Analyzing Groupon Profitability (7 Factors for Group Buying Success)

I’ve had a lot of conversations lately about the strategy of group buying sites (or daily deals, flash sales, etc.). Groupon is the leader in this space…so much the word is becoming a verb. The questions I often hear are: How do you know if Groupon (and group buying deals) are right for a type of business? What are the factors that make Groupon a profitable strategy? How do you evaluate and analyze the profitability of Groupon?

Already there are a lot of competitors with Groupon, and more several that are headed toward even more niche group buying capabilities, focused by interest, small city, or people groups. The group buying strategy will continue, and so will the conversation about this. But the model of giving a significant (50%+) discount on goods and services has its dangers. So it piqued my curiosity to analyze this from an economic perspective.

On the plus side, this is a pay-for-performance approach to customer acquisitions. And it's a sudden and (mostly) predictable burst of new customers and revenue.

On the cautionary side, you’re paying for that acquisition with negative margin. Do business owners really know (or at least rationally evaluate) the complete profitability of these customers?  If I were doing this, I’d look as much as possible at the total economic impact, as there are some overlooked aspects to this type of promotion.

A fascinating study on Groupon effectiveness by Utpal Dholakia of Rice University cited that 66% of small business owners report Groupon to be profitable. In discussing this with him, that figure is a self-reported, which is valud to understand how the owners think about the outcome. It is natural for an owner to believe and report they made a profitable decision. But this is not to say that 66% of Groupon promotions actually are profitable. I would assert most small business owners were not instrumented or had taken the time to fully analyze profitability.  

Utpal and I agree that the analysis for full profitability may not be possible for the average small business owner. Epsecially at the detail I’m about to outline. However, if I were running a business, I’d at least want to logically think through the assumptions of profitability and measure what I could…otherwise, I would be headed down a slippery slope.

This kind of customer acquisition can become a ‘drug’ to a business looking for revenue, and yet the total P&L impact may not be understood. Groupon reports that 95% of businesses would run Groupon again, though Utpal’s study suggests it’s more like 68%. Both are self reported figures. How many actually DID use Groupon again? I digress.

 

Let’s use a fictitious example to walk through what the “ideal” analysis would include.

Groupon Assume you’re the owner of a spa salon and you offer a coupon of $50 for $100 of spa services (to make it easy), and you sell 1,000 of them.

You get $25 from each sale (because typically 50% of the $50 goes to the group buying site). If you had 50% margin on the $100 list price, then you’re losing $25 on each deal and 1,000 of these coupons is costing you $25,000 in negative margin.

On the plus side you’ve acquired 1,000 new customers. However, how many of those actually ‘new’? This is the first key assumption and the maturity and visibility of your company will be important in determining this value. Let’s assume 20% of those who received the coupon would’ve bought at full price. That’s 200 customers that would’ve given you $10k in margin, but instead cost you $5,000. That’s a $15k net swing.

The remaining customers are new, 800 customers that cost you $20k in negative margin But, how many will buy again at full price over the year? This is another key assumption and the type of business you have an the kind of service or product you provide have impact on the lifetime value calculation. For this exercise let’s assume 20% of the 800 new customers will come back and spend $100 in services again three more times in the year. That’s 160 customers driving $150/yr in margin (3x $50 margin) = $24k in margin.

Here’s the margin math so far:

200 existing customers in lost margin = -$15k

640 customers who won’t come back = -$16k

160 customers with 3x 1yr full margin value = +$24k

It’s unprofitable soi far. Ah, but we’re not done!

 

How many of the 1,000 customers never redeemed the coupon? Let’s assume 10% don’t execute on the coupon before it expires. That’s 100 coupon purchases where you get $25 each with no cost of goods, $2,500 in positive margin.

Now, how many of the 900 customers who DO redeem buy something else when they turn in the coupon? Let’s assume 30% of those customers spend 30% more. that’s 180 customers spending $30 in full margin ($15) = $2,700 positive margin.

