Analysis of a for-profit association designed to give young mothers information, services, and purchasing power.
Analysis of a for-profit association designed to give young mothers information, services, and purchasing power.
Jonathan Silver wants to create a for-profit association of young mothers that gives them information, services, purchasing power, and political clout. But will his one-stop-shopping concept stand out in a competitive field?
On a fair summer Saturday in New York City, a battered gray Lincoln slows to a halt at the corner of Park and 65th. The engine is running. And so too is the driver, who, having spotted a stroller, has abandoned the car and dashed down the block after an unsuspecting mother and child. "He does this all the time," says a seasoned passenger, sighing. It is, after all, New York. For the fast-talking young man waving brochures at the half-startled mother, however, chasing a stroller is no urban sport. In fact, it's strictly business. He considers the episode a cold call, made in the tireless service of his infant company, Mothers' Network. When gangly, 31-year-old Jonathan Silver returns to the car -- "Caught her," he pants -- he's convinced that a new customer has just been won. So what if he has to stop traffic now and then to give chase? You don't build a business idling in traffic. Launching this business -- a national, for-profit association for mothers -- Silver can't afford to let too many strollers slip by.
Not that this Wharton-educated entrepreneur ever expected to be pursuing women pushing babies up Park or any other avenue. He's not the most likely candidate for founding an outfit called Mothers' Network. "I'm not a mother. I don't have kids. I don't even have a wife," he confesses. "I just happen to have this idea and a one-and-a-half-year-old company to match."
Silver's brainchild? Mothers' Network, a membership organization for mothers that hopes to turn a profit by imitating nonprofits. The game plan: provide members with benefits and services ordinarily found among nonprofits, knit a web of local chapters across the country, build membership to several hundred thousand, and then sell it. Sell what, you may ask? "The channel," says Silver, who believes that a captive audience of half a million parents will command a handsome price from toy makers, diaper sellers, and other marketers. The mommy channel: if he builds it, will they come?
Silver, who had worked at blue-chip consulting firm Mc-Kinsey & Co. for two years and attended Harvard Business School (for 10 days) before launching this business, got into the market in 1987 through Itemz, the small marketing firm he was running at the time. He discovered a product called the Bubble Potty. Inflatable, with disposable liners, it was the ideal emergency potty. He sold nearly 20,000, and by mid-1988 parents across the country were calling. "They told me they were using it in the park, at the playground, and that it was a great way to meet other mothers." One message became clear: "People were looking to make contact with other parents."
A little research revealed there was no national membership organization for mothers. There were parenting publications -- national, regional, and local -- but Silver thought them "impersonal." There were childbirth centers that offered prenatal and postnatal training for mothers, but they focused for the most part on health issues and served only a tiny fraction of the market. There were local support groups run through Y's and churches and community centers. They offered opportunities for companionship but few hard economic benefits. There was no one-stop-shopping service organization that catered to parents' social, information, and financial needs.
Yet with census figures showing 17 million households with children under age 6 and the birthrate climbing up in recent years -- it went from 3.7 million in 1985 to an estimated 4.1 million in 1991 -- surely there was a market for a national association, Silver thought. He had another reason for optimism: steady growth in the market for juvenile products. Spending on children's products had been increasing by roughly 5% a year. (It reached $52 billion in 1992.) In the first year of a child's life, parents spent an average of $3,238 on paraphernalia. If Silver could combine merchandise sales with membership, he figured, he'd have a gold mine. He decided his primary market would be first-time mothers within six months after the birth of their children, when anxiety and expenditures reach their peak. He targeted mothers and mothers-to-be with household incomes exceeding $25,000 a year.
Silver envisioned an association as powerful and as lucrative as the American Association for Retired Persons (AARP), the advocate for the elderly based in Washington, D.C. His Mothers' Network would offer discounts, publications, insurance, and other products (including, eventually, a commanding lobby group in Washington) at modest cost. But Silver's start-up would differ in one crucial detail: while the AARP was legally a nonprofit, Silver's association would be a business.
In the first phase, he would concentrate on parents of children up to age 5. Beginning in 1989 he started identifying areas where his association would offer benefits: health issues, child rearing, and product information, which he would provide on a local basis to small groups of parents. He introduced the network at a trade show that summer.* * *
"There's no real training to be a parent, and it can be very isolating at first," Silver says. "People today are separated from their extended families, juggling work pressures and family responsibilities. The roles of fathers and mothers are less clearly defined. There are more choices to make about brands to buy, child-care options, parenting philosophies. Things are more complex."
