In the space of two years, influencer marketing went from a hobby, where popular people on social media would post about products in return for free samples, to a profession where fully-fledged influencers would demand thousands of dollars to post about product or brand. In 2013, an influencer with 50,000 followers on Instagram was charging, on average, less than $50 per post. Over time, the fees started to increase. By early 2015, that same class of influencer with 50,000 followers could make ten times what they were making just 12 months earlier. Influencers became so savvy that they would do group photos containing the products of several different brands and charge each brand hundreds of dollars for their efforts. For a few minutes’ work, they could make thousands of dollars.
I realised almost immediately that I couldn’t compete financially with what other companies were willing to pay for influencer services. I decided to try a money-ball tactic and hone in on influencers that had fewer followers but better engagement scores, which I hoped would translate into better sales. There is no point going after someone with 500,000 followers and paying them a few thousand dollars if they are only going to generate a few thousand dollars in sales. It makes more sense to approach someone with 10,000 followers with better engagement who will generate substantially more in terms of revenue. I spent two days drafting personalised emails to send to 30 influencers I wanted to work with. While many of them were willing to work with me, I was unable to afford any of their rates. Even the influencers with fewer than 5,000 followers still thought it was appropriate to charge hundreds of dollars per post. Other teatox companies and Instabrands were willing and able to pay influencers substantially more than me.
In return for posting, influencers get paid in one of two ways: flat rate payments per post or commission payments based on sales generated. Most influencers demand a flat fee, per post, in advance. The rate itself varies greatly depending on the number of followers. Someone with 5,000 followers might charge $200 for a post, while someone with 100,000 might charge $2,000 for a post.
Influencers can add value to brands in several ways. Most brands have a short-term focus and spend money on influencers to acquire an immediate benefit in the form of sales. With this approach, as a business, you are trying to pay an amount that is significantly less than what you stand to make from sales that are generated as a result of an influencer’s post. A margin of safety is essential. If a business is willing to spend $5,000 on an influencer, they need to be sure that that influencer is going to generate at least $15,000 in sales to allow the business to break-even on the marketing spend. For instance, a company selling make-up brush sets for $100 might be willing to pay a popular YouTube make-up artist $15,000 for a review video. To break even on the $15,000 payment, the company would need to receive 150 orders. To make enough to break even on all of the other associated expenses, the company might need to receive 200 orders from the video. It’s impossible to know whether it will pay off. All the company can do is make an educated guess. If the influencer has 1.5 million subscribers on YouTube and an average video gets 400,000 views, it would not be unreasonable to assume that 0.05% of those viewers could order. If the video goes well, that would mean that the company would receive 2000 orders, or $200,000 in revenue. If the video doesn’t go well, the amount of revenue may not cover the influencer marketing spend. Before going ahead, the company just needs to make sure that they are confident that sales will go past the break-even point. If they are, there is very little risk involved and a lot of potential upside.
I noticed several issues with flat-fee payments to influencers. The most obvious issue is that, while the potential upside is great, the incentive structure is extremely poor. Influencers who get paid in advance and have absolutely no accountability for the effectiveness of a post. What if a company pays an influencer $15,000 for an Instagram post and the post doesn’t generate any sales because the influencer forgets to mention the company’s website domain or some other agreed term? While larger companies may be able to get their money back by threatening legal action, there is very little chance that a smaller company would have access to the same legal avenues. When incentives aren’t aligned, it can be hugely problematic. Influencers don’t care if their clients are unable to generate a single dollar from a post. If I had paid $2,000 for an Instagram post and received two orders, I would have been out of pocket over $1,900. For every one influencer that makes money for a brand, there could be another ten that lose money.
Beyond having no accountability for post effectiveness, influencers also have no loyalty. Just because an influencer promotes make-up brush sets from one brand today, doesn’t mean that that person won’t promote another company’s brushes tomorrow. It also stands to reason that if these influencers do a post every day or every second day, their followers are going to spend money on certain products and not on others. There is only so much disposable income to go around. Over time, posts will become less and less effective as followers spend more and more money on other products. Potential sales will also vary week on week, depending on when an influencer’s followers typically get paid. If most customers may get paid on a Wednesday, there is a good chance that a post on a Thursday will generate more sales than a post on a Friday.
A pain point for me with influencer marketing is that many of the influencers I contacted never took into account the size of my business when setting the price. Influencers would charge a tiny company like OMGTEA the same amount that they would charge a huge corporation like Nike. Since influencers have no skin in the game and no accountability, they don’t have to think about what companies stand to gain from using their services. They simply want money. For them, it’s transactional; it’s about the money and nothing more.
Rather than gambling with my company’s money, I decided to take a more conservative approach. I only used influencers who were willing to accept commission payments based on the number of sales generated as a result of a post. There was nothing complicated about the strategy. Each influencer was given a personalised discount code for their followers to use. Every time they post, they simply mention the discount code. Here’s an example:
Have you tried OMGTEA yet? It’s incredible! I have been consuming it for the last 3 years to help ease digestion and curb unnecessary snacking (a major problem of mine as you all know). Check it out on www.omgtea.com and use the code LIV15 for 15% off everything on the site.