And, what’s the brand recognition worth of the campaign itself? This is the most difficult to measure and understand. Yet it’s probably the assumption Groupon wants you to believe in the most, which is one of the reasons they invest in great copywriting for their offers. There are a lot of assumptions to think through on this…how many are seeing the promotion, how well is your company marketed, how many of the audience already knew about your business, what’s the acquisition opportunity of this kind of awareness-building, etc.? For the sake of this exercise, let’s just assume that 25,000 people see this promotion and 1% of that audience will visit you at full price, assuming the same $100 of service they purchase 4x a year. That’s 250 new customers spending $400 ($200 in margin) = $50,000 in margin.

Ok, so let’s net out the total economic impact:

200 existing customers in lost margin = -$15k

640 coupon customers who won’t come back = -$16k

160 customers with 3x 1yr full margin value = +$24k

100 coupons not redeemed = $2,500

180 customers buy more on site = $2,700

250 new full margin customers from campaign awareness = $50,000

Total margin impact for year: $48,200

 

I haven’t touched on the possible word of mouth impact from customers that experience the product/service (see my Mashable article) or value of acquiring customer data, or value of learning something from these customers.

Now, there are a ton of assumptions in this exercise you can argue. I just made these numbers up.  If the awareness didn’t bring any customers in after the coupon, the example is not profitable. The point is to illustrate the factors to think through and debate with yourself.

Also, every business is different, every group buying site campaign is different, and you could do it at different times of the year which would all effect the economic outcome. The one-year value of doing a group buy coupon could be negative margin as much as it could be positive margin in this exercise.

For example, when Groupon did the Gap promotion, perhaps the % of customers that would’ve bought from them anyway is much higher.  Everyone is aware of Gap, so I doubt they got as much upside on the awareness building from the campaign. If anything, they may have told customers that it’s possible to get a better deal at Gap if you look for a coupon or wait, so perhaps they lost a higher percentage of full margin customers. The turnout for Gap may have been very bad from a one-year margin calculation and a brand impact. Or, perhaps the majority of people who redeemed coupon spent twice as much at full margin and therefore they didn’t lose money. Though I still question the incremental lifetime value opportunity from these customers. In my experience coupon users are discount shoppers. The thrill is in getting the best possible deal, so money spent beyond the coupon is not a deal.

 

The point is there are a lot of factors that go into the determination if this is a good strategy for one business vs. another.  Here are some factors I would consider if I were a small business considering if a group buying strategy was worthwhile:

 

  1. Awareness – if your company already has high awareness in your market then the awareness building benefit of the group buying campaign is less positive. Further, if you have high awareness, than the % of existing customers who buy with a coupon could be high.
  2. Repeat Business – Do you have a business that has repeat customers? 50% off a vehicle registration service is not as good as 50% off a haircut. If you have repeat business, then you have a higher likelihood (and of calculating) for lifetime value of a customer acquired.
  3. Differentiation – How differentiated is your business, product and/or service. If you’re a burger joint as good as many others, than customers may take you up on your coupon, but go to the next burger joint with a coupon next time.
  4. Word of Mouth – Related to repeat business, what is the likelihood that someone who experiences your business at a discount will be delighted, and how word-of-mouth-worthy is your experience. Interestingly, Certain types of businesses or products can have a higher word of mouth quotient than others. A zip line company has more WOM than a nail salon. And customer experience matters. Uptal’s research reports that if employees were happy with the incoming customers, the owner was more likely to believe the promotion was profitable. Things like group-buying sites will require businesses to create better products and services, otherwise you will lose the LTV benefits of acquiring customers. See my Mashable article.
  5. Upsells – What’s the likelihood people who come in with a coupon will buy more at full price? The type of product and service will make a difference, as much as how upsells are executed. According to Utpal’s study,
  6. Breakage – what is the likelihood people will not execute on the coupon? Are you far away; is the dollar amount small, is scheduling involved?
  7. Data – How much data can you capture about the customer? That enables you to remarket (assuming you do so) and raise the return business assumption. And what is your ability to capture and analyze the measurements above? This doesn’t change the outcome, but it does better inform you if you should do it again. Otherwise, it may be too tempting to do something like this again that could put you out of business. 

