There was an error in this gadget

Saturday, November 27, 2010

Is Groupon Good for a Small Business? Do the Math

Thinking Entrepreneur

I have been reading with great interest (especially here) the stories of retailers sharing their experiences using Groupon. For those of you not familiar with Groupon, the company partners with local businesses to send a daily coupon e-blast to its members. The members who buy the coupon get 50 to 70 percent off on a product or service, and Groupon splits the proceeds with the retailer — usually leaving the retailer with about 20 to 25 cents on the dollar of retail value.

I have never seen anything that is both so celebrated and demonized at the same time. There has been talk that Groupon might be worth as much as $3 billion, and yet here are some blog comments from retailers who’ve tried the service:

  • “It is for desperate businesses.”
  • “The financials just can’t work out.”
  • “Groupon is the worst marketing ever.”
  • “We did Groupon. It was O.K. It brought in new customers — we kept most of them. But the margins are a killer.”

As a retailer who has used Groupon — as well as traditional advertising — to build my business, I’ve come to the conclusion that there’s a lot of misinformation out there. Is Groupon the worst marketing ever? Or is it the best marketing ever? Probably both. One thing is for sure: Groupon is a beast.

What else would you call something that can deliver 2,000 customers to your store? It’s a beast that can propel your business or smother it. It depends on your business. It also depends on you. Here are some key factors:

The first is the type of business you have. How many potential customers in your area don’t know about you? Do you have excess capacity? Can you handle a surge?

The second factor is about branding. Do you believe that by giving out a large discount you risk damaging your brand? It is a judgment call. I am sure that it is a bad idea in some cases.

And then there is the math, which may be the most important factor. I have seen it attempted many times — but if it is not done properly, it can result in very misleading conclusions.

Groupon is advertising. If you don’t need or believe in advertising, there is no reason to look at this. It costs money. Instead of writing a check for an ad, you are choosing to lose money on sales. This can wreak havoc on the brain cells of a good retailer who is always watching profit margins. It can feel wrong, especially when the coupon customers don’t spend more than the amount of the coupon.

That is why it is critical to do the math. Math is cold and unemotional — and eye-opening. Unfortunately, it is much easier and much more accurate to do the math after you try the program, because you will not have to guess on as many numbers. There are eight key calculations you need to consider to determine whether this is a better advertising vehicle than something else you may already be doing:

1. Your incremental cost of sales — that is, the actual cost percentage for a new customer. If you are giving boat tours and have empty seats, your incremental costs for an additional customer are next to nothing. If you are selling clothes, your incremental costs might be 50 percent of the sale price. Food might be 40 percent. In any case, don’t include fixed costs that you would be incurring any way.

2. The amount of the average sale. If the coupon is for $75, will the customers spend more that that? I have seen more than one retailer complain that nobody spends more than the value of the coupon. That’s unlikely but I am sure it can feel that way, and that is my point: Keep track.

3. Redemption percentage. You don’t really know until the end, but from my experience and from what I have heard, 85 percent is a good guess.

4. Percentage of your coupon users who are already your customers. I’m sure this number varies tremendously depending on the size of your city, how long you have been around, and the type of business.

5. How many coupons does each customer buy? (The more they buy, the fewer people are exposed to your product or service.)

6. What percentage of coupon customers will turn into regular customers? Again, it can seem as if they are all bargain shoppers who will never return without a discount, but that’s almost impossible. Is it possible 90 percent won’t return? Sure.

7. What is the advertising value of having your business promoted to 900,000 people — that’s the number on Groupon’s Chicago list — even if they don’t buy a coupon?

8. How much does it normally cost you to acquire a customer through advertising? Everything is relative.

Let’s look at an example of how this might work for a restaurant. Suppose you sell 3,000 coupons with a face value of $75 for $35. Then let’s assume the following:

1. 40 percent incremental costs (mostly food).
2. $85 average ticket ($10 more than the coupon).
3. 85 percent redeemed.
4. 40 percent used by existing customers.
5. Two bought per customer.
6. 10 percent come back again — or send friends.
7. $1,000 advertising value.
8. $125 typical cost to get a new customer through other advertising methods.

Now, let’s do the math:

Number redeemed: 3,000 x 85 percent = 2,550.

