As consumer demand continues to point towards a digital marketplace, businesses offering traditionally physical products have begun to expand their digital offerings to serve consumers. At Fender, music is more than instruments and accessories, it’s about the experience of the musician. I recently spoke with Jim Broenen, chief financial officer and executive vice president of IT at Fender, on how the company combines traditional business data with consumer engagement data to increase sales through its traditional platform and its rapidly growing digital platform.
Jeff Thomson: Fender has evolved from a physical product only company to a digitally engaged company, with apps that provide guitar lessons, progress reports, online tuning tools, and other value-added benefits. This type of change often requires significant shifts within the finance department. For instance, pricing for subscription services as opposed to a one-time product purchase. As both CFO and EVP IT of Fender, what are the opportunities and challenges you have in managing dual roles?
Jim Broenen: Overseeing both roles presents more opportunities than challenges. In my role, I am involved in most aspects of the business including strategic planning, sales, operations and even marketing. Being responsible for both finance and IT ensures the goals of both organizations are aligned. Working in tandem and being involved in key initiatives allow us to leverage the expertise of both organizations to help the business achieve those plans.
For example, the IT and finance teams recently partnered to create a KPI (key performance indicator) dashboard utilizing a new toolset automatically highlighting areas of opportunity and risk based on predefined criteria, providing actionable information. The cloud-based dashboard auto generates emails for critical KPIs, and as a result, we have seen significant demand from all areas of the company for access to the tool and its reports. The biggest challenge for me is evaluating investments, especially in the infrastructure and security space, as these projects are becoming more difficult to evaluate from a traditional ROI perspective. It’s important to have a CIO – our CIO Michael Spandau has been with the company for 13 years – that you trust and can practically articulate the benefits of these types of investments.
Thomson: What expectations do you have for finance and accounting people in terms of asking the right questions about IT?
Broenen: Before any project, I believe these are the right objectives to consider when evaluating IT projects or spend:
- Elevate consumer or retailer experience
- Improve the sales opportunity
- Increase productivity
- Reduce cash needs
- Reduce a significant risk
- Enhance security
These points cover the full 360-degree approach when evaluating what’s best for the brand and ultimately our customers. If one of these areas is not addressed, we probably should not be working on that project.
Thomson: What are the expected competencies i.e. data analytics?
The digital business is fundamentally different from our traditional product business, which is new and exciting. Everything from product development to marketing to pricing moves at a much faster pace in real time. For guitars and amplifiers, we announce our main product launches twice a year at NAMM (The National Association of Music Merchants), market launch them thereafter and adjust prices once or twice a year. For our digital products, we test new product features in real time, get consumer feedback and iterate often within days or weeks. We do the same for pricing, regularly testing new pricing options to understand what drives the most subscriptions with the greatest LTV (life time value). On the traditional side of the business we sell through our musical instrument retailers, e.g. brick and mortar, online and a mix of both, so most of the time we are not privy to who exactly purchases our products or have insight to their activity/behaviors.
Another fundamental difference is the plethora of data available to us from our digital platforms. For our digital products, we know a lot about the consumer and continue to learn by the day. We know what type of guitar they play, what genre of music they play, how often they play and how long they play. There is a significant amount of data: the typical financial data but also the consumer behavior data.
These different business models have different KPIs, require different modeling, new toolsets and so require different skill sets for both finance and IT. Data analytics are important for both businesses but crucial for the digital business. As we have more data measuring consumer behavior, the ability to include that in our modeling helps us predict our subscription business more accurately and enhance the product and marketing efforts to attract more subscribers.
Thomson: The latest innovation in Fender’s digital revolution is Fender Play, the subscription-based application created to give beginner musicians expert music lessons through high-quality videos. Has this service positively affected instrument sales and profit margins? How does digitization enhance long-term growth?
Broenen: Overall, it’s an exceptional time to be in the music industry. Demand for recorded and live music is at an all-time high and growing. Now, more than 178 million people are subscribed to paid streaming services from companies like Spotify, Apple or Pandora.
