Kevin Keating figured he had a sure thing. So why didn't it walk off the shelves?
Suppose you invented a light bulb that, for all practicall purposes, never burned out. How would you market it?
About 1.5 billion incandescent light bulbs are sold every year in the United States. Most of them are rated at 750 or 1,000 hours of life, which is to say that if a group of them were burned continuously, roughly half would fail in less than two months, and half would burn longer. It costs General Electric Co., the market leader, less than a quarter to make such a bulb. The consumer pays maybe 75? to buy it.
It costs DioLight Technology Inc. 49? to make a bulb that retails for $4.99 and lasts, on average, 6 years and 10 months if burned continuously, 50 years if used only two or three hours per day. DioLight's bulb costs the customer less than seven times as much to buy as GE's, yet it burns 60 times as long. Kevin Keating, co-inventor of the bulb and founder of DioLight, assumed that a light bulb that good would be easy to sell. "Once we started making them," says Keating," I thought all the work was done."
You think so too? You don't know the light-bulb business.
Since Thomas Edison developed the first practical bulb in 1879, Edison General Electric Co. and its successor, GE, has been the lighting industry's undisputed and rarely challenged market and technology leader. Almost every lighting innovation to gain commercial acceptance -- the tungsten filament, the gas-filled bulb, the frosted bulb -- have come from GE's labs. GE developed the machinery and processes to lower manufacturing costs, and it developed the distribution system to move its bulbs to residential and industrial/commercial users.
It also held most of the best bulb patents, and in the past would license other bulb makers to produce only what GE wanted them to produce.In 1923, for example, GE itself held a 61% market share. Westinghouse Electric & Manufacturing Co., GE's only "class A" licensee, was allocated 16%. The six "class B" licensees, including a little company called Hygrade Sylvania Corp., together were allocated 9% of the market. Licensees could exceed their quotas, but their license fees on the excess rose dramatically. And while GE didn't dictate bulb prices, it could revoke licenses on whim; licensees that wanted to stay in business stayed in line. By the mid-1930s, according to one estimate, bulbs accounted for about one-sixth of GE's sales, but as much as two-thirds of its profits.
Only GE's accountants and executives know what its light-bulb margins are today, but the overall market shares haven't changed much. GE is still on top by a hefty margin. GTE Lighting Products, manufacturer of Sylvania light bulbs, is probably number two, and if so, North American Philips Corp., which recently acquired Westinghouse Electric Corp.'s U.S. bulb business, is a close third. The three giants account for about 90% of all the incandescent bulbs sold in the United States.
To be sure, you don't need a huge share of a $2-billion market to achieve respectable sales, and there are plenty of nooks and crannies a small company can slip into. But it's not as if these niches are unoccupied. Last year, Duro-Test Corp. sold longer-life and specialty bulbs worth $68 million to claim about a 3.4% share of the market. Marvel Lighting Corp. and Supreme Lighting Co., among others, survive on "me-too" products (with smaller margins) sold through private labelers. Action Tungsram Inc. supplies "promotional" bulbs to such mass marketers as K mart Corp. and Zayre Corp. for special cut-rate sales, typically three for a dollar. (Selling GE bulbs at that price, Action Tungstram president Allan Merken has persuaded the big chains, would tell the consumer that the regular price was a rip-off.)
When Kevin Keating set out to break into this market, he figured his only problem was technological. A better mousetrap, so to speak.
Keating is 33 and grew up in the wealthy suburbs north of Detroit. If the automobile industry and Detroit's real estate market hadn't plunged into recession in 1979, he probably would still be eating his lunches at the Bloomfield Hills Country Club and doing big deals in the real estate firm his grandfather started. But when the market died, Keating began selling diodes -- the little energy-saving buttons people put in their lamp sockets -- for his brother, a vice-president of a diode company. Diodes cut the voltage to the light-bulb filament, reduce the power consumed, and extend the life of the bulb. Also, Keating learned, they chop the light output and can create shock and fire hazards.
Suppose you could put the diode inside the bulb, Keating thought, and get the benefits of the device without the drawbacks. He asked Russ Monahan, his friend and classmate (Brother Rice High School, class of 1970) at a party one night if the idea was feasible. No problem, said Monahan. A mechanical engineer, he took charge of designing Keating's light bulb.
If we can design the bulb, can we make a business of it, Keating asked Chris Callaghan, another Brother Rice classmate. Sure, said Callaghan, with the right research and development, manufacturing facility, marketing, financial backing, and management organization. An M.B.A., CPA, and Ph.D., Callaghan took charge of outlining Keating's business plan.
Keating himself wanted to know if the bulb they had in mind could actually be manufactured. GE wasn't going to tell him; neither were its competitors. So, dressed up as a priest, he toured an independent bulb-maker's plant in Mullins, S.C. His engineer brother-in-law, passing himself off as a student, went with him. Making the bulb, they decided, would pose no serious technical problem.
But who would make it? Potential domestic suppliers, the trio discovered, weren't interested, and most Taiwanese manufacturers declined as well. "As soon as we told them we wanted to make a long-life bulb," says Monahan, "they'd say, 'No way, Jose. We're in the bulb-replacement business." One, the last on their list of possibilities, finally agreed.