His anodyne to parenting in this age of choice anxiety? A panoply of services and discounts:
* Workshops. The network's live events offered locally on a monthly or bimonthly basis would address topics ranging from discipline and building self-esteem to child nutrition and safety. Interactive, and led by experts, the workshops would function as chapter meetings that could be underwritten by sponsors, who would demonstrate products and intersperse commercial messages during the two-hour-long sessions. The prefabricated workshops, delivered according to standard curricula, could be easily transplanted to other regions as the network expanded.
* A buying club. The company would extend a discount buying club to members, whereby price-sensitive parents could receive 10% to 30% off merchandise or services at participating businesses.
* Merchandise. A catalog of more than 300 mom-and-baby products would provide even more convenient shopping for members and yet another profit center for the company. By Silver's original design the catalog would entice discount shoppers and pull in 40% of the company's revenues. When it failed to do either, he later abandoned it.
* A newsletter. Titled "Mom," the bimonthly publication would grow from an eight-page black-and-white newsletter to a four-color magazine over three years. It would feature practical advice and regular columns on parenting topics, calendar listings of relevant regional events, member profiles, and question-and-answer columns.
* A resource bank. Because of time constraints -- more than half of all mothers with children under the age of one now worked outside the home -- parents needed to find resources quickly and efficiently. Mothers' Network would publish a directory -- a yellow pages for parents -- listing child-care centers, health-care providers, and retailers, among others. Paid for by advertisers, it would be updated quarterly.
Eventually, as membership grew, Silver hoped to offer big-ticket benefits such as insurance coverage, pharmacy discounts, and travel discounts. But to have a prayer of persuading a large insurer to extend group rates, he'd have to show a critical mass of members first. When that happened he might receive kickbacks of a point or two on premiums to a third-party provider. In the meantime, revenues would come from membership fees, meeting fees ($5 to $6 per person), and ad revenues. After early tests showed no resistance to a $35 membership fee, he raised the price from $25. (Later, actual response rates would persuade him to reduce it to $29.95.) His combination of benefits appeared to work at that price point: 7 out of 10 prospects signed on.
In the first year, the association signed up 300 members in metropolitan New York. By 1992 Silver counted 2,300.* * *
The Marketing Strategy
Silver's marketing strategy, through various iterations, honored one commandment: Thou shalt recruit members. With scant capital, that meant reaching prospects through a medley of grass-roots, even guerrilla, tactics.
* Members. The trick is to get them coming out of the delivery room, then keep them for a decade or so. But forced to recruit on a bootstrapper's budget, Silver had to restrict marketing costs to $9 a member if he was to turn a marginal profit. He also needed to keep renewal rates high enough to amortize that cost over the lifetime of a membership.
* Direct sales. The best and cheapest way to lure members, Silver initially figured, was through mothers themselves. "Mothers tend to trust other mothers. Their buying decisions are heavily influenced by one another," he says. He would recruit a direct sales force of mothers -- "consultants" -- to work each of eight New York City-area territories. Unfortunately, at the price points Silver sold memberships and, later, merchandise for, there was too little margin built in to pay anything but paltry commissions. Turnover was high. And the company wasn't exactly hurtling toward the 100,000-member mark, the milestone needed to impress national marketers and insurance carriers.
* Professional endorsements. To gain credibility (and members at a lower cost), he began marketing through perinatal professionals. Targeting pediatricians, obstetricians, and childbirth educators, the company circulated brochures in more than 100 doctors' offices, gaining exposure to some 15,000 prospective members in metropolitan New York. "But we couldn't rely on doctors to sell aggressively for us," he says. He formed an advisory board of professionals, who were paid to lend their advice and their imprimaturs to the company.
* Public relations. Coverage in the New York Times and on Cable News Network got the phones ringing and brought in a wave of new members, but media attention was fickle, and stories were sporadic.
* Co-marketing. The company persuaded retailers and service providers in the New York metropolitan region to distribute brochures and membership applications, à la Visa or American Express, in point-of-purchase, take-one displays. The response was anemic. But Silver is undaunted. "We have to rely on allied businesses to market nationally," he says. "It lowers the cost of reaching new members and reduces the risk of going into new markets." He is pursuing cross-promotion deals with large packaged-goods companies. He also hopes to barter with allied businesses willing to host (that is, provide space for) network meetings in other regions.
