Nautilus 2002 Annual Report Download - page 8

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year with slight increases during the summer months. Queen-sized mattresses, which became the largest selling segment in 1998, continued to
top the U.S. market in 2001, capturing 34.2% of the market according to the ISPA.
DIRECT BUSINESS SEGMENT
DIRECT TO CONSUMER MARKETING
We market and sell our Bowflex and Nautilus Sleep Systems products through our direct-marketing channel utilizing a combination of
30-second, 60-second, 2-minute, and in some instances 5-minute "spot" television commercials, 30-minute television "infomercials," response
mailings, the Internet, and inbound/outbound call centers. The direct to consumer distribution channel involves sales of our products directly to
the consumer. Sales leads are derived primarily from television advertisements, including both commercials and infomercials. Additional leads
and sales are obtained via our internet commerce web sites. By selling directly to the end consumer, we are able to target premium price points
paid by end consumers, eliminating all other parties from the supply chain. Our ability to capture the entire gross margin has consistently
produced a high financial return on time and money invested. The size of the direct market is also substantial. Through our advertising
initiatives, we estimate that we currently target 70 million homes. Success within this distribution channel is almost entirely dependent on the
ability to capture target demographics. By using hundreds of different toll free numbers, we are able to measure which ads our customers are
responding to, and we have built a comprehensive database that assists us to adapt marketing strategies to better target customers. Historically,
we have been able to predict, with a high degree of accuracy, inquiries to specific advertisements and the resulting sales. We continue to believe
that this will serve as a key differentiating factor and enable us to maintain a competitive advantage within this channel.
We conduct direct to consumer marketing through a combination of television commercials and infomercials. To date, we have been highly
successful with what we refer to as a "two-step" marketing approach. Our two-step approach focuses first on generating consumer interest in
our products and requests for product information, which is achieved primarily through the use of spot commercials and infomercials. The
second step focuses on converting inquiries into sales, which we accomplish through a combination of response mailings and outbound
telemarketing to potential customers who have made initial inquiries based on our first step advertising efforts.
The effectiveness of our direct marketing is influenced by seasonal factors. We have found that second quarter influences on television
viewership, such as the broadcast of national network season finales and seasonal weather factors, cause our spot television commercials on
national cable television to be less effective in the second quarter than in other periods of the year. Additionally, we have found that advertising
availability during the fourth quarter is more limited due to an increase in annual holiday advertising and political advertisements during
election years.
ADVERTISING
SPOT COMMERCIALS AND INFOMERCIALS. Spot television commercials are a key element of the marketing strategy for all of our
direct-marketed consumer products. For direct-marketed products that may require further explanation and demonstration, television
infomercials are an important additional marketing tool. We have developed a variety of spot commercials, infomercials, and marketing videos
for our Bowflex and Nautilus Sleep Systems product lines. We expect to use spot commercials and, where appropriate, infomercials to market
other consumer products that we determine are appropriate for the direct-marketing channel.
When we market a new product, we test and refine our marketing concepts and selling practices while advertising the product in spot television
commercials. Production costs for these commercials can range from $50,000 to $150,000. Based
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2003. EDGAR Online, Inc.