal & external environment can be

drawn.

Strength

TCF is the only exclusive TV network dedicated to fashion with a 24x7 and 7 days a

week broadcasting. Furthermore, also it is operating in a niche market; the channel is

accessible for all cable customers as TFC. Due to the large number of subscribers and

the comparable low advertising fee it is attractive for advertisers.

Weaknesses

TCF’s market research is poor, as it does not consider its customers, competition and

advertising clients. Low customer awareness, interest and perceived awareness in

comparison to the competition is one of result. As the company does not perform any

customer segmentation, advertisers are not able to attract a particular target group or

cluster, resulting in less than expected ad revenues. Furthermore, reluctance to drastic

changes is prevalent in the company and hinders them so far from developments.

Opportunities

TCF’s strength offers certain opportunities. A new focused advertising strategy as well

as successful segmentation will improve the situation. Targeting the viewers of certain

clusters and age groups will increase advertising revenue and profit margin. Identifying

the prime, most valuable consumer groups will bring huge profits.

Threats

Today TCF faces various threats due to increased competition, lack of reputation and

awareness resulting in loss of market share, advertising revenues and audience. In the

case that TCF becomes even less attractive, cable operators will consider offering the

network in less appealing packages thereby losing its broad audience.

According to the SWOT analysis, TCF’s competitive advantage will not be sustainable as

already other fashion blogs from broader networks erode its market share and show

higher audience awareness. In order to sustain in this environment, the company has to

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develop and renew its strategy and introduce a segmentation approach, targeting more

profitable consumer and age groups. Hereby, TCF has to take the risk of losing certain

customers as only a change can secure future success.

In order to improve the current situation, increase reputation and awareness as well as

attract more advertising revenues, the market and customer data provide vital

information. Reviewing Dana’s data, the national consumer survey offer various hints

what consumers are looking for and what should be taken in TCF’s future programming

considerations.

The survey shows that fashion is not a topic for a broad audience as only half of the

interviewees shows interest or likes to shop. This information already disproves the

current strategy and leads to a segmentation strategy as the only option. The consumers

who like fashion are most interested in information about fashion trends, special TV

programs on current fashion, value deals, entertainment and special event clothing.

These results should be taken in consideration when creating the new programs.

Additionally, this survey reflects the lack of reputation and awareness already

established before. Only 30% of the interviewees strongly agree or agree with the

statement that TFC is the best place on TV for fashion information. Considering the

competitive data, TFC does not offer any unique programming feature to distinguish

from the fashion blocks of CNN or Lifetime who only dedicated limited broadcasting

periods to fashion. In contrast the competitors’ average ratings are 3 to 4 times as high.

A closer look at the prime segment of those aged 18-34 shows that Lifetime already

established a high market share. However, as CNN focuses more on the 35-54 agers, TCF

still has room for growth.

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b. Scenario Analysis

Based on this data Dana’s segmentation approaches are evaluated and pros and cons

developed:

Scenario 1: Broad multi segment approach

Pros Cons Reduced risk as approach is consistent with company mission (Fashion for everyone) and past strategic approaches

10% drop in CPM to 1.8

No additional programming costs Continued loss of market share due to strong competition

1.0 to 1.2 increase in ratings

Loss of advertising revenues

Less expected internal and external reluctance due to minimal changes

Easy to obtain economies of scale, scope, and density, covers wide range of population

No strategic improvement or development, lack of focus

Lack of customized services as all viewers are treated the same

Scenario 1 reflects the “easy way” with low expected reluctance from audience and

supervisors. The company would stay closely with its current strategy while ignoring

customer and advertisers demand as well as competitive threat. In the short-term Dana

might be able to promote this strategic approach as revenue and ratings rise, however

in the long-term it will not be profitable as it leads to a drop in CPM.

Scenario 2: Focused approach

Pros Cons Highest value for advertisers as it appeals to a specific segment

Most competitive segment

Increased CPM up to 3.5

Risk to lose loyal audience

High focus, unique niche strategy Smallest cluster, less audience

Additional programming costs of 15 Million

Drop in rating from 1.0 to 0.8

Lack of strategy-company fit (fashion for everyone)

Reluctance from supervisors and audience

Opposed to scenario 1, this approach would be a drastic change in the current overall

strategy. As it focuses solely on Fashionistas opposed to a broad audience it would be

easier to establish a true market niche and build a reputation as the true fashion

channel. It would further help to distinguish the company from its competitors who take

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a more mainstream approach. The focus on the Fashionistas-Cluster which is highly

valued by advertisers is expected to increase the CPM to $3.50. However, Dana will

have a hard time selling this approach to her supervisor as it offers high risk and

demands the openness to reinvent the channel. A 20% loss of viewers; a rating drop

from 1.0 to 0.8, and additional programming cost $15,000,000 per year compose

additional financial hurtles.

