Kevin Hillstrom on YouTube: A Presentation At A Recent Listrak Event

Here's a brief presentation I gave at a recent Listrak event ... give it a view if you want to hear a few comments about modern email marketing and segmentation.

• YouTube Video.
• Listrak Blog Post about the presentation.

At the end of the presentation, you'll see a brief panel discussion with venerable experts Anne Holland (WhichTestWon) and Sucharita Mulpuru (Forrester).

Youth and Catalogs and Brands

By some accounts, there are more than 22,000 catalog companies in the United States.

Yup, you won't hear that stat bantered on Twitter.

What's interesting is who shops these brands.

Many of you are contacting me now, pointing out how a half-dozen brands are using catalogs to attract 18-29 year old customers.

I've never said that catalogs can't work among younger customers.

I repeatedly say that catalog brands that targeted a 25-54 year old audience in 1995 kept targeting the same audience, and are now left with a 40-69 year old audience with an average customer age of 55 years old, +/-.

This is the problem.

If you create a catalog for an 18-29 year old customer, and you combine that with a brand experience for the 18-29 year old customer, then that can work.

If you've followed the Baby Boomer generation for the past two decades, then you have a very different set of decisions to make.  This is the business that I tend to work with, one that is having a very hard time acquiring customers, one that is having a hard time growing, one that can achieve profit optimization by reducing catalogs to customers with a high organic percentage.  This type of catalog brand has not, over the past fifteen years, demonstrated the ability to acquire younger customers.  

This isn't good or bad, it just "is".



Catalogers take a very different approach to target markets than do online pure plays.  I frequently meet with online business leaders.  These folks will craft four online brands, one targeted to older customers, one to younger customers, one to full-price customers, one to discount buyers ... all fulfilled out of the same distribution center, all with different search and e-mail strategies.  Each brand attracts a different audience.

Catalogers try this, but are less successful ... creating different titles, then using similar tactics that result in each title having a similar demographic composition.

We need to strategically think about titles, brands, and demographics.  We need to think less about channels.

Taco Bell and Social Media

By now, you've read the interesting story of how Taco Bell offered Facebook fans a free taco.

A full 3% of fans took advantage of the free offer.

Social media advocates offer excuses for why this didn't work, or blame the brand/victim for failing to implement social media best practices.  Social media critics blast this as a epic failure of the medium.

The reality, of course, is that this isn't a success, and it isn't a failure.

It just is.

There are no shortcuts.  The internet era, the search era, the social era, and the now burgeoning mobile era all promise shortcuts to success.  Just employ a channel, and sales will naturally follow.

In the meantime, we've forgotten how to build a brand.

Honestly, I cannot even believe that I'm saying this.  If only you could have seen me in the 1990s ... I struggled with brand marketers, folks who I perceived wasted other people's money trying to "build a brand".


The importance of creating a reason for a customer to shop with one of our companies seems to have been lost in the channel-based get-rich-quick easy-ROI climate of the past decade.


There has to be a reason why the customer would choose our company over numerous competitors.


Now, if you want to have some fun, ask a member of your Executive team a question today ... ask them to, in one sentence, describe why a customer should buy from your company instead of any of a thousand competitors without using the words "quality", "value", or "service".  If they can do that, quickly, then they have a good feeling for what your "brand" is.


Facebook + Free does not equal Success.

Dear Catalog CEOs: Overworked

Dear Catalog CEOs:

We expect you to be overworked.  If you're working 8-5 every day, somebody is going to pin a random business issue on the fact that you're not fully committed to "the brand".

Now let's take a look at that random marketing director of yours.  You remember this person, he was a promising manager back in the fall of 2007.  Then the economy collapsed, and you decided to collapse three or four departments into one, offering the whole shooting match to this person, promoting the individual to director without an increase in salary.

Today, this person is doing three jobs ... and has 70% of the staff that existed in 2007.


And you want to know why your marketing team fails to answer a single strategic question you have?


It's time to invest in people, once again.  

After all, you happily funnel a half-million dollars to Abacus each year ... have you seen improved performance from Abacus over the past four years?


You can't outsource everything ... when you do that, you outsource intelligence.  Intelligence is your competitive advantage.  These days, so many catalogers outsource intelligence to the vendor community, bankrupting their own brand of profitable ideas.