Of course, I didn’t calculate your time and opportunity cost to evaluate, execute and analyze all this to determine if you should do a group discount. Add that to the mix as well!

Again, I don’t assume small business owners can or will go to this level of detail in analysis. The point is to consider the characteristics above, to go through a rational decision making process, and then measure what you can to determine how to use group buying.  

 

 

 

The Best Tweets of Shop.org Summit 2010

I used Keepstream.com to curate the ‘meatiest’ tweets from Shop.org Summit 2010, which just ended today. It was another great show. Over 3,000 attendees! Social, mobile, and local are still hot themes as they were last year…because few retailers have figured them out. I led a couple roundtables on social commerce and social media ROI. However, other discussions around the show suggest there’s a lot of money to be made getting the basics right…email, SEO, SEM, content, testing/targeting, and customer service.

 

I’ve Joined the Board of Monetate: Testing, Targeting and Personalization

I've been in digital marketing and ecommerce my entire career. As such, I recognize that online marketing is about balancing the creative with the analytical. In the case of my Dell career (managing Dell.com) it was heavily analytical. That's what I love about online direct marketing, you can justify investment and grow a business through learning what works and what doesn't.

Here's the problem though. The cycle of learning what works, of failing fast, of cycling through tests to optimize online return is too slow. Some of this is cultural, but it is also because tools are clumsy. Until now. 

A few months ago I saw a demo of Monetate. I was blown away, and I've been in this business a long time. I pursued the board and CEO of Monetate to get involved, because I am truly excited about what they have and where they're going. I think they're a hidden secret in ecommerce, and the smartest marketers I know are using them at QVC and Urban Outfitters. Sorry Alex and Dmitri to let your secret out!

Here's what they do in a nutshell. First, here's what you have to do. Put one line of javascript code on your site (much like you've already done with Coremetrics or Google Analytics). That's it. What they do is everything else. You can literally change or rewrite any part of any page. Image overlays, ratings, functionality, banners, pricing, etc. They provide expertise to run different tests and segmentations. You want to change a banner on your site based on people experiencing sunny weather right now? You want to add functionality that IT is taking too long to implement? You want to trial 10 of the features you plan for your site redesign? Done, Done, Done.

As you can see, I'm excited about this company. I'm joining their board and hoping to see the ecommerce world beat a path to their door. As CMOs and VPs of ecommerce struggle for resources and attention in a multi-channel world, I truly believe an elegant capability like Monetate to test, target, segment, personalize and merchandise, and analyze is the key to online growth and culture change. In essence, it turns web site managers, content manager, web producers, and merchandisers into "margin makers", democratizing the P&L impact any individual can make.

Check them out: www.monetate.com

Here's the release:

Monetate Welcomes Dell Veteran and Bazaarvoice CMO Sam Decker to Board of Directors

Seasoned eCommerce expert brings enormous digital marketing and company growth expertise to testing, targeting, and personalization leader

Philadelphia, PA / September 22, 2010 – Monetate, the leading independent provider of testing, targeting, and personalization for websites, today announced it has appointed Sam Decker, Chief Marketing Officer of Bazaarvoice and former Dell marketing executive, to the company’s Board of Directors. Sam brings more than 17 years of industry leadership in digital marketing, social commerce, and start-up growth experience to Monetate, including an unparalleled ability to precisely identify the evolving needs of marketers and innovate measurable, high-impact solutions to emerging challenges.

“We are delighted to gain the expertise and guidance of a visionary eCommerce expert of Sam’s stature,” said David Brussin, Founder and CEO of Monetate (www.monetate.com).

Sam Decker Monetate Board of DirectorsAdded Brussin, “Sam brings enormous experience in building companies that have become market leaders, most recently playing a key role in Bazaarvoice’s spectacular growth to over 950 clients worldwide. He also stands apart for having a unique vision and platform, as a blogger, an author and the architect of categories like social commerce that have come to dominate the online landscape. His expertise will be invaluable to Monetate as we expand to serve our rapidly growing customer base.”