Scenario 3: Two segment approach

Pros Cons Increase in rating from 1.0 to 1.2 Higher programming expenses of additional

20 Million Growth in CPM to 2.50

Leveraged risk as focus is not as narrow as in option 2

Transition and development of strategy instead of radical change as opposed to option 2

Company’s past mission is still feasible to retain

The third scenario seems to be a compromise between scenario 1 and 2, targeting the

two most relevant segments without going too broad. Although strategic changes would

be made, the channel would still be able to maintain its mission. The change would lead

to 20% growth in ratings, from 1.0 to 1.2 as well as a boost in CPM to $2.50. However

the increase in revenue comes with additional cost of $20,000,000.

Although, the factual scenario analysis of each strategic option already leads to a

favorable strategic approach, it is important to conduct a financial impact study of each

scenario to support the decision.

Exhibit 4: Ad Revenue CalculatorCurrent 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% 1.0% 1.20% 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

Ad Revenue/Year $230,630,400 $207,567,360 $249,080,832 $322,882,560 $345,945,600

Incremental Programming Expense $0 $0 $15,000,000 $20,000,000

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According to the Ad Revenue Calculations, Scenario 3 offers the highest revenue

prospects per year. In case this strategy is selected, revenues are expected to increase

by 50% in comparison to the current year. Although the expenses for Scenario 3 are the

highest (Exhibit 5)¸ it offers the highest profit margin (39%). The expected net income

when choosing scenario 3 furthermore is 80% higher as in the current year and 78%

higher as in scenario 1. Scenario 2 is expected similar successful as scenario 3 with a

profit margin of 37%.

Exhibit 5: Financials2006 Actual 2007 Base Scenario 1 Scenario 2 Scenario 3

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

Total Revenue $310,630,400 $289,167,360 $330,680,832 $404,482,560 $427,545,600

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

Total Expense $216,918,912 $234,527,021 $235,772,425 $252,986,477 $258,678,368

Net Income $93,711,488 $54,640,339 $94,908,407 $151,496,083 $168,867,232

Margin 30% 19% 29% 37% 39%

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III. Decision

In regard to the different analysis conducted, scenario 3 is the most fitting long-term

strategic option Dana can suggest to her supervisors. Although this strategy does not

offer the highest CPM, it convinces with the highest profit margin and net income.

Furthermore, it allows the company to segment with leveraged risk as the strategy is

not as narrow as in scenario 2 and not as broad as in scenario 1. As it is not a drastic

change to the current strategy, less resistance from supervisors and audience is

expected.

Although Scenario 2 offers a higher CPM and its profit margin is only marginally less

than in scenario 3, the concept is entirely too risky. While advertisers might favor this

narrow target market, supervisors and the broad audience would be hard to convince as

it alters the current concept completely.

Scenario 1 is out of question as Dana would not be able to initiate the needed change.

This option not only offers the least beneficiary financial data, it is disadvantageous as

the company would lose audience, awareness and reputation to its main competitors.

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IV. Recommendations

In order to put scenario 3 into action it is recommended that Dana follow certain steps

to ensure its success:

I. Dana has to become a change agent and the leader of the strategic change.

Although the third option might not be as drastic as scenario 3, it needs the full

commitment and support from both the supervisors and employees. Lack of

commitment, resistance of the people involved, as well as a lack of resources will

lead to a failure. Dana knows that the supervisors have the tendency to avoid

changes and show reluctance to new approaches; she has to be absolutely

convincing and in charge of the discussion. Objective analysis, advantages and

disadvantages of each possible outcome as well as potential financial outcomes

have to be presented in order to initiate a discussion and come to one coherent

conclusion. Considering the implementation of an integrated marketing

approach, the commitment, involvement and support of the whole team is

indispensable to transport the coherent message to the customers.

II. In order to achieve commitment and involvement, Dana may set up mixed

project teams working on suggestion to bring scenario 3 alive. Hereby all

employees can be involved while capturing valuable input from sales people,

program writers, technicians etc. The internalization of the integrated

marketing message is another advantage of the described involvement and joint

development.

III. As two different segments are target, Dana is advised to approach both segments

and the different age groups separately in order to avoid mixed messages or

confusion however considering not stepping out the overall integrated

marketing message. As the prime cluster, Fashionistas aged 18-34, will be highly

involved in their profession during the week, the programming should focus on

them during the weekend or at night time. Weekends are especially interesting

as their main competitor in this segment, Lifetime, only broadcasts fashion

blocks on weekdays. The programming should be based on the attitude drivers

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established in the survey. Planners and Shoppers, where the age group 35-54 is

more predominant can be mainly target during the day or late afternoons.

IV. In order to ensure the success of this strategy implementation, it is

recommended that Dana keeps track of the implementation process, establish

SMART sales, profit and customer objectives and continuously watch as well as

measures the progress. This action will help to quickly adapt the strategy in case

the audience or the advertisers do not respond as predicted.

V. Finally, Dana is advised to stay in close contact with the audience and

advertisers, keep track of new changes and demand, measure awareness and

reputation and conduct continuous market research.