An Alternative Look At GroupOn Marginal Costs

In my previous article I wrote about the necessary and sufficient conditions for choosing to run GroupOn campaign for your business.  I made a case for looking at the marginal cost of each unit sold to decide on whether or not to run a campaign. Alternatively, and in all fairness to GroupOn, we can look at the entire cost of running the campaign as “Fixed Costs” or “customer acquisition costs” and hence can ignore the marginal cost argument.

For instance,  let us use the $4 cupcakes that you make for $1.5. If you run a campaign to get 1000 new customers with a 50% deal  (for a promotion price of $2) and let GroupOn get its 50% cut, your total promotion cost is 1000 X ($2-$1-$1.5)  = $500

Yes you are selling each cupcake for less that what it costs to make and sell it. But another way to look at is, you spent $500 to sell 1000 units at $1 each, there by ignoring the marginal cost argument with the HOPE that these first-timers will spend more in the future.

That said, every other cost component – incremental investment, opportunity cost, etc – remain the same.

Next we can model the Lifetime Value of such first-timers based on:

  1. How likely will the customer revisit (or what percentage of customers will revisit) .
  2. On the average how many additional times they will revisit
  3. On the average what you will gain from each visit. Note that this not just average spend per visit but the profit from that spend.

If the total lifetime value is more than the total costs, then one can argue that it is worth doing.

See here for a very simple calculator.