Perils of being on the wrong side of asymmetric two-sided market

Plug for my book: To Group Coupon Or Not: Small Business Guide to Groupon, LivingSocial and Others is now available.

eBay, Craigslist, dating sites and GroupOn have one thing in common – these are two-sided markets that need two sides (producer-consumer, men-women, stores-deal seekers) to be present to succeed.  Buyers flock to such a market like eBay if they believe there is a wider selection of sellers and vice versa. Two sided markets succeed when there is net new value creation that all three (the two sides and the market maker) get to share in it.

When two-sided markets simply redistribute value from one side to other while taking its share we have asymmetry. If you get caught on  the wrong side of asymmetry, any advantage you get from participating in the two-sided market is wiped out.

Deal seekers score! Does your business too?

In case of group buying sites it is easy to build the buyer side. These people add no net value but they reap large consumer surpluses.

With a large population of deal seeking customers enabled by social media (like facebook connect) the demand side is almost  unlimited. As it has been pointed out by many during the Google-GroupOn acqusition days, the stickiness from social media connections create loyalty to these sites even though the business model can be easily copied.

The question is what do the sellers who give away 50% discounts get in return. Claims made by people like Sam Decker and Seth Godin state,

“Once the first timer experiences your astonishing product and service, they become your lifetime customer”

There is a difference between stating this as one of the possibilities with a level of uncertainty vs. this is the only expected outcome. These are no different than the claims of an adorable cartoon giraffe that, “Madagascar is indeed San Diego because it has white sandy beaches“.

Small businesses must call these rosy projections into question since they are the only ones who is adding value but not getting their fair share. They need to ask,

  1. What job is the deal seeking customer hiring the group buying site for? For discovery, thrill of getting discount or for maximizing their consumer surplus? Which one of these gives you long term advantage?
  2. If you were able to lure away someone else’s lifetime customer (who is also likely to have astonishing product and service) with your 50% coupon, what makes you think they will become your lifelong customer?
  3. What do you get in return to track the lifetime value of these customers?
  4. Where is data behind the claims of these gurus? Data from Utpal Dholakia point to very minimal if any repeat business or customer margin.
  5. What is the impact on reference price and value perception due to 50% off? My experiments show customers are likely to assign lesser value a product they bought at a discount than to a comparable product bought at full price.

To repurpose Omar Khayyam, “The deal seeker, having scored the deal moves on to the next deal. (Likely) no amount of astonishing product or service will bring them back to pay the full price”.

If you want to add a new channel to minimize deadweight loss, by all means do it. But do the math behind it and not base it on hope

  • Do you  have a product with high contribution margin (price less marginal cost)?
  • Do you have excess capacity (with sunk costs and no other way to monetize it)?
  • Is there a segment of customers with low willingness to pay but reducing the price to include them will deliver less profit than your current profit (even though it is still profitable)?
  • Is there a segment of customers with low willingness to pay that you cannot reach through any other way?
  • Can you serve these low willingness to pay customers through these group buying site without the full price customers knowing about it (third degree price discrimination)?

If  the answer to any of these questions is NO, you have hard math ahead of you (Spreadsheet).

There is Marketing Research and then there are the rest

Why bother with marketing research at all?

If you have already decided on the path to take, product to develop, its pricing and  its routes to market –  save your time and money and go right ahead, there is nothing marketing research can do for you.  Of course you might believe that you already know the right answers and marketing research will help add analytics backing to your case. If you are not looking to do anything different based the data you find, there is no incremental value from marketing research to you.

Why can’t I do it myself ?

Yes you can. You are very good at what you are doing and you took the right step of seeking information for your decision. But you are the decision maker, you are too close to the problem. Your biases will most likely push you to seek data that attests your notion rather than seek the right information let alone seek data that contradicts your notion.

I plan to talk to customers and validate my hypotheses, isn’t that enough?

What are your hypotheses? How many customers? How did you choose them? What do you plan to ask them?  If you are simply verifying whether there exists few customers who are vaguely interested in a product that you have then yes, that is enough. The information you get from a few customers you talk to cannot validate any hypotheses about product features, pricing or segmentation. The output from “getting out of the building” and talking to prospects/customers is not data but informed hypotheses about their preferences, characteristics, buying processes, and segmentation that need to be validated across the wider market.

Isn’t it sending out surveys research?

No it is not. While a survey is an essential component of marketing research, sending out a canned survey or the one you designed yourself is not. First, there is the key step of doing qualitative research – customer interviews, focus groups, following the customer (ethnographic studies) and yes “getting out of the building” – that helps you find the language of your customers, the extremes of their preferences,  and hypotheses about them. Then comes survey or surveys custom designed to seek specific and relevant information  using rigorous data collection and analyses processes to validate these hypotheses. Remember, marketing research starts with talking to your target market and not with a canned survey.

Why would I spend money on hiring a professional do it?

Yes, there is cost to acquiring the information the right way, but what is the value of information to your venture?