Celebrate the Second Anniversary of My Groupon Book

It was two Super Bowls ago I published this book, same time Groupon had their infamous Ad featuring Tibetian restaurant. Since their IPO a few months later their stock is hovering around $5 – far below its opening day pop but 150% growth over their 52-week lows.

How do you make informed decision about whether or not a business should run Groupon promotion?  Here is a chance to read this book for free, because you likely spent all the money on iPad and iPad mini. Or worse lost it buying high and selling low Groupon shares.

Fill out this form and the first 50 people will get the book that sells for $9.99 for free.

Even if you are not a small business owner you will find the chapters on demand curve and sales vs. marketing channel a refresher course for you.

Here is the link : Groupon Book

Surely you are not surprised by Groupon woes?

Update 11/1/2012: Groupon valuation is back in news because of its rival LivingSocial’s woes.

In Amazon’s 10-Q filing late Friday afternoon, it disclosed that Living Social saw revenue of $372 million for the nine-month period ended Sept. 30. While that is up 120% from the same period last year, it reflects third-quarter revenue of just $124 million – down 10% from the June period.

If that sequential drop reflects an overall weakness in the daily deals business for the third quarter, then it implies potentially disappointing results for Groupon when it posts its own results for the period next week,

When valuing a company’s stock it pays to understand what pressing customer needs it serves and what unique value it adds. That is assuming you are Benjamin Graham, Warren Buffett type investor who takes the time to understand the business before investing.

Business model is value-creation and value share. A business that creates net new value for its customers gets to share in it. A business cannot get its share of value it did not help create, let alone grow exponentially.

If you are such an investor then Groupon’s announcements about lax controls should not come as a surprise to you. I am not referring to the $2 drop in its stock today but the news that led to it.

It is hard to describe Groupon’s business. In fact even Groupon is not clear about what it is.

For starters, it is a two sided market. It essentially brings together small businesses on one side and end consumers on the other side.

In general a two sided market adds value by unlocking value, creating new value or removing inefficiencies. It then gets its fair share of the net new value added. A two sided market must be consistent in its positioning – it must serve as the enabler for the jobs the two sides are seeking to do. There should be no asymmetry.

Take for example, eBay. It positions itself as the market place for buyers and sellers to find each other. No asymmetry here. EBay adds value by enabling transactions that otherwise would not have been possible.

What about Groupon’s role as two sided market?

What is its positioning to deal seekers? It tells them about, “one ridiculously huge coupon everyday” and its tag line is, “Collective Buying Power”. In other words it wants the deal seekers to hire it as a sales channel to buy products at steep discounts.

What about its positioning to small businesses? It tells them about, “guaranteed new customers”, “big exposure”, and “measurable marketing”. The story line goes, “these customers fall in love with your service and visit you again and again, paying full price”. In other words it wants the businesses to hire it as a marketing channel.

That is asymmetry (to put it mildly) in its messaging. Groupon cannot be a sales channel to acquire ridiculously huge discount and a marketing channel to acquire valuable customers at the same time.

What value does it add?

Businesses bring value to the table in the form of 50% off discount. Deal seekers add no value but get 50% off. Groupon gets its share of 25% from the businesses.

 

You bring a full pie.
Give half of it to my email subscribers.
Give half of what is left to me.
Take home the rest and wait.
It will not only grow to become a full pie, it will multiply into many full pies.

To repurpose Omar Khayyam, “the deal seekers having scored a deal, move on. No level of customer service will bring them back to pay full price for your cupcake they can get for 50% with their next coupon in the bakery next door”.

There is no net new value add. Just value distribution – from businesses to deal seekers and Groupon.  Groupon cannot take its share of value it did not help create.

So we have a business that most do not understand, even it does not have clarity on the needs it serves and adds no new value. How can you place a valuation on such a business?

Surely you are not surprised that such a confused business finds itself again in the accounting hot water?

There is a WSJ report that SEC may investigate Groupon. I see no reason for such an investigation at the expense of taxpayers. If irrational investors want to bet their money on a business they do not understand or chose not to understand, why should they be protected?

We can turn Groupon into a daily habit for consumers

The Wall Street Journal interviewed Groupon CEO Mr. Andrew Mason about his IPO and his business. The Journal throws a whole bunch of softball questions to Groupon CEO Andrew Mason.

They either deliberately failed to ask or focused on the wrong things like these,

1. Valuation – It is perfectly acceptable for a company to expect and set any valuation. It is up to the market to buy the shares at that price or not. Why question him on the valuation?
2. Asking about current stock price: What is the point of asking about the stock price to any CEO? When did anyone answer anything other than,
   

   “I’m aware of it [stock price], but I think as a company we aren’t driven by it. It’s a futile exercise to be responsive to the stock.”

3. On the employee memo leaking out: Mr. Mason asnwers,
   

   “If I knew it was going to leak,”

   and the  Journal reporter lets it slide. Really?

4. Questioning his maturity: This is an insulting question. Ask about his challenges and how he rounds up his gaps with an executive team.
5. Asking, How important is profitability?:  Really? Now who is being immature, excuse me, being unaware of the number one goal of any business? This question lets Mr. Mason talk about the growth, market share etc etc.