Revenue:
3,000 x $35 x 50 percent = $52,500 (Groupon sends a check).
2,550 x additional $10 = $25,500 (additional money spent by each customer).
total revenue = $78,000 (plus, you also get the $1,000 advertising value of having all those people introduced to your product or service).

Expense:
2,550 x $85 (average retail value) x 40 percent incremental cost = $86,700.

In this example, the restaurant took in $78,000 at a cost of $86,700, which means it cost $8,700 to run the deal. The key question is how many return customers the restaurant will get for that expense. If you divide the 2,550 total coupons by two (the average number of coupons bought by each customer), you get 1,275 customers. Multiply by 60 percent (to exclude existing customers) and you get 765. Multiply again by 10 percent (the percentage of new customers who return), and you get 76 new repeat customers.

Divide the $8,700 cost by 76 new customers, and the restaurant paid $114 for each new regular, which in this example is roughly what we assumed it would cost with conventional advertising. The question the restaurant has to answer is whether it was worth the trouble to get 76 customers — especially given that it probably annoyed some of its existing regulars. On the other hand, maybe it kept some of  its employees busy when they otherwise would have had short hours.

But keep this in mind: because of the huge volume, if you change any of the variables, you can get very different results. For instance, if the customers had spent an average of $95 instead of $85, the restaurant would have actually made money on the promotion — something it’s almost impossible to do with traditional advertising. Of course, it goes the other way, too. If the customers spend only the $75 coupon amount, the cost to the restaurant will be $24,000 — an expense most owners probably never even consider.

Best marketing ever? Worst marketing ever? It all depends on a few little numbers. Here is the big difference between traditional advertising and Groupon: Traditional advertising requires spending some money and knowing that it can be lost if the ad doesn’t work. With Groupon, you spend no money up front but you mess with your formula for making money. You can win big and you can lose big.

It is a new world. The old math still works in it.

Jay Goltz owns five small businesses in Chicago.

Here's the best calculations I've seen to evaluate Groupons. Since most of the experiences we hear about are anecdotal, the best thing a SMB can do is approach Groupons with some ROI calculations in mind. As with all ROI calculations regarding advertising, there's always some assumptions. But if you're the owner of a local SMB you're the best person to make those assumptions.

Posted via email from Randy's Stuff

Thursday, November 4, 2010

Facebook "Deals"

Facebook Ads Provide 'Deals' for Local Merchants, Marketers

As Users Share Their Locations, a New Way for Marketers Like Gap, Starbucks and McDonald's to Reach Them

Share on Twitter Share on Facebook Submit to Digg Add to Google Share on StumbleUpon Submit to LinkedIn Add to Newsvine Bookmark on Del.icio.us Submit to Reddit Submit to Yahoo! Buzz

SAN FRANCISCO (AdAge.com) -- Facebook has a new offer for users willing to share their locations in status updates: deals from nearby merchants or big-brand marketers such as Starbucks, Gap or McDonald's.

Facebook is launching the Deals service with 22 big brand partners -- Starbucks, McDonald's, H&M, and Gap -- and 20,000 small-to-medium-sized businesses can start creating Deals on their Places page inside of Facebook.

Facebook is launching the Deals service with 22 big brand partners -- Starbucks, McDonald's, H&M, and Gap -- and 20,000 small-to-medium-sized businesses can start creating Deals on their Places page inside of Facebook.

--> The social network announced "Deals," an extension of its Places mobile feature, which allows users to check in at locations such as bars, coffee shops or malls. Users will be able to claim those deals by walking into a merchant and checking in on their phones or other mobile devices, giving marketers the ability to reach consumers and potentially attracting them into a given store.

The new service combines two of the hotter trends in local marketing: location-based check-in services such as Foursquare, and local group deals services such as Groupon or LivingSocial. "There are many changes in mobile, and there's a revolution in the social space," said Mark Zuckerberg, founder and CEO of Facebook, which has 200 million mobile users. "Mobile is as big as that -- when you combine mobile and social, industries can get disrupted."

But like everything Facebook does, it has the potential of taking a niche phenomenon now exploited by a coterie of small startups and turning it into a mass phenomenon. "While businesses have been able to use other geolocation services to incentivize customers to some extent, Facebook Deals allows global brands to do so at massive scale," said Michael Lazerow, CEO of social marketing firm Buddy Media.