That being said, we entered the online lessons business for three reasons:
- To increase our engagement with the end consumer
- To increase the likelihood of beginning guitar players becoming lifelong guitar players. Our research indicates 90 percent of new players quit within the first three months of learning but the rest that stick with it for a year tend to be players for life, buying multiple guitars, amplifiers and accessories
- To serve as a new revenue source, as our research indicates the guitar lesson market is twice the size of the new guitar market one.
Early indicators show we are having some success. We are seeing a much larger percentage of subscribers still playing after six months versus the 90 percent that gives up within three months. We are currently on track with Fender Play, having over 60,000 active users, making us one of the largest providers of online guitar tuition in under a year. Our goal is to have 100,000 active users by end of 2018 as we invest in marketing in English speaking countries outside North America for Play. We continue to make enhancements to the product that we believe can extend retention to over a year.
We also believe the marketing and media attention of Play is having a positive impact on the electric guitar market, which is now growing in the high single digits. We are also seeing that people who sign up for Play and subsequently make a purchase on our website are spending on average 40 percent more than those that don’t subscribe to Play. Consequently, we are seeing a positive impact on our growth and we see Play as a significant component of our long-term growth.
Thomson: Similar to Fender Play, Mod Shop is another way Fender has planted its flag in digital sales – through custom guitar design and construction. As more consumers demand customized products, how does Fender achieve cost efficiencies while providing consumers what they want? How else have customer expectations changed Fender’s traditional business models?
Broenen: Launching Mod Shop was a very difficult endeavor: from configuring and streamlining 70,000 plus options on our ecommerce site, to creating the order within our enterprise resource planning (ERP) system, to manufacturing the customized guitar and delivering within 30 days. On the manufacturing side, Fender guitars were fortunately designed to be somewhat modular to more easily allow for customization. We have also spent significant time creating small batch production capabilities within our factory that is not only used for Mod Shop, but also limited-edition guitars like this year’s release of the popular Parallel Universe Series.
Customers (especially the left-handed!) are looking for opportunities to personalize their experience beyond just guitars and beyond just our physical product and we plan to provide those opportunities in the near future.
Thomson: In the past, Fender has relied heavily on insights from data to help inform business decisions. For instance, in the 1980s you ceased importing guitars from offshore manufacturers and created a flagship factory in Corona, CA, to improve quality control. How does the finance team leverage data to make strategic recommendations? How does finance help you target new markets or improve the value proposition of your products?
Broenen: We use data analytics to drive all aspects of the business. Some examples include:
- Driving topline growth by segmenting our customers
- Identifying new product assortment and penetration
- SKU (stock keeping unit) rationalization and pricing analytics
We also have used analytics to drive margin improvement through productivity initiatives increasing factory first pass yields from 50 to 80 percent by sourcing savings and converting our warehouses to 3PLs (third-party logistics) to reduce logistics costs. Finance was a major driver in divesting multiple low margin brands and business segments allowing the company to focus on the more profitable core Fender business. Finance and IT have partnered with the business to drive over 800 bps (basis points) of margin growth over the last few years, increasing the company’s profitability and allowing the company to invest in people, products, marketing spend and our digital business.
Thomson: Your Custom Shop creates “dream instruments” for professional musicians and guitar enthusiasts. Clearly, when you own a Fender guitar, you own something more than just an instrument. As a finance professional, how do you balance both the tangible and intangible aspects of the business?
Broenen: Finance is clearly comfortable managing the tangible aspects of the business, but the intangible is more challenging yet exciting at the same time. As we expand into digital and invest more in marketing, specifically digital and social, we are faced with this more regularly. We need to be comfortable investing in intangibles like brand energy and excitement, consumer engagement, likes and impressions. These may be more challenging to measure in the short term, but I absolutely believe they lead to long-term growth. We are creating more than just guitars, amplifiers, etc. We feel we are a part of historical music culture (past and present) and want to continue to deliver that product innovation on both the tangible and digital side to accompany players on their musical journey.
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