What questions they should have asked instead?

1. Question the contradiction–  When Mr. Mason said,
   

   discount to deliver more buying power for consumers, as well as solve better inventory management for merchants, delivering them more profits

   The question is how can you say more buying power to customers and more profits in the same sentence? Profit implies share of net new value created. What is the net new value created?

2. Is it  a sales channel or marketing channel?  When Mr. Mason said,
   

   solve better inventory management

   The question here should have been – are you a sales channel to dispose of excess inventory without cannibalizing  current full-priced sales or are you a marketing channel to acquire new full-price customers?

3. What happens when Groupon turns into a daily habit?
   The title of this article is a quote by Mr. mason in the article. What would happen if customers are used to the  “ridiculously large discount” they get from Groupon? What does this mean to the small businesses?
4. How does the upfront investment pay off in the long run? – When Mr. Mason said,
   

   There’s an upfront investment that we know pays off over the long-term

   The question should have been, is that a guarantee? hope? insurance? promise?  What metrics are you providing to small businesses to measure that pay off?  There is no data or assurance that deal seekers come back. Besides didn’t he just say, “we can turn Groupon into a daily habit for customers”?

5. Did you read the book?
   Why not buy a copy of this book and give it to all the small businesses before signing them up to do Groupon?

Paper Napkin Math for Adding a Sales Channel

Some call it the Distribution Channel, I call it the Sales Channel.

A sales channel is for reaching customers and selling them your product.

If you made and sold cupcakes, your cupcake store is a sales channel.Customers walk in to buy your cream filled cupcakes and other goodies.

Suppose you want to reach customers who do not come to your store but are already visiting another store. You can sell to those customers if you make your cupcakes available in that store by cutting a deal with that store. For example, if you sell your cupcakes through local Whole Foods, that is yet another sales channel.

Your goal here is not about bringing those who buy the cupcakes at Whole Foods back to your store but to reach them where they are. For providing you this access, Whole Foods (or any other sales channel) will take a cut of the sales. That is the cost of hiring the sales channel.

Sales Channel unlocks value for you. It helps you reach new customers and likely different willingness to pay for your product.

These new customers are a different breed. They may not value your product the same way those who walk into your store do. The price they are willing to pay may be higher or lower.

For some sales channels, like GrouponLive, it is lower because of the way they have been trained to expect discounts. The You need to discount your cupcakes 25% (or more) and also give another 25% or more to Groupon as sales commission for making this sales possible.

You may be able to sell 1000 additional cupcakes per day with this new sales channel. But should you do it?

When is a sales channel profitable? Only when every sale is profitable. You need profit on every cupcake sold. If not, you are better off not adding the sales channel.  As the saying goes, you cannot make it up in volume if you are losing money on each unit.

 

Is Groupon a tool for price discrimination

NPR’s  Robert Smith claims Groupon’s success comes from simple economics, “Different people are willing to pay different prices for the same product”.

Since some people are not willing to pay $18 for burgers but are willing to pay $9, Groupon makes it possible to bring these customers and sell them the same burger for lower price.

Smith misses the point and even Groupon will strongly disagree with Smith’s claim. His argument is an extension from regular price promotion coupons which are a way to achieve price discrimination.

None of what Smith describes about price discrimination is incorrect it is simply irrelevant to the new world of Group Buying.

The basic question to ask is whether Groupon and the Groupies are Sales Channels or Marketing Channels.

Groupon positions itself as the marketing channel. Their messaging is about finding new customers who come in for 50% off, fall in love and become a regular paying full price. They do not want businesses to look at contribution margin at individual customer level.

Groupon does not want to be seen as a tool for off-loading excess inventory or just another way to reach sell to new customers. That is the job of a sales channel.

A sales channel  can be a tool for practicing price discrimination. You sell your product through different channels to different target segments and can charge different prices.

As a tool for achieving price discrimination,  Groupon will be effective only if

1. There are no opportunity costs to selling at lower price
2. There is no possibility of arbitrage – customers buy through one channel at low price and sell in different market at higher price
3. It is targeted and does not cannibalize current sales – full price customers continue to pay full price and do not take advantage of 50% Groupon promotion

The secret to success of Groupon is not price discrimination and is no secret at all. It is because we lack the appetite to do the math on long term value of giving away 75% of our revenue for short term long lines.

My first book: To Group Coupon Or Not

You have seen my posts on Groupon and the hidden costs of doing a promotion that gives away 50% off to acquire new customers. I have written a eBook, To Group Coupon or not, to help Small Business owners understand the math and metrics of such a deal. The book link is http://book.MathMarketer.com

The book received great reviews from two established Pricing experts, Mr. Reed Holden, Author of Pricing With Confidence and Mr. Ronald Baker, Author of Pricing With Purpose.

I understand you read my blog for Marketing, Analytics and Pricing and you most likely are not a small business owner. It is still a great read if you want to understand the hidden costs of any promotion and how and when to add a new sales channel.

I would appreciate if you  can give it a plug – write about it in your blog, tweet the book link and tell your business owner friends about it.

Thanks.