At the end of each week, the data was pulled into an excel table, where I calculated each influencer’s commission payment as a percentage of the sales that were generated using their personalised discount code. This proved to be a much more authentic way of promoting the brand because the influencers had a vested interest in generating brand sales. Not all businesses need to adopt this approach. Businesses selling products with good margins at higher prices, would have found it much easier to stomach flat-rate influencer fees.
To demonstrate how influencer commission payments works in practice, it is useful to go through an example. If an influencer has a 15% discount and mentions that discount in a post, there will be a stream of people directed to a website. If a brand has a single product that usually retails for $35, a customer using a 15% discount code will end up paying $29.75 including GST, plus an additional $4 in shipping. Of the $29.75, the influencer will get paid a certain percentage, say 15% or $4.46. Once other costs are taken out, this will leave the company with about $15 profit. The great thing about using influencers on an ongoing basis is that they make themselves redundant over time if they don’t continue to grow their audience. The followers of the influencers slowly become the customers of a brand. If you, as a brand, are able to keep those customers, you do not need to pay the same influencer the same fees in the future. The goal for a company is to cut out the influencers at some point and have direct access to customers for future marketing efforts.
Feeling completely dejected about not being able to bring any influencers on board, I decided to take a step back from the business for a few weeks. I simply didn’t know what I could do to increase sales. Much of my marketing strategy had been based on assumptions: “If I can get ShaaanXO to promote my products on her channel, everything will change.” When it came to contacting influencers, I knew that one of three things would happen: they would either ignore my email, say that they didn’t want to work with me, or they would demand an extraordinary fee in return for posting.
One day, my luck turned. Out of nowhere, I received an email from a moderately popular influencer in New Zealand who ran a support forum on Facebook. While I had never heard of her or her forum, the forum provided a place for women to go to for support and guidance related to healthy eating and exercise. The members-only area had a few thousand members, while the Facebook page itself had about 60,000 likes at the time. Apparently, several people had been talking about the tea in the members-only area and it had been brought to the attention of the influencer who administered the page. She wanted to try the tea herself, so I agreed to send her a few boxes. I didn’t think too much of it at the time. A few days after receiving the tea, I received another email from the influencer, proposing that we work together. For whatever reason, she really loved the product. After some back-and-forth, we came up with a commission-based payment system that would allow her to make money by promoting the tea in her forum and on her Facebook page. She quickly became a key influencer for the brand. While she didn’t have a large following compared to a lot of other influencers, she did have an extremely engaged follower base. It’s important when identifying influencers that engagement metrics are taken into account, rather than focusing solely on follower numbers. Engaged followers are worth infinitely more than fake ‘likes’ and fake followers. While it is hard for most brands to understand, ten thousand engaged followers could be worth more to a company than one million basic followers.
Bringing an influencer on board forced me to rethink my pricing structure. Since every customer coming to the website had access to a discount code, the average sales price immediately dropped. With a 15% discount, I was immediately giving away $5.25 on every $35 order, plus an additional $4.46 to influencers. I had to weigh up whether I thought I could spend less than $9.71 ($5.25 + $4.46) to get people to pay the full price of $35 or whether it made sense to give $4.46 to influencers to get customers to pay $29.75. The influencer model was appealing at the time because it meant that I could focus on volume sales, which allowed me to move through stock faster. It turns out that product manufacturing wasn’t designed with ecommerce-only businesses in mind. When it comes to ordering stock, the minimum order quantities are generally very high because manufacturers are only used to dealing with product businesses that supply stock to other retailers. Having to hold 20,000 units of something to sell directly to customers is a huge burden and requires constant turnover.
The problem with a sales-based influencer model is that customers come to expect discounts. While offering codes may provide a short-term boost in terms of sales, customers learn that they can always get a discount code and never want to pay full price. A customer who behaves like this is worth a lot less than a customer who is prepared to pay full price. Therein lies the problem with pricing: prices have to be low enough that a customer without a discount code will buy, but high enough that a business will still be making money if a discount code is used. This then begs the question, why not charge $29.75 and not have a discount code? Aside from being able to track influencer sales, some customers only respond to discount codes no matter the price. If the price of a product is dropped from $35 to $20 (a 43% discount), customers wouldn’t necessarily be inclined to purchase. Offer a 10% discount, however, moving the price from $35 to $31.50, and they would jump at the chance.