Sam Decker is a recognized expert in eCommerce, word of mouth marketing, and direct marketing. As founding Chief Marketing Officer at Bazaarvoice, Sam helped build the core platform of Bazaarvoice products and led the company’s marketing efforts resulting in them becoming the category leader in Social Commerce.

Before joining Bazaarvoice, Sam spent seven years of leadership at Dell, Inc. in marketing, eBusiness, CRM, and customer-centricity. From 1999-2003, he led Dell’s consumer website, building Dell.com into the largest consumer eCommerce site at $3.5B in annual sales, and established global best practices in merchandising, analytics, product management, and operations. Later he directed marketing for Dell’s $1B+ installed-based marketing division, responsible for eBusiness, marketing communications and brand management.

Sam is a frequent speaker at marketing and eCommerce events and author of an award-winning marketing blog (www.deckermarketing.com) and a bi-weekly ClickZ column on social commerce (http://bit.ly/SDClickZ). Sam has authored two books on word-of-mouth and guerrilla marketing. He serves on the board of the Word of Mouth Marketing Association (WOMMA) and the board of advisors for the Web Analytics Association.

“Monetate has had an extraordinary amount of success for a young company, with clients such as QVC and Urban Outfitters.” said Decker. “They are one of the most exciting companies in eCommerce and digital marketing right now, with a full service solution that creates indisputable results for their clients. I am very excited to join the team as they reinvent testing, targeting and personalization that revolves entirely around the customer and their needs.”

About Monetate

Monetate is the leading independent provider of testing, targeting, and personalization for websites. Every day, major retailers like QVC and Urban Outfitters use Monetate to make the most of their online marketing dollars and optimize their website investments. Monetate helps marketers test product pitches and eCommerce site features, then accurately target messaging and personalized offers to specific audience segments, anywhere on the site, without using any internal IT resources. Based in Philadelphia and serving a growing list of Internet Retailer Top 500 companies, Monetate is a Coremetrics Partner, an eTail Preferred Solution Provider, and a member of Shop.org.

Media Contacts: Stephen Cobb
Marketing Evangelist
Email scobb at cobb dot com

Source: Monetate, Inc.
100 Four Falls Corporate Center, Suite 407
Conshohocken, PA 19428
Phone: 484-323-6313
Fax: 484-323-6311

Web: http://www.monetate.com
Blog: http://www.monetate.com/blog
Twitter: http://twitter.com/monetate

Dropbox User Interface Review — Getting it Right

It's surprising how many web apps are out there that set out to accomplish growth and mistake activity for sustained progress. Perhaps they get some press but then lack traction. Why? Because they don't get the 'how' right. 

It's a lot like producing a movie. You can get a great actor and pull off a movie, and there are thousands of B to D grade movies out there. Or, you can get a great actor with a fascinating story, smart script, talented director and sophisticated editor…it's the difference between a blockbuster or a straight-to-DVD production.

Dropbox should be studied — in the way Google, Facebook and Craigslist are studied — on how they've built their user interaction and design. I'll show you a few screens to show what I mean.

Their home screen is as simple as Google. For Dropbox, you either login or download, or watch a video to understand how it works. That's it. Less is more.

Dropbox2
 

While a TechCrunch or Mashable article can spike signups for a web or phone app, sustainable growth is only possible if the app has high utility (where it 'infects' their life), convenience, and engagement. DropBox is brilliant in this screen. They very clearly outline steps they'd like you to take, and make the most prominent image a 'thermometer' infographic that reflects something you can earn, 250MB of storage space. That's a smart giveaway because it costs them practically nothing (assume most people don't even go up to 2GB), yet has high perceived value for first time users, and it reminds users they may want more storage space (teeing up an upgrade later). My only suggestion is they put a time limit to get that upgrade.

