How John Rood Competes With Giant Marketing Budgets Of 80 Year Old Competitors

by Tim Jahn on January 21, 2011

It’s not every day you come across somebody that decides to start a company and intentionally go up against a giant competitor with a seemingly endless marketing budget.

John Rood did just that with his test preparation company NextStep Test Prep.  In this interview, John shares some of his marketing techniques that allow him to compete with the established giants of his industry.

Transcript

Tim Jahn: My first question is what made you create a company that you knew would have to compete with 80 year old companies with 400 million dollar marketing budgets? That seems like something that you knowing that ahead of time you might not go down that road.

John Rood: Yeah. That’s the big question. I think it’s a really good one. I think that there is a couple of things that made me think it could be successful. Number one is despite the fact that Kaplan’s is 80 years and Princeton Review is 30 years old, they really hadn’t changed very much in the way that they did business.

So that to me was kind of the first sign to say, hey we should think about reevaluating the business model. So the business model that like Stanley Kaplan started in the ’30’s was lets get a group of people together in my basement, and I’ll teach them about the SAT. And that’s pretty much the way that they do most of their business now.

So there’s some online components, some other stuff that they’ve got going. But the huge bulk of their test prep business was still, “We’re going to get a group of people together, we’ll have one teacher and they’ll kind of talk to the class about it.” So that’s kind of one thing.

Whenever you see a business model that’s been unchanged for 80 years, you know, not to say it definitely doesn’t work, but there might be some other things that we could do there. And then the second thing was I had worked at one of the big companies for a pretty short time five or six years ago and what I learned was that their business model was kind of strange in the terms that they’re margins looked huge on the outside.

And I think that they’re margins really are huge when we start to look at more of the numbers. And it’s not — you know, number one, they’re hyper profitable and then number two, they’ve got a ton of money to spend on marketing. So, the second thing that I really thought of was given that this was an old business model and it’s got these crazy margins, is there a way for us to kind of rethink that business model from start to finish, provide more value for the customer, and just kind of think about it on a different kind of revenue model.

Tim Jahn: Yeah, you mentioned that you, in your pre-interview notes, you mentioned that you studied one of your competitor’s business models and you realized there was a few holes in the system where you saw opportunity. What were some of those opportunities you saw?

John Rood: Well, I think that the biggest opportunity was that at my big competitors, most of what they do is teach these prep classes. So you want to take the GMAT to go to Kellogg or Booth or whoever else. You go in and you sit in a class.

You know, you get some really great materials; you get an instructor that’s probably pretty good. But you’re still sitting in this group of all these other people and you’re paying a premium rate for it. So I think that the main hole that we thought we could fill in the market was we thought that if we just kind of changed our revue model a little bit, changed the cost model in the prep industry, what we could do would be provide one on one tutoring for about the same price.

And that’s kind of what we’ve been able to do. And to give you an idea, I mean, some of the things that we’ve been able to think about does it really provide the student a lot of value to have meetings in a two floor office building that they have rent in the loop? What if we did tutoring sessions at a library or at your house or at your university student union. That’s going to save us tens or hundreds thousands of dollars every month. And that’s something that we can kind of pass on to get the one on one revenue model to work.

Tim Jahn: So you were looking at ways to save yourselves money that you could then pass on the savings to your customers?

John Rood: Yeah, that’s exactly right. So just kind of approaching a business where kind of the margin seems so ridiculous. It just made sense that if we could think about what’s really the best product that actually adds the most value for our students? One of the things that we can kind of eliminate in order to make that model work and that’s the whole idea behind our business.

Tim Jahn: Yeah, it seems like the old model was just so bloated that I mean, in a sense you wouldn’t have too much trouble poking some holes in that and streamlining it.

John Rood: Yeah, absolutely. And I mean, there’s a ton of challenges there too. So it’s not just that all of the money that they make goes to crazy profit. A ton if it goes back into marketing.

So you know what, I learned a couple of days ago that I was talking to some great folks over at Rise Interactive about paid search and they said a company like Kaplan for example might do around ten million dollars of paid search. So obviously that’s something that we could never support —

Tim Jahn: Ten million dollars in paid search alone?

John Rood: Yeah, yeah absolutely.

Tim Jahn: Maybe that’s not a very big number, but to me that sounds insane.

John Rood: That sounds big to me. Certainly given what our marketing budget is, that sounds pretty big.

Tim Jahn: Wow.

John Rood: But so that’s the kind of thing that we really have to compete with. So it’s not just that we can have savings and then we’ll be instantly successful. It’s that we need to think about given that I think that we have a really great and compelling value proposition, how do we kind of get the word out to students that you can do this a totally different way.

But how can we get that message out kind of on the cheap? So without a ten million dollar adwords budget, without people on the ground putting up 150 flyers at every campus, over 20,000 students every week. How can we kind of get the message out? So that’s really our big challenge.

Tim Jahn: How do you tackle that challenge? I mean how do you get the world out when your competitors have an unlimited amount of money it seems to throw at marketing?