Change this trend.

Crutchfield Attribution: Re-Visited

Last week's "Crutchfield: An Attribution Nightmare" was one of the three most popular posts of 2011, and for good reason.  The text of the post outlines a shopping experience where attribution becomes challenging, even overwhelming.

I received a lot of feedback, via comments, via email messages, and via Twitter.  You don't get to view a full picture of reader feedback.  I do.  So it's time to share some of the feedback, and my reaction, don't you think?

Question:  Kevin, you clearly doubted your purchase, or you would not have waited a month to place your order.  Nobody waits a month to buy an item without advertising playing a major role in the purchase.

Kevin:  Oh boy.  In the article, and multiple times in the comments, I noted that the only reason the purchase was delayed was to make sure that delivery would coincide with a window in which my builder could install the television.  It's that simple.  If you choose to not believe me, well, then that's your choice.  I'm being 100% honest.

Question:  Kevin, marketers who think customers will find you without advertising will lose market share.  Focus on last click attribution or fractional attribution, ok?

Kevin:  Oh boy.  Have you ever conducted a test?  Hold out catalogs for three months, and hold out e-mail campaigns for three months.  Do sales decrease by 99%?  No.  Anybody who has analyzed a mail/holdout test knows that customers will find you without advertising --- and the stronger your brand is, the more likely the customer is to find you without advertising.  We're attribution professionals, and yet, we fail to execute Attribution 101 --- simple mail/holdout tests.  If your attribution professional fails to recommend mail/holdout tests as the cornerstone of a proper attribution algorithm, go find yourself a new attribution professional.

Question:  Kevin, marketing clearly played a role here, you said so yourself when you decided to search for a lower price.

Kevin:  I purposely placed this comment in here, because quite honestly, this is the only place where one can logically suggest that price comparisons played a role.  If I had found the item for $350 less with comparable shipping, sure, I may have made a different decision.  Why almost nobody talked about this is beyond me.  This is the essential piece of the attribution solution!  I literally told you that nothing influenced my decision, I literally told you that I did execute a search, and yet, the feedback focused on how to parse shopping cart abandonment emails into the attribution routine, or how to parse the gift with purchase into the attribution routine.

Question:  Kevin, if activities correlate with an outcome, it's probably a good idea to participate in the activity that causes a correlation, right?  So if a shopping cart abandonment email is highly correlated with a purchase, we should execute shopping cart abandonment emails, right?

Kevin:  Let's view this from a different angle.  Let's say that you send two email campaigns per week.  By doing this, all purchases are correlated with the activity of sending email campaigns to a customer.  Therefore, all purchases should be allocated to email marketing campaigns, right?  You'd never agree to this if you were a search marketer, a television advertiser, a catalog marketer, or if you had retail stores and you saw that email campaigns took credit for all store purchases.

Question:  How did you know that Crutchfield offered free shipping?

Kevin:  I've been a customer since the 1990s, and I recall purchasing speakers in 2008.  So, obviously, there is some brand loyalty, prior e-commerce activity, and decades-old catalog activity that fueled my knowledge of the brand, coupled with email campaigns over the past three years.  That being said, you don't allocate today's sale to email campaigns mailed three years ago, do you?

I'm not saying I have any answers, other than to execute some mail/holdout tests, and to not discount the impact of search in the purchase process.  I am saying, however, that we, as attribution experts, have clear biases that result in us giving disproportionate credit to the marketing channels that we align with.  And that's the important thing to take away here ... execute some tests, minimize biases, and always remember that a significant portion of purchases (in spite of what some say) happen because of brand loyalty, and not because of marketing activities.

Customer Acquisition

In so many ways, we're suffering from a hangover.

Back in late 2007, we retained maybe 40% of last year's buyers.  And we did a reasonable job of acquiring new customers.


Then the economy collapsed.  Some of us retained 37% of last year's buyers.  Some of us retained 31% of last year's buyers.  Almost all of us took a hatchet to customer acquisition activities.


Today, retention rates have largely recovered.  In many cases, we're between 90% of where we were, to 5% or more above where we were in late 2007.


And, yet, sales are lagging in some cases.


