Family: Single
Personal funds invested: $2,000
Equity held: 20%
Education: B.A. in marketing from the University of Notre Dame
Last job held: Brokerage rep for Phoenix Mutual Life Insurance Co.
FINANCIALS
START's Income Projections
($ in millions) 1993 1994 1995 1996 1997
Number of memberships 1,000,000 -- -- -- 11,800,000
Revenues $51.5 $225.8 $517.8 $894.2 $1,240.8
Cost of revenues (agent commissions, contributions to $44.8 $171.7 $378.2 $641.1 $881.7 members, solicitation and enrollment costs, membership maintenance)
Gross profit $6.8 $54.1 $139.7 $253.1 $359.1
Corporate expenses (marketing, general and $26.8 $36.0 $40.0 $44.4 $51.1administrative costs)
Pretax profit (loss) ($20.0) $18.0 $100.2 $208.7 $308.0
WHAT THE EXPERTS SAY
Customer
Chris Ohlinger, a consultant who reviews and recommends marketing programs for retailers like Wal-Mart discount stores, Kroger supermarkets, and Montgomery Ward department stores. His business, Service Industry Research Systems, is based in Cincinnati
First, START's timing may be a problem. To compete with the wild success of the warehouse discount formats, traditional department stores, grocery stores, and drugstores are madly pruning costs out of their systems rather than adding them. They're preoccupied with cutting so they can deliver the best deal to customers who are obsessed by price.
Second, a majority of retailers are overleveraged because of the buyouts of the 1980s and the low inflation of the 1990s. They're like deer frozen in the glare of headlights, and they're not responding to sales-oriented ideas like START. And don't forget, a traditional food retailer earns less than 1% on sales. With that slim margin, it's extremely unlikely those retailers can afford anywhere near the 8% that START's negotiating in other deals.
Observer
Walter Erickson, executive vice-president of the promotion division of Carlson Marketing Group, a billion-dollar worldwide marketer in Minneapolis specializing in creating loyalty programs for airlines, hotel chains, and credit-card companies
Most businesses understand that there's greater value in selling more to existing customers than in searching for new customers. Thanks to the success of frequent-flier programs, there's no lack of interest in the marketplace for this kind of program. The question is, can this one be executed?
START needs more sponsors, and fast. To win, Andreini needs to corral enough sponsors into his network so that customers will use START on a daily basis. He's far from that now. The $25 enrollment fee, while a great way to weed out people who don't intend to play, does dramatically limit the number of people who do play. It's easy to take 200 consumers, look at the way they spend, and assume your whole universe of consumers will spend that way. But our experience with loyalty programs is that you have a big database of names in the beginning because lots of people join, but a much smaller portion play, and then an even smaller group play continually. And although groups signed up through agents make Andreini's membership numbers spike up, those members will play very little. They haven't requested START. In that kind of automatic enrollment, less than 50% will play, and Andreini would be lucky to get 10% to play heavily.
Competitor
Richard G. Barlow, a consultant who does customer-retention marketing for clients such as Sheraton Hotels worldwide, whose program has a million members in 65 countries. Founder of Frequency Marketing Inc., in Cincinnati, Barlow is also crafting his own loyalty program for avid golfers
There's no jump start to this program -- to get members playing and to entice cosponsors to sign up. Any program like this needs to give Joe Average a reason to get in early and play heavy-duty -- like double points for the first 30 days. Also, START's funding formula is going to have to change. Here's why: Eight percent is a huge amount. START would like to be able to assure cosponsors that this is a great investment because it brings new customers. But it can't. It's likely that a cosponsor will often be paying just to keep a current customer. Knowing that, cosponsors will push to cut lower deals. On the other end, members are going to be disappointed once they get in and see how slowly their retirement funds accumulate. To keep members, START will have to come back and run bonuses -- meaning that START's margins will be squeezed. That's when Andreini will have to return to his investors to make a whole new case and reconfigure his funding formula -- or close the doors.
Financier
Ted R. Dintersmith, general partner at Aegis Venture Fund, based in Lexington, Mass., who does large early-stage deals, a third of them in service businesses
My biggest concern is the amount of exposure START will get before it has any feel for where it's going. After six years in the prelaunch stage, roughly $5 million has been consumed, and the company is projecting $20 million in operating losses in 1993. It wouldn't surprise me if we're talking about a $30-million bet on this company. That's a huge bet. You won't know whether this is a profitable or an unprofitable business until 1994, when START can calibrate custom acquisition costs, margins on current customers, and retention rates. The problem is that how those numbers stack up depends on more than how well START does its job. In large part, success or failure hinges on how well START's vendors and cosponsors work as a team -- some of which is out of START's control.
Managing customer expectations is also going to be a challenge. Customers haul these cards around and steer their purchases in certain directions and then get the first statement. If people are disappointed with their rate of savings early on, they'll quickly drop the program, and you'll see retention rates fall to the floor.
