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.