Retail stores use sales and discounting as a core part of their retail strategy. They know customers respond to sales more than they respond to everyday low prices. A typical retail store loses money every day and makes all of its money for a year in three or four heavily marketed sales. Consumers like sales. A friend of mine, George, comes from a family who own a chain of furniture stores in New Zealand. Each store turns over $5-8 million a year in sales. When George’s parents started the business, they had a lot of trouble gaining any sort of sales traction and almost went out of business several times. They had come up with a formula for pricing that made sense to them at the time. They would sell everything at 2.5 times cost. If a sofa cost $150 to make, they would retail it for $375. If a chair cost $50 to make, they would sell it for $125 and so on. They wanted to offer good quality furniture at reasonable prices, without having to run sales. It quickly became clear to them that they weren’t moving through stock fast enough. Since they didn’t sell through enough stock, there were flow-on effects: their wood supplier started giving them lower quality wood because their business didn’t mean as much, factory workers had to be let go, and their transport company cancelled their contact and increased prices. The temptation in this situation is to drop the price of each product until the price falls in line with demand. That’s what they teach you in business school. George’s parents instead started to think about the true value of their products and increased their prices using the same formula, but this time at four times cost. Sales increased slightly, and they were able to run a sale for boxing day one year. The sale offered 25% off everything in store: a chair that previously cost $125 and now cost $200 was discounted to $150, a sofa that previously cost $375 and now cost $600 was discounted to $450, and a table that previously cost $180 and now cost $300 was discounted to $225. They had their best day ever and sold through almost all of their inventory. They even had to hire more staff to cater for the increased demand. Soon after that boxing day, George’s parents increased prices a second time. This time, they decided to try something different and set prices without factoring in manufacturing and product costs. The chair that proved so popular in the boxing day sale was now $450. Their logic was simple: “If sales are slow throughout the year regardless, we may as well increase prices and see if we can get any bites and have a few sales throughout the year if sales are slow.” It worked. While sales dipped as a result of the increased prices, the sales they received throughout the year more than made up for the decreased demand. They were also able to keep suppliers happy by running sales at various points in the year when stock wasn’t moving as well as it should have been or sales were lower than expected. By moving the focus away from daily sales and focusing instead on annual turnover, they were able to see the bigger picture and focus on creating a business with more longevity.
That sort of consistency is key in business. What differentiates a great business from a good one is the same thing that differentiates a great athlete from just a good one — consistency. Any professional football player can play a better game of football than Lionel Messi on any given day, but only the great players like him can perform at a high-level day in, day out. That is why we revere elite athletes like Lionel Messi and Roger Federer and LeBron James. People often forget this when starting a business. Anyone can have a good day or week and sell a product or service once or twice and make a little bit of money. The challenge is doing it over and over, day in and day out. There’s a difference between selling cupcakes at a market every weekend and making a few hundred dollars and doing it every day in a physical retail space. When you have to do it over and over, you not only have to manage external factors like rent and staff and stock levels, but you also have to manage the internal self-doubt that plays on a loop in your head.
I wasn’t quite prepared for the impact that a single influencer would have on sales. After the first Facebook post on a page with 60,000 likes, my sales figures rose from an average of $500 a day, to $4,000 on the day of the post. The following day, I received another $3,000 in sales. All told, that one post generated $10,000 in sales over the following week. It made me re-evaluate the way I was using social media. Social media guides instruct brands to post constantly to keep an audience engaged. I had previously been posting multiple times a day across different platforms and generating no sales whatsoever. It is impossible for smaller companies to generate enough content to keep an audience engaged. So, what was the point? If I post, I generate no sales and if I don’t post, I generate no sales. I went from posting three or four times a day to posting once a week. When I saw that that wasn’t working, I started posting once a month. Posting made me feel better, but it was having absolutely no impact on my bottom line. I see brands doing this all the time. A business can post a thousand times over the course of the year, but if it isn’t directly or indirectly generating sales then it’s not a worthwhile strategy. Many companies are sold social media packages by companies that have no accountability and don’t care if any sales are generated as a result of posting. While it was hard to sit on my hands and do nothing, I decided to shift my attention to managing influencer relationships. Despite the fact that I was no longer posting on my accounts, my sales grew exponentially as a result of influencer posts. Over the course of six weeks, I sold through an entire shipment of tea that would have otherwise taken me a year to sell.
As sales increased, so too did the amount of rubbish I was producing. The tea was shipped over from China is corrugated cardboard boxes — each box contained 20 individual boxes of tea. Since I was shipping out orders from home, I didn’t have the benefit of a commercial recycling pickup. When sales were slow, I would dispose of boxes using domestic recycling bins. When sales picked up, however, I had to find a way of getting rid of 50 boxes a week. Since I hadn’t factored rubbish disposal into my pricing, I didn’t want to pay for a pick-up service. Instead, I spent my Sunday nights before rubbish collection day going from house to house dumping flattened cardboard boxes into any half-empty recycling bins I could find sitting on the roadside. After a few weeks of doing this, and several close encounters with neighbours, it became obvious that I needed a more permanent solution. Naturally, I started hunting for unlocked commercial recycling bins instead. I even went so far as to purchase a $10 high visibility vest so I could dump boxes throughout the week in broad daylight; no-one ever questioned me.
Before selling out of stock, I placed another order with my Chinese supplier who agreed to speed up the production process for the second production run. Instead of waiting months, I only had to wait three weeks for the new stock to be shipped. As soon as I knew that it was on a ship, I started accepting pre-orders: you have to make hay while the sun is shining. I knew that sales could dip at any point or my influencers could stop posting. I was able to cover the entire cost of the shipment before it arrived, so any money I made after that point was pure profit. Pre-orders became something that I used for almost every product release. Not only did it give me the opportunity to gauge product interest, but it also ensured that my production costs were covered before I had to pay for the goods.