John Rood: That’s a great question. And that’s certainly the challenge for us. I see it in kind of two big ways. So number one marketing channel is that we want to make sure that our online marketing is as good as it can be given our budget. And the second parts going to be kind of in person marketing. So on the online route, there’s a couple of things that we can do. One of them is just kind of getting our SEO efforts on, going, and just making sure that that’s really targeted.

And that seems to be a place where our really big competitors haven’t necessarily spent a whole lot of time and money. So, they score really well on super big terms. So if you search for example for GRE Prep, they’ll be one of the top results. But if you search for something like GRE Prep Chicago, they may well not have invested kind of the time and energy into getting those kind of smaller longer tail terms. We also do, lets see we do I mean, we do online classifieds all the time. That’s really cheap and relatively effective.

We do a little bit of paid search although not anywhere near that kind of budget. And again, looking at kind of longer tailed terms and kind of trying to find more value. And then also social media. So one of the big things that’s really important to us as a company is we want to students to kind of think of us as like trusted advisors who they can rely on as they think about these exams.

So it’s not just that we’re a company, we’re here to kind of take your money if you want to give it to us and then we’ll give you our product. We want to kind of engage with students from the beginning. So a couple of ways that we do that, number one we blog about these tests. So we think that we can provide great free value and that’s a great way to kind of get students in the top of our funnel. And then we also use tools like twitter for example.

So people are talking about these tests all the time, twitters biggest demographic is our biggest target demographic which is people that are 18 to 25 years old. So when we see people talking about these tests, people will say, “I’m just getting started studying for my LSAT.” And we can send them a link to our blog and say, “Hey, you might like this. It’s a post about kind of how to get started.”

Tim Jahn: I see. So I mean, it’s the idea that you know they read your blog, they understand that you’re pretty well versed in this field and maybe you can help them?

John Rood: Right, exactly. Exactly. And whenever we kind of touch a potential customer we also want to make sure that they understand our value proposition. So we try not to get too selly but at the end of everything we do that’s free, we want to kind of make sure to communicate, “Hey if you go with us, you get this one on one attention for the same price as a class at one of our big competitors.”

Tim Jahn: But you were talking about the search terms just a few minutes ago. And I was just curious, what happens when these big competitors, these big companies, once they start to figure out that there’s long tail terms out there and maybe they start buying up GMAT Chicago or GMAT Michigan terms, what do you do then?

John Rood: That’s going to be a big challenge and I totally get that. Our hope first of all is that we can already be established in those terms and score pretty well. We hope that over time, we’ll get a lot more traffic and a lot more attention to our brand which might insulate us a little bit.

But I mean, if they, if someone with $400.00 of test prep revenue wants to go after GMAT Prep Chicago, they’ll definitely get it. And then we would just have to adjust. I mean, that’s one of the benefits of being small and being a startup is that we can be more focused. So if they kind of ever hunkered down and say, “We are going to go after absolutely every search term out there, and just throw millions of dollars at it.” We’d be in bad shape and we’d have to kind of rethink that strategy. But for now, that’s seems to be working.

Tim Jahn: Gotcha. So you guys didn’t go after any funding when you started this company? You said, you created a business model that would generate some revenue from the get go. Why? I mean, I’m a fan of that but so many people seem to go straight for the funding and forget about the business.

John Rood: Absolutely. There’s a couple reasons behind that. I think that the biggest one frankly is personal. So I wanted to own this company. I see it as a lifestyle business that I want to scale and not as something that we’re trying to get huge in three years and then sell. So I think it’s a very different model. I think it’s a longer term play and I don’t know that it would attract huge amounts of funding.

So I feel really good that if we said that we wanted to go out and try to raise $100,000 or $500,000 or something like that, I think that we have the value proposition. Again, if we had the connections then we could get it done. But then when I kind of thought about it, I kind of thought what would we want to do with that money? And the risk that I see a lot of companies running is they get a bunch of money and then what can you do with it?

So if you’re a tech company, and let’s say you’re a software company. If you get money, what you’re doing with it mostly I think is number one feeding yourself while you work on your product and number two, just kind of getting your product built. So hiring your developer and so on, so forth. For us we had our product, right.

So we — I know how to teach some of these tests, I hired other people that know how to teach the rest of these tests really well. We were able to kind of put together our product and get that all set. So I think that if we had more money, when I think about what we could do it with it, I want to make sure that it’s sustainable. So could we buy a bunch of paid search? Maybe. Could we do all these other things? Maybe.

But to me I mean, I just really value the idea that we were going to kind of start out with this great product, it was already generating a little bit of revenue and then kind of build that organically. And if we weren’t able to do that, I think that that would expose problems in our business model that we would want to address rather than give us reasons to go look for more money.

Tim Jahn: Gotcha. You know, I’m wondering, when you first started and like I said, you knew you were going up against these big players and that there was going to be a tough road ahead and they were established, how did you even start seeking out customers? I mean, I imagine you know, it’s just beyond me, you’re in a space where everyone knows all these other companies, their probably using them. How do you even say, “Hey, I’m in the room”?

