A Green Thumb

Who knew dirt-free indoor garden kits could be such a hot commodity? They're also a great direct marketing product, which is why AeroGrow International is shifting its business model away from selling to retailers and targeting consumers directly.

“We're squarely on the right side of a lot of emerging and powerful trends,” says J. Michael Wolfe, the company's chief operating officer.

“Our product is healthy, it's green, it's renewable and it assures fresh, safe food.” It can also save consumers money, he says, in, that a $50 AeroGarden will produce hundreds of dollars worth of herbs.

So why not just keep selling through retailers? AeroGrow has in a relatively short time built up a powerful database. Wolfe, who has been in the direct marketing industry for 25 years, says he's “never seen a customer database that performs as well as this one does.”

AeroGrow's direct-mail-acquired customers perform better than those from any other source available, Wolfe says. “They are among the least costly customers to bring onto the database, and they have the best back-end performance — with high repeat purchase frequency and multiyear value,” he says.

The company announced the intended shift in its business model in January, when it named Jack J. Walker CEO, replacing Jerry Perkins, AeroGrow's CEO since March 2008. (Perkins will continue to serve on the board of directors.)

That's also when Wolfe, who had been vice president of operations since April 2006, was promoted to his current position. He'd also served as the general manager of AeroGrow's direct response division since August 2008, and launched the company's first direct response catalog in 2007.

AeroGrow's targeted prospecting efforts — largely through its catalogs — have brought “a better quality of name onto our database, significantly increasing the lifetime value of a name on our database,” Wolfe says.

Green and mean

Boulder, CO-based AeroGrow International was founded in 2002, and currently employs about 40 people. It became a publicly traded company in 2006, the same year it launched its core product.

That would be the AeroGarden, which uses dirt-free aeroponic technology to create a humid growing chamber that fits on a kitchen counter. The fast-growing, “high-output” indoor garden produces fresh herbs, vegetables and flowers year-round. And customers return to buy more seed kits every four months or so.

Indeed, the big win in AeroGrow's business model is in the “annuity” that it sells in the form of seed kits, grow bulbs and so on, Wolfe says. “This part of the product line has the highest margins.”

AeroGrow sells more than 50 seed kits in its line now, and the line is constantly growing, Wolfe says. “Soon, we hope to be selling many more vegetables and flowers.”

The company started out selling via stores, on Websites and in catalogs such as Frontgate and Herrington, as well as through television via QVC and infomercials. But working with large retailers has become increasingly difficult since the economy plummeted in fall 2008, Wolfe says.

“Since then, we have found that more retailers are pushing the inventory risk back to the manufacturers — often placing purchase orders for products and then not taking delivery of them,” Wolfe says. “As a relatively young company, this risk has just proved to be too onerous.”

AeroGrow will continue to partner with Amazon.com, QVC and some other retailers, Wolfe says. “But our direct business affords us significantly higher gross margins than those we traditionally achieved in our retail business.”

AeroGrow's channel shift is not uncommon these days, says David Solomon, co-CEO of investment firm Lazard Middle Market. More manufacturers are braving the channel conflict caused by competing directly with their retail clients and by selling direct to the consumer.

“The implications for higher margins and better inventory control can offset the loss of wholesale business,” Solomon says.

What's more, the direct model allows the company to sustain an ongoing relationship with its customers.

“In an annuity business such as AeroGrow's, where the lifetime value of the buyer is so important, we feel that having a direct relationship with our customer is a powerful opportunity,” Wolfe says.

A direct path

Before joining AeroGrow, Wolfe had been president/chief operating officer of Concepts Direct, where he oversaw the development, launch and operations of seven independent catalogs, including the Colorful Images, Snoopy, Etc. and Linda Anderson brands. Revenue grew to more than $80 million prior to the sale of the company to Taylor Corp.

Prior to that, Wolfe served as vice president of database management company Wiland Services, which had launched Colorful Images. (When Wiland Services was sold to NeoData Corp., the assets related to Colorful Images were spun off to Wiland's shareholders and became Concepts Direct.)

So how did Wolfe wind up at AeroGrow?

“I met Michael Bissonnette, AeroGrow's founder, in 2005 and I loved the business model,” Wolfe recalls. As funny as it sounds, he notes, “there are a lot of similarities between selling stationery products through Colorful Images and seed kits at AeroGrow: Both are basically annuity businesses in which building a rich customer database that will continue ordering from you is the key.”

Since December 2008, Wolfe has spearheaded AeroGrow's overhaul of its Internet division. “I would characterize this as a shift from top-line focus to bottom-line focus in our marketing initiatives,” Wolfe explains.

During that period, the return on media dollars spent in the company's direct response business more than doubled and its database of active buyers surpassed 100,000 names — a growth rate of over 15%.

Better still, the average annual amount spent by existing AeroGrow customers in repeat purchases increased by more than 20%, to nearly $50.

How did it do this? Specifically, AeroGrow restructured its pay per click (PPC) and affiliate programs to bring media costs into line and ensure that they were generating profitable revenue.

The company also put a greater emphasis on the quality of its e-newsletter, “which dramatically increased the frequency with which we contacted our e-newsletter subscribers. This turned our e-newsletter from an afterthought into a primary marketing vehicle to our customers,” Wolfe says.

AeroGrow also shifted a large portion of its media expenditures from infomercials to catalog prospecting. This enables it to generate customers at a much lower acquisition cost, but also captures a customer with a far superior lifetime value.

“Two years ago we spent over $85 per new name that we added to the database,” Wolfe explains. “This number improved to $20 per name in the most recent 12-month period.”

Wolfe says AeroGrow's total database has grown about 50% and the active customer file rose by 15%. During that time, he notes, sales to prospects actually decreased, “as we spent significantly fewer media dollars on television advertising and had a reduced retail presence.”

As a result, total sales declined somewhat, he says, “but we reduced our cost for customer acquisition dramatically, which has set the stage for sustainable profitability.”

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