In many ways, we're in the hangover stage, now.  The customers we chose not to acquire in 2008, 2009, and 2010 are not available to pay the bills in 2011.  Be honest, you've run your file forecasts, and you know this to be true.


The economy isn't going to change.  We're stuck in whatever we're in.  So it is time to protect our future.


Go out there today, and find yourself new customers!  Our future depends on it.

Dear Catalog CEOs: 35%

Dear Catalog CEOs:

35%

That's a pretty important number.

If 35% of your direct-channel sales come from the mail/telephone channel, the average age of your customer is probably greater than fifty-five years old.

The rules of time seem to bend if your average customer is over the age of fifty-five.

• Search is less a way to acquire customers, and more a way to identify a forgotten URL.
• E-Mail marketing is seen as being a bit modern.
• Facebook is a way to connect with friends and children, and is less a channel of commerce.
• Customers are passionate about the content in a catalog, customers are likely to hold on to a catalog for more than three days.  Page counts reflect the breadth of your assortment.

Marketing seems to be moving in a couple of different directions.  

There's an under-40 audience.  This is the audience that you read about on Twitter, or in Trade Journals, or you learn about from Bloggers.  There's neat stuff happening there, of course ... there always is.

Then there's the 40-54 year old group, a segment of the population that's caught in-between eras.  This audience will shop online after receiving a catalog, and will give "f-commerce" as shopping via Facebook is called a try.  This demographic is willing to do just about anything.

The 55+ audience is different, willing to try new channels, but largely a creature of habit.  What worked in the past still works with this audience.  Some will have huge opportunities as demographics shift into the sweet spot of the brand.  Some will struggle, as customers age into retirement.

So many of you ask me "what happened" over the past decade?  You tell me you followed the multi-channel formula that should have yielded success, and yet, it did not yield the success promised to us.


In so many ways, a shift in demographics happened to us.  We applied our craft to our audience, and our audience aged as we aged.  In so many ways, our craft cut us off from a younger audience.  That is what happened to us.


You can tell if you cater to a 55+ audience.  Look at the percentage of sales that are sourced over the telephone, or through the mail.  If 35% or more of your sales come from those channels, you cater to a 55+ audience.

Dealing With The Trends

I've shared these trends with you, many times previously.

Outside of a few folks nitpicking the results ("my twenty-four year old daughter just picked up the phone and shopped via a catalog, so you are wrong"), you aren't disagreeing with the thesis.

So, what do you do about it? 

First of all, recognize that the multi-channel mantra of one solution fitting all is not relevant in 2011 ... it might have been relevant in 2001 when all of this stuff was beginning to evolve.

Be honest ... if all of the multi-channel stuff really mattered, we all would have doubled or tripled the size of our multi-channel businesses over the past decade, right?

Now, the cataloger faces challenges.  

Customers age 55+ are still responsive to catalogs, but productivity will inevitably decline as the customer retires from the workforce.


Customers under the age of 45 are harder and harder to acquire via a catalog.  In fact, these customers are largely the reason for declining response rates and declining file sizes ... they are not easily acquired via catalogs.


Your co-ops respond to this by optimizing their lists based on response ... so the customers that you acquire tend to skew to 55+ rural customers.  This creates a self-fulfilling prophesy ... the customers we acquire are increasingly older.


So we have to identify audiences, based on behavior.  We have to reduce catalog mailings to customers who exhibit behaviors similar to the under-45 audience.  In many cases, we can mail more catalogs to customers who exhibit behaviors similar to the over-55 audience.  Yes, more catalogs.


When we reduce mailings, we have a choice.  We can mail fewer catalogs.  Or, we can mail smaller catalogs.  And as postage increases and the cost of paper increases, we'll get to fully explore these topics, in detail, won't we?


Over the next five years, we're going to deal with this constant cycle of "optimization", using the organic percentage to figure out where to make reductions.


Most important, we're going to figure out how the heck we sell merchandise to customers under the age of forty-five.  That may include a catalog, that may include online marketing, or mobile, or social, or Hologram Marketing in 2016, or whatever.  But we're going to figure this out, aren't we?

Crutchfiled: An Attribution Nightmare

Attribution experts express confidence in their ability to parse an order across the activities that caused the order.

Oh boy.

Let me explain an attribution nightmare, courtesy of Crutchfield.