Dropbox
 

Every time I add the app to another computer, they know it's me, and they ask if I'm ready to upgrade. Very simple choice…showing me where I'm at now. When I install the app, that's a relevant contact point, because as I add it to other computers, ostensibly I've likely increased usage. I don't know if it's the case, but I'm sure upgrade messages will come as I approach 2GB.

Upgrade
 

This is great UI X smart business sense. If you're wondering if a great designer or user experience professional is worth the investment, just look at this example (and dropbox's traction) as evidence.

Guy Kawasaki Tweets…Curated by Keepstream

This is a summary of some of Guy Kawasaki’s recent tweets that I like…but I’m really doing this to show off Keepstream’s new application, which will be featured at Capital Factory Demo Day on Wednesday (disclosure: I’m a co-founder in CF and therefore an investor in Keepstream).

They are announcing a 48-hour free signup on Wednesday (9/8), but I have an inside scoop…you can sign up right now and still get in on the free signup.

Sam Decker
Guy Kawasaki
Guy Kawasaki
Guy Kawasaki
Guy Kawasaki
Guy Kawasaki
4 things you should know about influence https://idek.net/30eM
Guy Kawasaki
Turn your iPad into a laptop with the typad https://idek.net/30RZ
Guy Kawasaki
17 facts about bacon [infographic] https://idek.net/30OJ
Guy Kawasaki
Guy Kawasaki
Guy Kawasaki
Guy Kawasaki
Guy Kawasaki
10 Essential Tools of NASCAR Pit Crew Members https://idek.net/30Dt
Guy Kawasaki

Announcing my departure from Bazaarvoice…and search for my CMO successor!

This is a post about change. Winston Churchill said, “There is nothing wrong with change, as long as it is in the right direction.” 

4864924939_0af418c76c_b 4865531702_6749173c66_z After 4.5 years at Bazaarvoice, I’m announcing a smooth and amicable departure from the company in order to pursue my next challenge and opportunity. (I announced this to our company last week at our quarterly all hands.)

This is not your typical resignation. You could call this a ‘planned’ or ‘friendly’ departure. During this time I plan to remain on as Bazaarvoice CMO while I help recruit for my successor (one of the reasons for this post), and upon my departure I will be on the Bazaarvoice Board of Advisors to help the company’s continued growth.

“Growth means change and change involves risk, stepping from the known to the unknown.” George Shinn

There are three reasons I’m making this announcement proactively:

  1. To stop speculation or assumptions about this move – before it begins. We are an open & transparent culture and such is the spirit of this transition. Frankly, more companies should do it this way.
  2. To announce the beginning of my journey to explore what’s next, and be able to have open discussions outside of Bazaarvoice.
  3. To publicize and market that one of the best CMO positions in the country is now open!

To start off, I love this company. I’ve been there since we launched the company in January 2006. Brett and Brant (co-founders) have graciously referred to me as a third co-founder, and I’ve felt that way. It’s what has made this decision so hard. 

“Change starts when someone sees the next step.” William Drayton

My interest when we launched Bazaarvoice was to help invent where marketing was going. My objectives were to build the products, platform and brand that would be recognized as the leader in helping companies realize a new paradigm of high-ROI social marketing (i.e. social commerce). It’s been satisfying to consult directly with clients, helping them change the way they market, merchandise, improve products and change their culture.  Along the way we defined a new market, build a great team, developed a great culture, and created an authentic brand in non-traditional ways. By all measures my expectations are far exceeded and I’m proud of how far our company has come in such a short time. Bazaarvoice now has offices in 8 countries and employs 550 people worldwide. I’m incredibly passionate about the customer-centric transformation we’ve had on 850 brands globally. These are the best people I’ve worked with on one of the most exciting missions in one of the most dynamic industries.

“Things do not change; we change.” Henry David Thoreau


My decision to move on is difficult and complex, from the head and the heart. It took time to get here. The short story is I’m interested in building another great company, and I shared my “itch” with Brett (our CEO). We’ve had open discussions for nearly six months about exploring new challenges and taking the next steps in my career. With full support from Brett and the board, we agreed we could make a smooth and positive transition that’s good for both the company and for my future.