All they needed now was money. Keating's father thought his son foolish, and said so, frequently. "You're a realtor, not a light-bulb maker," he'd say. Nonetheless, he helped his disappointing offspring sell stock. By the end of 1982, they had raised $210,000 from a private offering bought by friends and friends of friends, at least half of whom, by Keating's estimate, "wrote the check because I was Howard Keating's son." His former Little League baseball coach, a GE sales representative, declined to buy. "He said it wasn't right for me to get people involved in a gimmick," says Keating. "A gimmick, he called it. My Little League coach."
By the spring of '83, a little more than two years ater the bulb idea struck him, Keating had a design, some capital, and a Taiwanese supplier. At the time, he thought he was going to turn the industry upside down. Looking back, he knows that that was when the marketing lesson began. How do you sell a light bulb that never burns out?
The first DioLights were tubular bulbs used to light exit signs, which by law should burn 24 hours a day. No one even knew how big the market was. Kevin Callaghan, one of Chris's 17 siblings and DioLight's new vice-president of marketing, went to office buildings, counted the signs on one floor, and multiplied by the number of floors. But how many office buildings, restaurants, hotels, and bars are there? Maybe, Callaghan figured, there are 40 million exit signs in America. Maybe 60 million. Anyway, lots. DioLight ordered 25,000 bulbs from the factory.
Since the bulb would obviously save users lots of money, Keating and Callaghan figured that finding customers would be no problem. They also figured that, since the bulbs threatened the established industry, conventional bulb distributors would have nothing to do with them, and DioLight would have to go straight to the consumer.
Wrong and wrong, as it turned out. But vice-president of commercial sales Todd Decker, another Brother Rice '70 alumnus, didn't know that. So in June 1983, he became a one-man sales force calling on restaurants, bars, and building managers in Detroit. He'd sell six bulbs here, a dozen there -- 600 in all that month, and another 600 in July. Not a promising start. The bartenders weren't as enthusiastic about money saved on light bulbs as he assumed they would be. "OK, buddy," they'd say, "if this is such a great light bulb, how come GE doesn't make it?"
"I found out," says Decker ruefully, "there were three problems: price, credibility, and lack of interest." Not many people wanted to spend $5.99 for a light bulb from a company no one had ever heard of. Besides, light bulbs are hardly the most important thing on a small-business owner's mind.
If your first sales strategy doesn't work, of course, you try something else. The Fortune 500 strategy, for example. Decker wouldn't waste time selling a bulb here and a bulb there to small users, he decided; he'd go after big national accounts. That was how lots of young companies got their start. "If small businesses couldn't see what we were trying to do," he says, "the large corporations of America surely would. They're smart, and they would do nothing but save money using our light bulbs."
That fall, with a couple of recent college graduates, he began canvassing corporate purchasing agents by telephone. He followed up with personal visits. Sales more than doubled, to 1,500 bulbs a month in the last quarter of 1983, and rose to 2,000 a month during the first quarter of '84. But it wasn't nearly enough. DioLight was losing $40,000 to $50,000 a month.
Decker was frustrated. "The large corporations of America that should be accepting change," he says, "weren't." Why not? He went over the purchasing agents' heads, direct to the chief executive officers when he could. Their reaction was about the same as the bartenders'. Who are you? And, never mind, we have a distributor.
Getting desperate, Decker hauled out the Detroit Yellow Pages, looked up lighting distributors, and called 15 of them. "If the guys who could save money with the bulb didn't want it," he remembers thinking, "how about the guys who could make money on it?" Twelve told him to get lost. But three let him talk, and one actually bought 1,000 light bulbs, C. O. D. Decker went to Toledo and signed on another distributor. He got one in Cleveland. In Buffalo. And in Pittsburgh.The minimum purchase was 1,000 bulbs.
After 12 months of trying to sell direct to the end-user, Decker had at least found out who his real customer was.
"I'm in New York City," he says, "with this company that's been in business for 40 years. They supply all the movie theaters. There are three guys there, and I'm giving them my pitch -- how they'll be my exclusive New York distributor, we won't sell direct. And I tell them, 'If you guys don't want it, I've got three other people to see this afternoon.' They sat there. Then one of them says, 'Well, whaddaya want? I tell you what, we'll buy 15,000 bulbs.' Were they kidding? I said to myself, don't say anything, dummy. The guy said, 'Did you hear? Fifteen thousand bulbs and we'll take it.' So I said, 'Well, Manhattan is pretty big. Let me call my president and see if he'll go for it.' I got on the phone -- they're listening -- and I called Kevin and said, 'I got these guys here, and they only want to buy 15,000 bulbs. . . ."