I was about to purchase a new television, a 46 inch model.  I decided to purchase the television from Crutchfield, because I knew I would get free shipping.

I made this decision on or around May 1.

In the first week of May, I received a small page count catalog from Crutchfield.  I looked through the catalog.  My television was not, to my knowledge, featured in the catalog.

In the second week of May, I researched the television I wanted to purchase.  I used Google.  I visited Amazon.  I visited J&R Music World.  I visited Best Buy.  I found the television I wanted to purchase.  I compared prices across brands.  I then visited Crutchfield.  The television I wanted was available.  I placed the item in my shopping cart.

In the third week of May, Crutchfield sent me an e-mail marketing message ... and surprise surprise, the television I wanted was featured in the e-mail marketing message.  Who knew?!  It's almost like Crutchfield scanned my cart and then advertised the item to me.

Late in the third week of May, Crutchfield lowered the price of the television.  Good for me!

Early in the fourth week of May, while reviewing my shopping cart, Crutchfield made me an offer.  They offered to give me a soundbar/subwoofer system, valued at over $300, for free, if I purchased my television.  Wow.  I added the soundbar/subwoofer to my shopping cart.

Midway through the fourth week of May, Crutchfield sent me an abandoned cart e-mail message, reminding me of the items I wanted to purchase.

In the first week of June, I added a mounting bracket to my cart, and I added a separate item not related to the television purchase to my cart.  I placed my order, saving about $50 on the television, obtaining a soundbar/subwoofer valued at over $300 for free, and getting free shipping as per standard marketing practices at Crutchfield.

Ok, attribution experts.  Tell me what caused this purchase?

• What impact did the mailed catalog have, given I already decided to buy the television prior to receiving the catalog, but given that the catalog was mailed a few weeks prior to buying the television (hint --- this is the crux of my stance on the "organic percentage").

• What impact did the first e-mail marketing message have, given that it featured the television I already placed in my shopping cart?

• What impact did the price change on the television have on my purchase?

• What impact did the offer of a free soundbar/subwoofer have on my purchase?

• What impact did the abandoned cart e-mail message have on my purchase?

• What impact did free shipping as a standard offer have on my purchase?

• What impact did Google have on my research?

• What impact did the fact that I already decided to buy this item before the marketing began have on my purchase?

• How would you, the marketing/attribution expert, parse this information without knowledge of the fact that I made up my mind on the purchase before any of the marketing activities were initiated?

Discuss.  Remember, I decided to buy a television from Crutchfield before any of the marketing activities mentioned here were initiated.

Dear Catalog CEOs: The Catalog Is Who We Are

Dear Catalog CEOs:

I hear this quote several times a month, from many of you:

• "I don't think you understand, Kevin.  The catalog is who we are."

This is common, and it is common across disciplines.  The e-mail marketing folks, in spite of maybe 5% of total sales, tell me that without e-mail marketing, all engagement is lost.  Social Media folks tell me that 88% of customers participate in Social Media before making a purchase, so they believe that without Social Media, business doesn't exist.  Mobile folks tell me that we will all be out of business in six months without a world class app.

When you hear the claims of e-mail marketers, or social media marketers, or mobile marketers, you are likely to scoff, right?  We know that the claims are foolish.

Back to our mantra:  "The catalog is who we are."

We're only going to have more channels in the future ... we haven't even addressed the problems that are likely to occur when Hologram Marketing arrives in 2016.

In the future, we need to define ourselves by what we sell, not by the method used to generate the sale.  Increasingly, I see a passion for the method we use to generate sales, while I fail to see passion for what we are selling.

Maybe the customer senses our lack of passion for what we sell.

Against Anything New?

From time to time, I am criticized for being against new trends and technologies.

Oh boy.

This couldn't be farther from the truth.

Allow me to amplify my position.

Here's what I am in favor of:

• Constant strategic experimentation with new technology.
• Innovation consistent with the preferences of your target demographic.
• Innovation in new channels, aligned with the audience that uses new channels.
• Sales increases that come without a significant loss in profitability.
• Consistent profit increases.
• Investment of a percentage of profit in new technology.

