September 21, 2010

Stupid Marketers, Part 2

Did you watch the Groupon story on Nightline last night?

See, I'm one of the stupid marketers I talked about in yesterday's rant titled 'Are We Marketers Just Plain Stupid? ... I didn't know the story would be on television (see, television is old-school, only used by Luddites). My wife, however, told me to record Nightline and watch what they said about Groupon.

So I recorded the episode.

Turns out that 70% of Groupon users are under the age of 35, are female, and live in cities.

"It was free to sign up, It was a place were we would go anyway, and, you know, we saved money and it was fun". Those are the words of Erin Donahue, a 27 year old woman interviewed for the story.

"I would say 60% of the people who come in here through the Groupon didn't even know I was here ... it put me on the map." said Richelle Ciluffo, Owner of "The Spa on Oak".

It was mentioned that Groupon is on track to rake-in a half a billion dollars in sales this year and is already turning a profit.

Somehow, a portion of our readership missed the most important point of the article.
  • "The men and women at Groupon are the smartest marketers in the room".
I am not criticizing Groupon. Please demonstrate to me the last time you founded a business and in 22 months you were able to grow it to a half-billion dollars in sales with 500 employees in the teeth of something just shy of a depression?! They are very, very smart marketers. They found a way to give their customers something cheap, and they found a way to capture our profit.

I am not criticizing Groupon.

I am criticizing us!


We are stupid.

Let's use me as an example. I wrote the article yesterday, knowing it had a chance of "going viral". And it went viral, all right! Last I checked, more than 1,300 marketers read the article.

And for all of that viral magic, I earned an additional 25 followers on Twitter.


See, Twitter, those folks are the "smart marketers" ... they theoretically benefit over and over and over again from the content we produce. On the other hand, I got 25 additional followers. Of the 700 incremental blog readers who visited my site and read the article, fewer than a dozen clicked on any of the links on the blog, and I sold zero consulting projects.

I am a "stupid marketer". My intellectual capital benefited Twitter readers (i.e. Groupon customers). My intellectual capital benefited Twitter (i.e. Groupon). My intellectual capital didn't benefit me (i.e. the retailer).

In fact, in the two years since "joining the conversation" on Twitter, I've generated a whopping $2,500 of consulting revenue, and that revenue won't be booked until November ... so at this time, I've technically generated $0.

Increasingly, we marketers partner with intermediaries. And when we partner with intermediaries, we darn well better accomplish our goals, because intermediaries suck the profit out of our business model.

Our goals are simple.
  1. We will acquire a new customer, a new customer with a positive lifetime value that greatly offsets the loss we suffer when we acquire the customer.
  2. We will increase the lifetime value of an existing customer.
Take the first point. Say you sell a $20 widget that costs you $8. You offer a Groupon, half-off. Groupon gets $5, you get $5. You acquire a new customer.
  • You just lost $3 on the item.
  • You probably lost $2 on operating expenses and salaries as well.
  • In total, you lost $5 to acquire the customer.
Now, the pundits will tell you that when that customer shops with you next time, you'll generate ten dollars of profit ($20 item less $8 cost of goods less $2 of salaries and operating expenses), so the transaction is a net positive.

That's theory.

Go get real customer data from a real retailer or real online brand. I've done this, more than fifty times. The reality, unfortunately, is very different than marketing theory.

In practice, for businesses that acquire customers via discounts and promotions, around 20% of the customers will come back and buy again. And when the 20% of customers do come back, half will purchase only if a promotion is offered to the customer again.
  • This means that 10% of the customers buy again, and they maybe buy twice in the next year, usually at full price. Here, you make maybe $20 profit.
  • This means that 10% of the customers buy again, buying maybe twice in the next year, using a promotion, often generating no incremental profit because of their lust for discounts and promotions, a lust we're happy to feed. Let's assume these customers generate $2 profit in the next year.
Total future profit is 0.80 * $0 + 0.10 * $20 + 0.10 * $2 = $2.20. And this assumes that you do not spend money advertising to this customer again in the next year.

In other words, you lose $5 acquiring the customer, and then the customer pays you back $2.20 in the next year.

In other words, you are a stupid marketer.

