Nutrisystem 2007 Annual Report Download - page 33

Overview of the Direct Channel
In the years ended 2007, 2006 and 2005, the direct channel represented 94%, 93% and 90%, respectively, of
our revenue. Revenue increases are primarily driven by new customer growth. Critical to acquiring new
customers is our ability to increase our marketing spend while maintaining marketing effectiveness. Our
spending on advertising and marketing to new customers increased by $59.3 million to $175.5 million in 2007
from $116.2 million in 2006. Factors influencing our marketing effectiveness include the quality of the
advertisements, promotional activity by our competitors, along with the price and availability of appropriate
media. In addition to our marketing efforts, we generate new customers through referrals and publicity, such as
magazine articles and mentions on television. We also advertise to our former customers. In the years ended
2007 and 2006, $3.2 million and $1.9 million, respectively, of our total marketing expense was spent to reach
former customers. When former customers return to the program and, as the number of former customers grows,
we generate an increasing amount of revenue from these returning customers. We refer to revenue derived from
returning customers more than nine months removed from their initial purchase as reactivation revenue.
We measure growth in terms of total revenue, new customers and revenue per customer. A new customer is
defined as a first-time purchaser through the direct channel. We define a customer with an initial purchase of
$100 or more to be a new “program” customer. These customers tend to stay on a weight loss program longer
and spend substantially more than customers who make an initial purchase of less than $100. Program customers
made up 99%, 99% and 97% of all new customers, with average marketing cost per program customer of $186,
$147 and $140, in 2007, 2006 and 2005, respectively. Profit margins are measured in terms of gross margin
(revenue less cost of revenue) and total marketing expense as a percentage of revenue. We evaluate the cost
effectiveness of our marketing programs based on the marketing cost per new customer acquired. When
calculating new customer acquisition cost, we exclude the marketing expense spent to reach former customers.
Prior to 2006 this spend was immaterial.
Financial and Operating Statistics for the Direct Channel
(in thousands, except customer data)
2007 2006 2005
Revenue ............................................ $727,612 $526,715 $189,274
Cost of revenue ....................................... 328,738 241,172 91,534
Gross margin .................................... $398,874 $285,543 $ 97,740
% of revenue ..................................... 54.8% 54.2% 51.6%
Marketing
New customers ................................... $175,480 $116,152 $ 47,313
Former customers ................................. 3,177 1,946 —
Total ........................................... $178,657 $118,098 $ 47,313
% of revenue ..................................... 24.6% 22.4% 25.0%
New customers
Program ........................................ 945,441 791,004 338,040
Total ........................................... 953,673 797,606 347,337
Marketing/new customer
Program ........................................ $ 186 $ 147 $ 140
Total ........................................... $ 184 $ 146 $ 136
Revenue/customer (9 month trailing) ......................
Total ........................................... $ 648 $ 632 $ 605
New customer revenue/new customer
Program ........................................ $ 607 $ 574 $ 516
Total ........................................... $ 602 $ 569 $ 505
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