* Space advertising. In its first year, the company spent more than $15,000 advertising (primarily for sales consultants) in local and regional parenting publications as well as daily newspapers. That effort brought in from 300 to 500 members, at an exorbitant cost of $30 to $50 each. While early forays into space advertising have proved to be budget busters, "we've learned our lesson," says Silver. He intends to place ads in the regional editions of select national magazines. "The cost is higher, but the efficiencies are better," he says. Silver expects to spend 40% of his marketing dollars on print advertising.
* Direct mail. This summer he entered a partnership with a large, national direct-marketing agency to conduct a direct-mail test and a telemarketing campaign. The company plans to send out 50,000 pieces in the direct-mail test and split the cost of the campaign with the agency. "We're paying the postage -- about $4,200. They cover the rest." In return, Silver will give the agency a healthy percentage of the membership fees. He hopes to get at least 1,000 more members. He estimates a national campaign could cost $250,000.
Silver's experiment trying to sell merchandise for mothers and children through a catalog had been disappointing, costing him more than $100,000 and causing his start-up to suffer a six-month-long "identity crisis." What business was he really in? In a desperate epiphany he realized he wasn't just selling baby gear. "We were really selling a relationship to mothers. Every benefit we provide -- the directories, the newsletter, the meetings -- is a marketing opportunity." So, when it came to peddling them, "we decided we don't just sell ads. We're selling a program." That program consisted of exposure in "Mom"; a listing in the network directories; direct-mail co-ops; list rental; and test marketing.
Silver won't discuss the cost per 1,000 that advertisers are expected to pay for access to his "mommy channel." But because of its status as a membership organization, Mothers' Network hopes to charge a premium over other publications in the market. In 1993, by his projections, each member would be worth $5 in mainly local and regional advertising revenues. By 1997, when the network would have a national presence, that figure would climb to $35. Besides advertisers, Silver is wooing sponsors among the ranks of large national baby-goods manufacturers like Johnson & Johnson or Gerber or Fisher Price. But large national sponsors demand more market penetration before they fork over a $50,000 to $100,000 sponsorship fee. They want at least 25% of births or a membership of 1 million. Silver predicts he'll get a more modest share of the market. Even at 500,000 members, he'd claim only 3% of the market.* * *
Tiny offices in midtown Manhattan, still crammed with the remnants of Silver's career as a merchandiser, serve as company headquarters. Every corner is crowded with boxes, each shelf laden with disposable bottles, bath seats, and an array of baby contraptions.
From here, memberships are processed and fulfilled. Applications are forwarded by nine area directors, who recruit members and organize local events on a commission basis. A database of members is maintained on a desktop system. Another database, of merchants and providers, is used to produce the resource listings and buying guides. Until membership applications reach a volume of 750 a month, Silver will continue to administer fulfillment in-house. Once the network expands beyond the New York region, he'll hire a fulfillment house. At headquarters, the start-up's staff consists of an information-services manager, a national sales director responsible for membership recruitment, and a local marketing coordinator, who sells ads. The office is run on less than $20,000 a month, including payroll.
Workshops take place off-site, usually at local hotels where a room can cost $150 for a couple of hours on a Saturday morning. Aside from room expenditures, there are few fixed costs associated with these events. The workshops are designed and delivered by consultants for modest fees. The cost of program curricula, developed by free-lance experts, is nominal. And the $6 fee charged at the door covers the company's outlay if 30 members attend.
The company's newsletter is also farmed out. A consulting editor, a former New York Times writer, was recently recruited to revamp it. Silver has allotted $24,000 a year for articles, but members are encouraged to submit articles for free, which cuts editorial costs. More than 50,000 copies of the September issue were slated for distribution in medical offices in New York and New Jersey.* * *
"Every personal asset I have is in this business," says Silver, who has invested about $250,000 and borrowed more from relatives. He even managed to settle a lawsuit for another $50,000. But despite the personal resources he's marshaled, Silver has so far failed to attract the outside investment he says he needs to roll out the concept nationally.
