Groupon round up -paul jan 24-2011


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Paul Cubbon prepared this presentation for a talk to BCAIM, Vancouver, Jan 26th, 2011.
It represents a compilation of a range of reports, some research based and some opinion/commentary.
I have tried to distill them into something helpful for businesses considering Groupon or other deep discounters, at this stage of the evolution of model.
The intent is not to provide a blanket “good” or “bad” pronouncement, but a basis for asking informed questions and making better choices on whether or not to engage and use this tool.

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  • July 7th 2011: As one would expect, things are evolving rapidly in this space. I think that it's important that people don't get drawn into the polarized views of 'deals are amazing - what's the problem?' or 'deals suck - you're crazy to do them.' Customization is key. Here is a useful interview with Living Social Escapes on what they see working in the travel industry - lots of customization, control, incentives from cross-sell, upsell AND reasons to share and repeat based on the experience and not simply the price.
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  • Hi Paul. Great presentation. I've been operating a site in the daily deal space in Vancouver ( since June of last year and I agree with many of your points. Would be happy to chat about my experiences and share some thoughts.
    Lesel Radage, CEO at
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  • PaulCubbon prepared this presentation for a talk to BCAIM, Jan 26th, 2011.It represents a compilation of a range of reports, some research based and some opinion/commentary.I have tried to distill them into something helpful for businesses considering Groupon or other deep discounters, at this stage of the evolution of model.The intent is not to provide a blanket “good” or “bad” pronouncement, but a basis for asking informed questions and making better choices on whether or not to engage and use this tool.
  • Very brief comment on group buying as a phenomenon: long established in formal and informal ways in b2b.Popular consumer model in China.BUT, Groupon is really very new and has gained major attention and activity.
  • Recent example (North Vancouver, January 2011).This is a full-value groupon, i.e. the coupon is redeemable for a full product or service, not a partial payment (see later in the presentation for partial payment groupon assessment)
  • As with many customer acquisition activities, the first transaction is often unprofitable. There is a whole body of literature on customer lifetime value, and break-even purchase units. However, it is not unusual for (smaller) businesses to either fail to take a lifetime value approach, and/or to fail to calculate either the full costs of acquisitions, servicing, and/or the potential cost-saving benefits of happy customers influencing others and thus reducing subsequent acquisition costs.This is not simply a Groupon or price aggregator issue, but a factor to consider in considering all marketing initiatives.
  • These variations have more upside.Discount on food is common in industry and this can be seen as a form of advertising and trial incentive, with a likelihood that customers will spend more than the coupon value, AND if they like it repeat at full price. Low variable costs, high fixed costs, high competition, fickle consumer behaviour: make this an attractive industry to try this type of technique, especially for new players and/or major relaunches. Downsides: setting expectations of low prices, and possibly subsidizing people who would have come anyway.Expiring inventory – Body Worlds was closing, so getting some money on a fixed cost was better than zero. They also already had a time booking mechanism which prevented them from being over-whelmed with volume. But did they need to use this technique at Xmas/New Year – they were totally full when I went. It may also encourage people to delay making full purchases on future exhibitions, in anticipation of a deep discount.
  •,%20Sep%2028%202010.pdf RICE RECCS:First, social promotions could be structured so that relational behaviors of consumers are rewarded instead of transactional ones. For example, instead of offering $60 worth of food for $30, a sushi restaurant could offer $20 worth of food for $10 on each of the consumer’s next three visits. Social psychologists have shown that repetitive behavior leads to the formation of habits that are remarkably durable, and social promotions, just like other incentives, may be effective in inculcating habits, if designed appropriately. Second, rather than promoting the total purchase amount during a visit, a specific item could be promoted. Instead of offering a discount on the consumer’s total bill, for example, such as $75 worth of services for $35, a spa could offer $10 off for a facial, another $10 off for a pedicure and $15 off for a massage, during a single or multiple visits. Social promotions should offer the small business a good opportunity to cross-sell its products and services to customers and increase the amount of the total bill, a strategy that prior research on promotions has found to be successful Third, the promoted .items should be chosen judiciously so that the business is able to use unutilized capacity or sell unpopular items through the promotion.
  • Jan 20th 2011, report on Living Social Amazon dealNote: Amazon has investment stake in LS
  • Higher dollar figure fashion start-up.Before you object, look at what Blue Nile did for online diamond rings …and how well Lands End, Victoria’s Secret and others do with online retail of clothing….things that were not supposed to be saleable online.This is a young company, building awareness (so the advertising aspect of Groupon is relevant to them). They are giving a partial discount on the full price of the item. They are getting some significant revenue, AND, as a newer 100% online company, importantly, they are gaining trial. If their product and service meets expectations then some repeat and positive word of mouth is likely.
  • Are you leading or re-acting?Have you thought through all of your options?What would happen if you did not discount deeply?Look at experiences of high-low pricing in multiple other categories.See classic HBR article: “How to fight a price war.”
  • MASHABLE story Jan 20th 2011
  • Provide some balance or counter to the more pessimistic views.Or Groupon (and others) to succeed long-term, many of their small business clients have to succeed with them, and repeat…..and so it has to make sense to them.Unless, cynically, one thinks this is a quick IPO play before it evaporates.
  • Many offer good newsletters, blogs or FB updates to research, articles and presentations
  • Groupon round up -paul jan 24-2011