Facebook announced the Deals Platform and another feature called "Single Sign On," which allows users to log into any app on their iPhones and Android phones, eliminating the need for remembering passwords and typing on tiny mobile keypads. There are 550,000 games and applications available on Facebook, and developers can now build the single sign-on into any of them or build new apps with the feature.

Facebook is launching the Deals service with 22 big brand partners -- Starbucks, McDonald's, H&M and Gap -- and 20,000 small- to medium-sized businesses can start creating Deals on their Places page inside of Facebook. Merchants create a Facebook page where there is an option for choosing the kind of deal they would like to offer: individual, loyalty, friends or charity. Individual and loyalty offers are digital versions of the traditional coupon and loyalty cards, where a customer gets a punch hole for every coffee or sandwich purchased. The friends offer is a strictly Facebook style deal, where if a user checks in his or her friends, they get a discount. The charity deal is where the merchant will donate $1 for each check to a charity.

"The Deals concept solves the long term," said Facebook's director of local, Emily White. "For a long time, merchants have been told to get online. This solves that problem for them and turns the fans into real dollars."

Gap decided to immediately participate in Deals, offering 10,000 pairs of jeans for free to all users who check into one of the 900 Gap stores nationwide. "It's important for us to connect with our customers where they are," said Olivia Doyne, a Gap spokeswoman on hand at the event at Facebook headquarters in Palo Alto. "This can be used in so many ways. If a store has too much inventory, we can use Deals for that. We can tailor the deals to our customers' locations."

Facebook does not earn money in the Deals promotions, and Ms. White said this project is very much in a beta state. But inadvertently, by having more businesses create pages on Places and having more people checking into those businesses, there will be a natural increase in Facebook traffic.

Marketers have long seen mobile phones as a powerful means of reaching consumers while they're out shopping or physically close to a given store. "This is continuing Facebook's empowering of small businesses," said Dave Marsey, senior VP of Digitas digital media. "We're gonna see the biggest response with small local businesses that can more directly and electronically manage attracting new customers and rewarding loyal customers."

Mr. Zuckerberg said that, as always, Facebook's focus is to make things better for users. "Whether the deals platform turns into something more commercial, or we choose to monetize something else -- though we have no plans of doing that any time soon -- that works for us too."

Facebook comes to the social buying deal biz. No surprise. But if Facebook's sweet spot for "local" merchants is Starbucks, Gap and McDonalds, I would think that would give local merchants not tied to national chains/franchises are real opportunity to out-maneuver them in the deal biz.

Posted via email from Randy's Stuff

Monday, November 1, 2010

Radio Shack Does Trade-In's for IPhones

We have two iPhones in our family. Yesterday we traded in the older one — my wife’s first-generation model, bought in 2007 — at Radio Shack. They gave us $72.94 for the phone and charger, against $199 for a new 16Gb iPhone 4. We’ll probably trade our other iPhone, my second-generation 3g one, pretty soon too.

Apple doesn’t have the same offer. I’m not sure who else does. I wouldn’t have known about it if I hadn’t stopped in a Radio Shack to buy an ethernet cable a few days ago, when the kid behind the counter told me about it. Turns out Radio Shack will take a lot of stuff in trade. Since my iPhone 3g is brand new (I replaced it at an Apple store last month for $79, before I knew about this deal), I can get $116.13 for it, according to the online appraisal system at that last link.

Yes, it bothers me that we’re staying inside Apple and AT&T’s joint silo. It also bothers me that Fake Steve Jobs is right about Android fragmentation. I also see a serious risk that Real Steve Jobs might succeed at repositioning closed systems as “integrated”. Just because, well, he’s Steve. We’re all in his reality distortion field now.

Speaking of which, Apple is now bigger than Microsoft, and the iPhone is now bigger than Rim.

I still see this as a phase, and not a bad one. Apple and Google have together cracked open the unholy death grip that phone makers and carriers have long had on the mobile world. At some point those two halves will come completely apart.

Until they do, we won’t have ambient connectivity, or what I call the Frankston Threshold.

But we’ll get there. It’s inevitable.

[Later...] If you do trade in an old iPhone, be sure to erase it before handing it over. Do that under Settings/General/Reset/Erase all content and settings.

You'd think Radio Shack would be better at promoting this.

Posted via email from Randy's Stuff