Alloy.com (“Alloy”), a clothing retailer targeting teens, must decide whether to partner with AOL or to move forward with its own mix of customer acquisition methodologies. We recommend that Alloy: 1) immediately do the deal with AOL for one-year, 2) cease plans to invest $5M in television advertising and instead invest in measurable online advertising and promotions calculated to increase registered users to their website, and 3) closely monitor online metrics and conversions to gauge whether to continue the AOL partnership (and their other online advertising expenses) moving forward.
First, given the timing of the deal, it is likely the AOL deal will pay for itself. Analysts project the announcement of a headline deal with AOL could bump up Alloy’s IPO stock price by 10% which would raise an additional $5.5M. Even if it only bumped the stock price up 3.6%, Alloy would still raise enough additional capital to cover the first year of this deal. Therefore, Diamond’s two primary concerns (the high cost per thousand exposures on AOL and the opportunity cost of the $2M) are less relevant because without the deal the extra capital would not even be available to Alloy.
Second, the AOL deal is a better use of funds than investing $5M in television advertising regardless of whether it affects Alloy’s IPO stock price. Alloy should discontinue any advertising that cannot be quantifiably tied to quality leads that convert into sales. Alloy needs to increase the number of registered users in their target segment to provide incremental sales revenue from merchandise sales and online advertising. Television advertising cannot be tracked effectively and is unlikely to deliver good leads in their target market. By contrast, AOL is a good medium to hit their target market and the AOL deal will provide quantifiable results. Alloy can track the number of unique visitors referred by AOL, the percentage of those visitors that register to their site, and the percentage of those visitors that purchase to help guide future advertising spend in the future. The combination of a successful new product and successful advertising is rare but when it happens, it is no time for skimping.