His first mistake, he explains, had been in assuming that GE, Sylvania, Philips, and the others had the distribution network all locked up, and that wholesalers and distributors wouldn't be interested in broadening their line. Most, in fact, weren't -- reasoning, perhaps, that every DioLight bulb they sold was 80 GE bulbs they wouldn't sell. But Decker nonetheless had a legitimate specialty product. At $4.99 and $5.99 each, DioLight's bulbs were too expensive for normal use, but they made sense for hard-to-reach places where changing a bulb was difficult and therefore costly. And they were good where aesthetics were important -- in signs or chandeliers, for example, where a dead bulb detracts. In fact, Decker points out, selling DioLight bulbs brings a distributor new customers to whom he can then sell his main-line goods. And the distributor gets a $1.50 gross profit out of every DioLight bulb versus about a dime from a conventional bulb.
As he pursued the strategy, sales took a definite uptick: 4,000 bulbs in April 1984, 7,000 in May, 20,000 in June (the New York deal). But then they leveled off. Decker was still a one-man sales force, driving and flying from city to city calling on distributors.
And then, all of a sudden, distributors began calling him. He came back from a sales trip that summer to find his desk awash in phone slips. It took him a little while to figure out what was going on.
The same might be said of Kevin Keating and his partners: it had taken them a little while to figure out what was going on. The product hadn't walked off the shelf. They had been wrong about who would buy it, and why. They had gradually worked out a moderately successful sales strategy, but they were still in doubt as to whether it would be sufficient in the long run. The one thing they hadn't done was to capitalize on Keating's Little League coach's remark. Maybe a long-life bulb failed to interest the bar owners and big corporations the company had originally tried to sell. But a bulb that never burns out -- now that was one hell of a gimmick.
"Never a Dark Moment with New Lifetime Bulb," the headline in the Detroit Free Press read. The article continued:
Q -- How many people does it take to change a DioLight light bulb?
A -- None. The bulb never burns out.
Well, almost never.
Would you believe 50 years?
That supercharged claim is being made these days by a veritable spark of a company, DioLight Technology . . .
That bit of fluff in a major daily newspaper was enough to interest Cable News Network's Detroit correspondent. The resulting video feature aired one night on national television just before and then again after CNN's Republican National Convention coverage. The timing was perfect, says Decker, to hit a business audience. Shortly thereafter came an article on DioLight in USA Today.
Behind the publicity, it turns out, was a little bit of marketing cleverness engineered by Kevin Callaghan. "Do any of your listeners use light bulbs?" Callaghan asks (with no subtlety at all) in a press release he sends to radio stations.
Would they be interested in hearing from the inventor of a household light bulb that is guaranteed to last forever?
The man CNN news said may have the greatest impact on American lighting since Edison!
Meet Kevin Keating. He's 33 years old, from Birmingham, Mich., and he's built a better mousetrap. . . . This is a classic American story of a small company taking on the giants. . . . Three enormous companies now control 95% of the light bulb market and these companies operate by their own set of rules. Which costs your listeners money. Mr. Keating will tell how and why. . . .
And Mr. Keating will talk about the future of lighting . . . like solar street lamps. Imagine light without energy cost . . .
That release last year got Kevin Keating interviewed on 300 radio stations. Other press releases generated 50 newspaper articles, 50 pieces in trade and consumer magazines (including High Technology and Newsweek), and seven television features about DioLight. Much of the publicity was targeted to specific cities and coordinated with Decker's sales efforts. According to DioLight's figures, the cost, not including Callaghan's salary, was $12,352, or less than $30 per story.
The chief benefit, Decker says, was the kind of credibility advertising cannot buy. It was the CNN coverage that precipitated the flood of phone slips, mostly from distributors who wanted to take on the DioLight line or from people like Philip Faulkner who, with a partner, chucked his old business to set up a DioLight distributorship in Memphis. But every story that followed jacked sales up some more. "A company that couldn't sell 100 light bulbs face-to-face a year earlier was now selling $8,000 worth over the phone. That," says Decker, "was amazing to me."
Now nearly four years old, DioLight hasn't turned the lighting industry upside down yet. But its sales network has expanded to 125 distributors in all 50 states, and in the fiscal year ending October 1, 1985, it sold 524,706 light bulbs, producing revenues of $802,500. This year, Keating projects unit and dollar sales twice as great. That's still light-years away from a 1% share of the huge bulb market, but it isn't bad for a fellow who, according to one of his Brother Rice classmates, couldn't change a light bulb four years ago, let alone make one.
Allan Merken at Action Tungsram, which makes the three-for-a-dollar promotional bulbs, complains that DioLight doesn't have a product that anyone else couldn't make. "With that kind of product, it's all just marketing," he snorts."It's a great item to get guys like you to write stories about."
"It's all just marketing," of course, is just the point. Alsip, Ill.-based Lite-Tronics International, a division of RSC Industries Inc., has been making 20,000-hour bulbs for about 15 years. "But all of the publicity that DioLight has created for itself," president Robert C. Sorensen complains, "makes us sound like a 'me-too' company, when we've been around a lot longer than they have."
DioLight continues to broaden its product line: flood lamps and candelabra bulbs are due soon. And it expects to be making its own bulbs in a new Pontiac, Mich., plant within the year. Meanwhile, Decker and Callaghan keep looking for different ways to uncover markets and customers. They're especially pround of one they found: General Electric Supply Co., a division of GE, which buys DioLight bulbs to resell to Radio Shack. It's a funny business.