    1. Is GroupOn good for your business?<br />Paul Cubbon Presentation to BCAIM, January 2011<br /><br /><br />Speaker notes in each slide provide reference links and more resources<br />A fuller version of this presentation can be found at<br />
    2. A brief history<br />Before Groupon<br />Aggregating buyer volume to gain price reductions<br />B2B<br />B2C<br />Groupon launch: Nov. 2008<br />
    3. Less than $15 to the salon for 1.5 hrs?!<br />Follow the money.<br />Consumer pays Groupon $29<br />Salon gets $14.50 from Group-on; installments over ~4 months <br />Salon costs include staff, product, rent, utilities etc.<br />Some costs fixed, some variable<br />BUT, a loss maker on the single transaction<br />SO, WHAT HAPPENS NEXT……?<br />
    4. What happens next……?<br />IF Groupon customer is a NEW customer she could:<br />Return to buy at full price;<br />Only return when deep discounts are offered;<br />Influence other consumers, positive/negative<br />Impact staff morale, positive/negative<br />Impact customer service, positive/negative<br />
    5. Variations with upside<br />If 2 people consume $40, Pivo gets $25 & possible repeat<br />Expiring inventory; plus time controlled entry slots - $11 vs. $0<br />
    6. Groupon Gap deal<br />Aug 19th 2010 - $25 for $50 value<br />441,000 groupons sold = $11m+<br />First national deal for “local” model<br />Mutually attractive advertising?<br />
    7. The cocaine analogy<br />“High-low pricing is devastating<br /> to the consumer’s opinion <br />of your brand.” <br />
    8. Seth on Groupon<br />Sees potential based on:<br />Fun<br />High margin items<br />Working with baskets of aligned goods<br />IF an improved permission based customization ability is developed<br />
    9. Academic study 1<br />Harvard: “Is Groupon good for retailers?” Jan 10th 2011<br />Working paper: “To Groupon or not to Groupon?”<br />Key themes<br />Price discrimination <br />Advertising benefit <br />Structured approach to questions businesses should ask before deciding<br />
    10. Academic Study 2<br />Rice University, Fall 2010<br />150 Groupon businesses in 19 cities (6/09-8/10) 66% profitable; 32% unprofitable.<br />Restaurants were the most unprofitable category, describing Groupon customers as "entitled," poor tippers, and definitely not repeat customers.<br />Spas, on the other hand, were the most profitable (though their Groupon-using customers were still bad tippers).”<br />42% said they would not use Groupon again<br />Recommendations include: selective, partial offers, designed to link to repeat behaviour.<br />
    11. Living Social<br />Competition<br />
    12. Jan 19th 2011: Living Social Sells >1 million Amazon coupons: $13m+<br />Like Gap Groupon<br />A national, mass advertising play<br />For Amazon, a $15 discount off of normal basket.<br />
    13. Swarmjam<br />More competitors. Barriers to entry?<br />
    14. eConsultancy view<br />“Group buying and the new customer acquisition lie” Jan 20th 2011<br />
    15. eConsultancy cont.<br />Patricia Robles:<br />
    16. Experiments with higher price, higher margin items<br />Example: Men’s Fashion start-up<br />Average consumer spend = $500<br />Groupon is -$150 at $50 cost to consumer<br />Run in multiple cities Fall 2010<br />Net from consumer on purchase = $350<br />Company also gets $25 from Group-on, in 3 staggered installments.<br />So far, only ~10% redeemed<br />Intent is to follow-up with custom messaging to gain repeat purchase and leverage word of mouth<br />
    17. Business strategy and potential role for deep price discounts?<br />STEP BACK<br />Why offer discounted pricing at all?<br />How does it fit your business model for<br />Customer acquisition<br />Retention<br />Revenue growth<br />Margin management and profitability?<br />What are the long-term as well as short-term implications?<br />Will deep discounting be the new norm in your category?<br />Can you WIN with this tool?<br />Will you start a price war?<br />
    18. Demand peaks and valleys<br />B<br />The conventional result of a price promotion (lower price,<br /> non-perishable). A= price down, volume up; B = price back up, <br />Volume down; C= volume eventually recovers to pre-discount level.<br />OUTCOME: only existing customers forward buy, at reduced cost: <br />Diluted margin, disrupted supply chain.<br />A<br />C<br />In this scenario, as price drops volume goes up as new buyers<br />trial at the lower price; but they abandon when price returns to<br />normal. Existing buyer keep buying. Typically, lower cost, <br />perishable items. New buyers saw little appeal except low price.<br />New buyers trial, attracted by low price, but appreciate the<br />brand benefits to the extent that they re-purchase at the full price<br />The last scenario is what you should be trying to achieve – with any price discounting. But for it<br /> to work, your core offering, the brand experience and perceived benefit has to superior<br /> to the next discounting competitor.<br />
    19. IF price discounting, alternative choices to Groupon, etc<br />2:1 coupons in existing media<br />Fundraiser books<br />Direct promotion<br />
    20. Should Groupon have accepted Google’s $6 billion offer?<br />Google <br />Offers<br />News<br />leaked<br />Jan 20th 2011<br />
    21. “Why we invested in Groupon”… the power of data<br />VC Greylock explains investment as a focus on the data and potential to customize offerings<br />Techcrunch interview, Jan 11th,2011.<br />
    22. Takeaways<br />What is your marketing strategy?<br />Where does price discounting fit into this? (if at all.)<br />Work through margin as well as revenue implications.<br />Look at longer-term as well as short-term:<br />Financial<br />brand<br />Can you customize to improve effectiveness?<br />Partial discounts<br />Time controlled<br />Linking to subsequent behaviour<br />Leveraging social media during and after usage.<br />If you decide to price-discount, is Groupon (or a similar aggregator) your best choice?<br />
    23. Q&A<br />Questions?<br />Comments?<br />
    24. Helpful info-graphic (link in notes)<br />
    25. Resources: some places for context on discount buying and online behaviour<br /><br /><br /> josh bernoff<br /><br /><br /><br /><br />