Here's what I am not in favor of:

• Vendor hype.
• Trade journal hype.
• Research organization hype.
• Blogger hype.
• Twitter hype.
• Social Media hype.
• Mobile hype.
• Strongly worded opinions not backed up by actual customer data.
• Promoting strategies employed by individuals/artists as being able to scale enough to work at $100,000,000 brands.
• Doing something that is trendy, but doesn't pay the bills.
• Failure to embrace the future.
• Discounts.
• Promotions.
• Lies.
• Using new technology to force old solutions on customers.

So, if DirecTV is going to allow me to watch the Green Bay Packers play on my iPad when I am in Paris, then yes, I am an unabashed advocate of new technology.  You see, in this case, new technology solves a problem for me.


But if a smartphone allows me to scan a QR code to receive a 30% off promotion only if I "like" the brand on Facebook, well, that may not register very high on my tech-o-meter.  This does not solve a new problem.  This is simply a game that manipulates metrics associated with new channels to make the new channels look good.


Ok, time for your thoughts.  Am I biased against new technologies and new channels?  Does my lust for profitability blind me to a horizon filled with possibilities?  Are you for/against new technologies and methodologies?

Retailers and Tablets

You've probably research Catalog Spree, correct?  Click here to take a peek.

One of the mistakes we're likely to see in the next few years is the "put a catalog on a tablet and you've got multi-channel success" mistake.

Again, we have to look at the data.  Customers who love B2C catalogs are largely age 55+.

Customers who love tablet devices are largely 30-39 years old (yes, I understand, 23 year olds love tablets and 71 year olds sometimes love tablets, I get it).  And, yes, I realize that catalogers will say that we are "multichannel", that because we have a website we're not actually catalogers, and then we'll mention that 33 year olds shop the website, so tablet devices could work.  I get it.



Retail brands and catalog brands are, of course, applying "what we know" to tablet devices.  We did this in the late 1990s, remember CD-ROM?  "We will put the catalog on a CD and put the CD in the mail and the customer will love it!"  Remember?


I'm not saying that a catalog on a tablet device can't work, it certainly can, and in many cases, it will work.


I am saying that we aren't thinking through the problem in an adequate manner.


What problem does a tablet device solve?  How do we use the device to solve the problem?  Does our customer demographic even use tablets?


Odds are that placing a catalog on a tablet device doesn't solve a problem faced by a customer.  There are catalogs in print, there's our website, and now, a third way to buy the exact same item.  We need to solve a customer problem.

Multi-Channel Merchandise Productivity

Sometimes we go way too deep into our attribution activities.  We want to tie every sale to every marketing activity.

And when we do that, we lose sight of what matters.

What matters, of course, is whether an item generates profit or not.

I like to simplify things.  Roll your data up on a quarterly basis.  For instance, measure item performance from January - March.  Sum all of your catalog expense across each time the item was featured in a catalog.  Do the same thing for search, for e-mail marketing, for all other online marketing activities.

Run a profit and loss statement for each item, during the quarter.

In this case, item #2 did not generate the sales that item #1 generated, but item #2 did generate more profit.  This is the type of analysis we need, the type of analysis that is sorely missing in our channel-based, attribution-focused, tweeting-simple-kpi's world.

Focus on how merchandise performs across channels.  Spend less time focusing on channels!!  Merchandise can sell without channels.  Channels cannot exist without merchandise.

Dear Catalog CEOs: The Big Shift

Dear Catalog CEOs:

By now, you have read this newsletter from a reputable catalog vendor (click here to read the newsletter).  Yet another traditional catalog vendor is choosing, maybe because of economics, maybe because customer/clients require the shift in focus (how could I possibly know the reason), to move in a different direction, a direction away from catalogs.  I can't judge the tone or the message, I can only say that I've seen the story before ... a vendor demanding that catalogers plow paper into the mail later announces that they are initiating a process to ensure their future over the future of a catalog brand.

Here's the problem.

These vendors told you that the future was all about putting paper in the mail, paper that would cause customers to buy online.  For a decade or more, they made this promise to you ... if you were "multi-channel" the way they told you to be, your business would grow.

By and large, in the B2C world, your business didn't grow.  Is your business 30% larger today than it was in 2001?  If your answer is "yes", it means you only kept up with inflation, and did not truly grow.  A business needed to grow by 60% over the past decade to generate appreciable growth above and beyond inflation that results in an appreciable increase in profit.