Then you have the second example, where you had an existing customer, and you took $20 of future value and you destroyed it by offering the customer who would have purchased anyway at full price a wonderful promotion. This is the example that "Erin" mentioned on Nightline last evening ... she said she used promotions at places where she would have shopped anyway. As marketers, this is our true blind spot ... we almost never view purchases from the standpoint of "the customer would have purchased at full price anyway." The results are devastating.
  • The customer would have generated $10 of profit.
  • Instead, you gave the customer a wonderful promotion, and the customer now generates a $3 loss (salaries and overhead are constant in this situation, the customer would have purchased anyway).
  • Net change to customer lifetime value ... a loss of $13.
In this case, you must get this individual customer to purchase an additional 1.3 times above and beyond what the customer would have purchased, at full-price mind you, in order to recoup this "advertising investment". And this assumes that the customer will shop with you again, which, when analyzing 50+ projects over the past 42 months, I know doesn't happen ... heck, good companies are able to get 50% to 65% of good customers to shop again in the next year ... so you may have just lost $13 of profit and a third of the customers won't come back and the remaining customers will not change their buying behavior and now may only buy from you when you offer promotions when in the past the customer would have purchased anyway from you at full price.

Again, you're a stupid marketer. Why would you do that? Be honest with yourself. Why would you do that?

Does anybody do the math outlined in this blog post? Do you do the math outlined in this blog post?

Old-school catalogers, these folks always place a "hurdle" around their free shipping promotions ... have you ever noticed that? They give you free shipping if you spend $100. Why do they do this? Well, they've "done the math". They know that the hurdle provides enough profit to offset the losses generated by the promotion.

That's being a smart marketer.

Those Groupon folks, they are the smartest marketers in the room.

Please do the math before going down the discount/promotion route. Please be a smart marketer.

9 comments:

  1. This is not false but at the same time, it’s not completely true.

    For example, your calculation doesn’t include the fact that some customers will promote the shop by talking with their friends about their purchase. Mouth-to-mouth is how to leverage social media! It could have many other examples like this one.

    Some marketers using Groupon are stupid but not all of them.

    “Which benefits do I expect using this service?” is the first question marketers should ask themself if they don’t want to lose both time and money.

    I’m not sure marketers will make more money using Groupon. I mean not directly and you prove it, but for sure they will promote their products to new people.

    The next question is “Am I willing to spend some money on that?”.

    Also, it’s much easier to leverage social media for B2C than B2B. The potential of using social media for B2B industry is overrated.

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  2. Thank you Justin for your feedback.

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  3. Christine6:42 AM

    Very intriguing article. I guess what I always look for is working with an intermediary who can deliver me a customer that I would not have been able to connect with otherwise .... so even though it's much less profit, it's still greater than the $0 I would have had, and no relationship with this customer. Then shame on us if our product/service isn't good enough to keep them coming back and wanting more???

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  4. Hi Christine, thanks for the feedback, there's always lot of opinions about how to do execute marketing strategies optimally, aren't there?

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  5. Wow. Thanks. Most of my sales are digital downloads and I rely on sales every few months to bring in additional orders. Apparently, what I am doing is "training" my customers to wait for my sales....?

    Interesting read.

    By the way - This is my first visit here. I found you because I was looking for a pdf of Libey and Pickerings book on RFM (Hard to get a hard copy where I live in Mexico) and I found one of your whitepapers with a link to your main website.

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  6. Thanks for visiting, Ryan!

    I don't know if you are training your specific customers to wait for sales or not ... I have client data where I can plainly demonstrate that is the case, and I have client data where customers do what they want to do regardless of promotional strategies.

    What I do know is that, across all of my clients, when a customer responds to a promotion, 50% of future items are likely to be purchased via another promotion ... if a customer buys because the customer wants the product, then 20% of future items are likely to be purchased via another promotion.

    The latter situation usually results in more profit.

    All that being said, if what is best for your customers is to have sales every few months, and you get incremental orders that you wouldn't normally get, and the sum of all orders is more profitable than not having the sale, then have the sale!

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  7. It seems to me that part of what we should learn is to sell to businesses and not to individual consumers.

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  8. Sean R.1:05 PM

    Just a thought, piggybacking on Justin's comment: Person A gets great deal for your store on Groupon and tells a friend. Yay! But the person who used a Groupon at your business and told a friend about the experience probably isn't talking up your shop. They're talking about the great deal they got through Groupon at your shop. If there is word-of-mouth, half of it is probably in Groupon's favor, and not yours. True? I don't know, but worth thinking about.

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  9. This is what we marketers love. Sean takes one side of a story, Justin takes another side of the story, and everybody has a wonderful discussion ... and everybody is right, and everybody can point to one example where their side actually happened. Both Sean and Justin are right.

    This is why I wrote about getting the actual numbers and doing the actual research. It doesn't matter who is right or wrong ... all that matters is that people have actual customer behavior, measured and quantified, so that it is easier to make unbiased decisions!

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