He attributes investors' coolness to confusion over the nature of his business. "In the beginning, when we were selling merchandise, it turned investors off," he recalls. His efforts to sell goods through a catalog and independent sales reps "made us look too much like Tupperware," he concedes. To investors as well as members, Silver's business bore too close a resemblance to multilevel marketers. "It was bad for our image." And it didn't make money.
He managed to finance the first year and a half out of personal savings and cash flow from a few consulting stints, but he racked up a backlog of payables. The company chalked up substantial losses on $150,000 in revenues between 1990 and 1991. Silver projects he'll lose $250,000 on sales of $450,000 this year, with $240,000 going to cover payroll and operations alone. Still, he anticipates he'll break even sometime in 1994.
Like any cash-deprived founder, he wants to raise as much as $1 million to expand. An investment of $250,000 to $500,000 would enable him to mount the direct-mail and advertising initiatives required to push into 20 new markets. His plan calls for entering nine large cities including Los Angeles and Chicago in 1993. He would add 10 more markets, representing 42% of all births, by 1994.
In 1995, when he plans to pass the 100,000-members mark, Silver would drop membership prices to $19.95, trading margin for greater volume. "We'd expect from two to three times the number of people to respond at that price," he says. By persuading one out of every two members to renew, he'd maintain gross margins above 50%.
Can he keep going without investment? "Not forever," Silver admits. If he faces a future of interminable bootstrapping, he'll continue to hold down overhead while growing slowly, mainly in the Mid-Atlantic region.
While shortage of capital and retarded growth might leave him vulnerable to competition, funding and accelerated growth pose equally daunting problems. Even if Silver attracts capital, expanding as rapidly as he plans could lead to chaos. Area directors alone would multiply from 9 to 63 in one year -- just about as quickly as the headaches of managing them. Pressure to control costs could compromise quality.
Quality service is, of course, the key to boosting membership. Parents may indicate interest in network benefits, but they can find most of them elsewhere. Silver will have to differentiate his services through execution. And he'll have to deliver value to members without confusing them. "At some point you can offer so many benefits that you muddle the reasons to join," he says.
Currently Silver does not segment his market. Considering mothers a unified market may prove a mistake. "The 17-year-old single mother living in a trailer park in Kansas City has little in common with the mother with an au pair and one child living on the upper East Side," cautions Judith Nolte, editor of American Baby.
No matter who his members turn out to be, the task of hitting 100,000 is urgent. To interest the sponsors and advertisers he covets, Silver needs to penetrate the market significantly. But achieving a national audience is no guarantee that marketers will buy into Silver's network. A cadre of strong and growing parents' publications aren't likely to surrender market share easily. The Mothers' Network may be hard-pressed to sell ads at a premium.
Perhaps Silver's biggest challenge lies in disciplining without stifling his toddler of a company. Running in different directions, exploring every opportunity, is perhaps quite natural at this stage. But Silver would do well to acquire the watchful eye his members must cultivate. "I think I'm learning what it's like to be a mother," he confides.* * *
Company: Mothers' Network, New York City
Concept: A national membership organization for mothers, providing seminars, publications, discounts, and other benefits, for an annual fee. Sell advertising and sponsorships to toy makers, diaper manufacturers, and other marketers eager to reach parents through a new channel
Projections: Losses of $250,000 against sales of $650,000 in 1993. Hit break-even soon after, posting profits of $866,000 when revenues reach $4.6 million, in 1994. By 1997, be a $38-million company with half a million members and pretax income of $15.4 million
Hurdles: Achieving a critical mass of members and retaining them long enough to turn a profit. Grabbing share in a fragmented market littered with local, regional, and national competitors. Persuading advertisers, insurers, and strategic partners to buy into an alternative channel. Raising the money to expand nationally
Personal funds invested: $250,000
Equity held: 100%
Education: B.S., the Wharton School of Business; B.A.S. in engineering, University of Pennsylvania
Other companies started: Itemz, marketer of gift and juvenile products
Last job held: Research associate at McKinsey & Co. in Chicago
Mother's Network Income Projections ($ in thousands)
1993 1994 1995 1996 1997
Cumulative members 15,000 88,000 197,000 408,000 648,000
Member fees $535 $2,985 $3,533 $7,044 $10,438
Workshop fees $41 $339 $1,061 $2,112 $3,940
Ad revenues $73 $1,267 $4,283 $11,565 $23,170
Total $649 $4,591 $8,877 $20,721 $37,548
Membership $205 $1,059 $1,907 $3,767 $5,098
Workshops $32 $259 $554 $760 $884
Direct mail $0 $220 $920 $2,353 $4,114
Selling $282 $1,265 $2,748 $5,797 $9,473
General and administrative $384 $922 $1,540 $2,021 $2,542
Total $903 $3,725 $7,669 $14,698 $22,111
PRETAX PROFIT (LOSS) ($254) $866 $1,208 $6,023 $15,437
Pretax margin (39%) 19% 14% 29% 41%
WHAT THE EXPERTS SAY
Investor in the National Association for Female Executives, a for-profit membership organization founded in New York City in 1974. Publisher of NAFE's bimonthly magazine, Executive Female
Silver expects to make money on the membership fee, which may be incompatible with keeping renewals at 50%. Most legitimate associations lose money on members the year they join. If they're not losing money, they may not be delivering real benefits or giving members enough reason to renew. And renewals are critical. He should be spending the entire membership revenue to recruit and serve members -- at least half of it on benefits. Otherwise, he'll face such high turnover and marketing expenses, he'll never become profitable. Plus, it takes a lot of money to roll out nationally and bring in thousands of members. Direct mail is a pretty expensive way to go. He won't get far spending only $200,000 to $300,000. It may take him years to figure out which lists really work.