John Rood: Right. Great question. I think that one thing that helped us out a lot was that I never want to bad mouth my competitors but there was a certain amount of kind of fatigue with their products and their marketing in the minds of a lot of different people. So one thing that we’re able to do really quickly is starting out in Chicago and then just starting out with one test which was the LSAT which is for people that are going to law school.

You know, I could go to universities and say, “Here’s what we offer, here’s our kind of clear and distinct value proposition and how it will benefit your students. Can I come give a presentation there? Can I send an email blast out to your students?” And that was — that usually worked because people saw that there was value there. So by kind of reaching out to advisors, we were able to start getting some traction there.

And then there was other things that we could do really cheaply to like we could do online classifieds for almost free and that was able to start kind of getting the ball rolling at a local level enough so that I could feed myself as we thought about how to scale the model nationally.

Tim Jahn: So you weren’t just trying to take over the behemoth from the get go, you were starting small and kind of the Trojan horse method, slowly sneak your way in and grow from there?

John Rood: Yeah, exactly. Exactly. And I don’t want to give off the impression that I kind of knew everything going into it that it was just like a plan that was all set the outset. A lot of it’s been just kind of learning as we go along. So I mean, one of the big things that we learn is that we think that there is a huge space to do premium tutoring online for a really good price.

And we think that that’s going to be super valuable to our students that don’t necessarily have access to a ton of resources the way that we do in Chicago. So if you live in like Akron, or like Dayton or somewhere like that, you may not have access to someone that scored in the 99% on the GMAT for example. And so that was a space where we could definitely play, where we can scale it nationally. And where we’re insulated at least for a time from the big companies. Because fundamentally they cant now step away from their class model very easily without totally blowing up their business model.

So, if they — they pay 120th maybe on a per student basis for instruction and then kind of the rest of it goes to marketing. If they did what we do which is pay out a fair salary for our tutors who are working one on one, they have to totally change their business model.

Tim Jahn: Gotcha. How did you — now I like how you guys take the one on one approach as apposed to — because I feel like we’re in world now where we want that personal one on one. Like I don’t think — and I’ve never disclosure gone for GMAT or LSAT or anything.

But I would imagine a one on one tutoring session is going to be worlds more valuable than a group of five, ten people with one teacher in a library basement, you know. And have you — do you guys do regular feedback with your customers to see how well your idea of the model works?

John Rood: Yeah, absolutely. We do feedback all the time and we get really, really good responses. The one response that we get all the time which is like how I know for sure that this is a scalable business is that we get students all the time that call in and say, “I took the course at so and so company.

I didn’t do as well as I wanted, can you guys help?” and we help them out and at the end of it, they say, “Man, I really wish that I have would have invested in one on one services upfront as apposed to going to like a class first.” So if we’re able to kind of reach those students before they go into the class, I’m absolutely certain that we can be successful with this model.

Tim Jahn: Wow, that’s amazing. So they come and say, “Hey the class didn’t work nearly as well as the one on one did, I wish I would have just found you from the get go.”

John Rood: Absolutely, absolutely. But that’s our challenge. It’s not like that’s an easy barrier to overcome by any means. But I mean, hey we know that it works, we know that it works. I mean, we have a really high success rate with our students. There’s a high rate of satisfaction. If we’re able to kind of get the word out more, I think that we can be successful.

Tim Jahn: What’s one piece of advice you’d give to a fellow creative entrepreneur who’s looking to maybe go up against some really big competitors?

John Rood: My number one piece of advice I think would be to move quickly. So I think the number one challenge I see with myself and with other entrepreneurs is to kind of spend too much time in like the planning phase and kind of the scale up phase and not to just kind of get their product out there and start getting feedback.

So I mean, for us I probably spent the first six months of this company thinking about it on a really small scale. So thinking about it on the scale of it’s just, is it going to be like me and two other people teaching and is it just going to be Chicago, is it just going to be a couple tests.

And then there just kind of came a couple moments where I said, this is a service that thousands of people across the country would value. We need to think about kind of a bigger strategy for getting the word out. So I guess move quickly and then think bigger I guess would be my two pieces of advice.

Tim Jahn: Think bigger in the sense that what do you mean by think bigger? Because I mean, in a sense you guys started small, you know, you said you started small instead of just trying to take over the world at the beginning. What do you mean by think bigger?

John Rood: To me, that means that we — I think that — I’m glad we started where we were. I think — I wish that I would have kind of had a plan for making it kind of making it scale faster or to just kind of scale at all. So I mean, an example of this is — I mean we put together a system where we would be able to kind of track student and tutor interaction to make sure that the engagements were going on time, to make sure that we got feedback from the student in a timely fashion, etc.

At a certain point, we said, “This is not going to scale. There’s just kind of be too much manual labor on our end; we need to get something that’s more automated.” And I just wish that I would have thought about that automation up front and said, “Well, we can start small in terms of the number of customers that we have. It would be great if we could put together a system so that when we have 100, and 500 and 1,000 students, that we’ll be able to kind of manage that really effectively without having to reinvest and having someone else build something totally different for us.

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