“Life is change. Growth is optional. Choose wisely.” Karen Kaiser Clark

As for the company, Bazaarvoice couldn’t be in a better position…which (as an investor) makes me comfortable about moving on. This is a fantastic time to find the next CMO. We’re an established market leader still growing at a blistering pace with new products serving new industries in new markets. Though I say this with some bias, the next CMO is coming into the best marketing team in the industry and has an opportunity to make a real difference.  We regularly have marketers reach out to us about joining our team, and I openly welcome the candidate who is going to take this company and team to the next phase of growth. If that’s you, or you know someone great, I hope you’re reading this! Send me an email, tweet or message through LinkedIn

In the meantime, I remain as Bazaarvoice CMO, pushing us forward as the leader in Social Commerce. Upon my departure (TBD), as I explore opportunities and ideas, I will be connected to Bazaarvoice as an advisor and consultant, and I may also consult to retailers, brands and other SaaS companies. I’m excited to uncover what’s next for me, and will share updates here or on Twitter/Facebook. I look forward to discussing new ideas, meeting new people, and exploring all sorts of change!

“When you're finished changing, you're finished.” Benjamin Franklin

The Paradoxes of Servant Leadership

I love this poem, which describes the paradoxes of being a "Servant-Leader". 

Strong enough to be weak

Successful enough to fail

Busy enough to make time

Wise enough to say "I don't know"

Serious enough to laugh

Rich enough to be poor

Right enough to say "I'm wrong"

Compassionate enough to discipline

Mature enough to be childlike

Important enough to be last

Planned enough to be spontaneous

Controlled enough to be flexible

Free enough to endure captivity

Knowledgeable enough to ask questions

Loving enough to be angry

Great enough to be anonymous

Responsible enough to play

Assured enough to be rejected

Victorious enough to lose

Industrious enough to relax

Leading enough to serve

Poem by Brewer — as cited by Hansel, in Holy Sweat, Dallas Texas, Word, 1987. (p29)

Do You Have Trapped Thinking?

Trapped  Since I left Dell, I’ve had conversations with several friends who were looking to take  their careers outside of Dell. They asked how I did it nearly 5 years ago. I told them I spent 2 years networking and evaluating ideas outside of Dell.  That’s not to say I didn’t perform during that time…in fact I ran a marketing department and helped grow a $1B business by 50%. However, just by ‘getting out’ I met great people and evaluated several opportunities. At first it was exploratory, but in the end it opened my eyes to the fact there was a world outside of the world my head was in 8 hours a day (er…make that 10 hours a day). 

What I observed after these lunches with my ex-Dell friends was discouraging. They took no action. They didn’t research companies or ask for contacts or set up lunches with people outside of Dell. They were absorbed inside the walls of their company. Their scope was trapped inside the company, inside their division, inside their team, and inside of their roles in aforementioned team, division and company! Their thinking was trapped, and therefore their action was trapped…therefore their career was trapped.

There is a similar problem of becoming more customer-centric as a marketer. When you are absorbed in the internal, your thinking is trapped in the rules of your day-to-day job. Internal measures, internal meetings, and internal perspectives. You’re surrounded by the 3-4 walls of your cube, surrounded by the four walls of your building, surrounded by a company perspective. For Pete’s sake (pretend that’s your customer), how are you able to think about the customer…let alone act on their behalf?
Cubes  

Break out! Change your day to day to include interaction with customers, their voice, and their data. Change the topics of your team meetings and 1x1s. Start with customer-centric measures rather than financial measures. Read reviews on your products every week, and do something about that. Attend a focus group, usability study and conduct a survey. Set up the Google alerts on your brand and set up a time on your calendar to read Tweets and other social media about your company.

Once you make a decision to get out of trapped thinking, and start breathing customer oxygen, it will change the way you look at your job and change the decisions you make. Just imagine if everyone in your company did that!