Director of membership for the American Association for Retired Persons, based in Washington, D.C., a powerful nonprofit organization providing insurance benefits, discounts, and other services to 33 million Americans 55 and older
The first thing you have to do in building a membership association is identify a fundamental need that is not being met anywhere else. For AARP, the needs were compelling: older Americans lacked insurance and health-care benefits. I'm not sure the needs that Mothers' Network addresses are quite as critical. Silver plans to grow the organization very quickly. In the process he may stretch his resources too thin and compromise the quality of the benefits he offers. It took AARP nearly 40 years to reach its current size. And the life cycle of a membership is long. To retain members, you must provide services that meet their needs as they move along the age continuum. That means constantly developing new products or services. I would think about adding modules for parents as their children age.
Marketing director for the Child Care Group of magazines, owned by Cahners Publishing in New York City
Thirty dollars (Silver's membership fee) would buy a lot of disposable diapers. It's a high price to ask a mother to pay for something that is unessential. He'll definitely have to drop his buy-in fee to capture the market share he wants. He should target a far more upscale demographic -- well-educated, upper-middle-class, first-time parents. His primary market will not be parents of children under 5. It will be first-time parents within the first year of their child's birth. Parents with more than one child won't need the network. They know how to do it. He'll lose half the market right there. His hope of renewing half the members from year to year is exceptionally high. He'll be up against the local parenting papers -- many of which are free -- and the national magazines, which sell for far less than $30 a year. If he can position the network as a quality provider straddling both, he might compete well. But it's a tall order.
Executive vice-president of Madison Direct Marketing, based in Greenwich, Conn., an agency targeting the new-parent and young-family markets
He may find keeping his recruitment costs to $9 a member difficult outside the new birth market. The cost of recruiting parents of older children will be much higher. Their interest in products and services of this kind dwindles as their inexperience and the novelty of having a child wear off. Silver's attempt at grass-roots marketing is admirable. But building real strong local organizations that are far removed from headquarters won't be easy. There's a danger that commercializing meetings and services will alienate mothers. And getting large sponsors interested without offering them very high penetration (50% to 75%) is unlikely. I doubt Mothers' Network can offer exposure that a sponsor couldn't get on its own or in a tie-in with another, more established company. Large packaged-goods companies are selective about the partners they choose. They would expect a prospective partner to show more financial stability than Silver can.
Writer and new mother, living in Newton, Mass., with her husband and daughter, age six months
Silver's premise is true: you can feel really isolated when you first have a child. It's the toughest thing about being a new mother. But there are so many resources out there that I'm not sure Mothers' Network offers me anything I can't get or don't already get from lots of other sources. Usually, free. I've got books; I've got magazines; I've got catalogs. I meet other mothers at exercise classes. I read a local parenting paper, where I can find ads for local events and services. I get discounts through the mail. Even my diaper service sends me a newsletter. When you have a child, marketers really come out of the woodwork. Something like Mothers' Network faces plenty of competition for my attention. If I were really convinced I could save money through this organization, I might consider joining. But I'm still not sure I'd pay $35. Maybe $15.