In other words, "multi-channel" did not work.  At all.  Sure, there are more channels than ever before, but they don't work in a way congruent with the story told by the vendor community.  The channels sure didn't cause customers to spend more ... if anything, they simply spread out demand across channels.

The thing we never think about is the age of a customer.

It turns out that the age of a customer means an awful lot.

In other words, a large percentage of 65+ year old customers love receiving catalogs.  They thumb through the catalog, then they purchase merchandise over the phone ... not everybody, mind you.  But this is what we observe, over and over and over again.  Go ahead, overlay demographic data on your file, and you'll see this as well.

Your 55-64 year old customer was trained to receive a catalog, then shop online.  This is the "multi-channel" customer the vendor community trained us to harvest.

In other words, catalog marketing isn't dead ... among customers age 55+.  Catalog marketing is what it always has been to this audience.  In fact, run productivity reports among this audience ... you may observe minimal changes in productivity over time.

Then, the model breaks down.

Customers age 45-54 represent a transitional period.  This is where e-mail marketing thrives.  This is where search thrives.  This is the customer cohort most influenced by "Web 1.0", as the pundits say.  This customer was 30-39 when the internet burst onto the stage.  This cohort was weaned on Microsoft, Yahoo!, Google, Netscape, AOL, and Amazon.  Catalogs can work among this cohort ... the key word is "can".

Customers age 35-44 are fundamentally different.  These customers are not likely to pick up a telephone.  This makes this audience much harder to track.  These customers are "multi-touch", they use numerous channels, combined with word-of-mouth, to purchase merchandise.  We have a hard time measuring "what works" across this audience.  The reality is that everything works, and nothing works.  Worse, these customers are not acquired by catalog marketing at the rates we're historically used to seeing.  This audience, by and large, is fueling the customer acquisition problems catalog marketers face.  We pay Abacus $0.06 for access to the name, but the name doesn't respond like a 55-64 year old customer.  Perform a demographic overlay, and look for yourself, you'll observe this trend, too.  The 35-44 year old audience is becoming the front-half of the "mobile generation" ... meaning they have earning power and they embrace technology in ways that customers age 45+ struggle to understand.  In many ways, this is the iPod/iPad generation.  This generation adores free shipping (think Zappos).  This generation bores easily.  This generation has a foot in both old and new, with a skew toward new.

Customers age 18-34 are, again, fundamentally different.  Catalogs have very little relevance here, on a mass scale ... perform the demographic overlay and run your productivity reports, you'll see what I'm talking about.  This is the "Web 2.0" generation ... no, not the 56 year old who tells us about the "social customer", but the 26 year old who actually uses social tools to behave in a fundamentally different way than other customers behave, fusing social and mobile in ways that a 56 year old marketer cannot leverage in a way that allows a business to "scale".  It's this infinite number of micro-channels across a diverse array of potential customers that frustrates traditional marketers (i.e. catalogers).  The cataloger wants to rent 2,000,000 names for $120,000.  This audience seemingly cannot be reached by "one size fits all" message ... unless, of course, that message is delivered though channels embraced by this audience.  By and large, catalogs are not embraced by this audience.

The big shift in the past decade is the abandonment by customers age 18-44 of the catalog business model.  We focused on using the catalog to drive a customer online, and by doing so, we attracted a 45-74 year old audience.  A decade later, we cut the 18-44 year old audience out of our business.

We aren't getting these customers back by working harder.

We can say that the customer "changed", like some in the vendor community suggest.  This is the easy way out, it allows us to, once again, make incorrect predictions about the future, it allows us to purse new technologies tethered to old business models (i.e. catalog on iPads).  This strategy has a low probability of success.

Customers haven't changed.  Demographics changed.  Baby Boomer kids now dominate the 18-29 year old demographic, and are about to enter prime earning years.  Baby Boomers dominate the 45-64 year old demographic, and are heading toward retirement.

In other words, it is my opinion that we need two business models.

We need a catalog business model calibrated to a 55+ audience.  This model will undergo consistent and frequent budget cuts, increased targeting, maximization of the "organic percentage", harvesting of profit, and a general wind-down over the next decade as the 55+ audience becomes a 65+ audience.  We optimize profit, then we exit the business model at some point.

We also need a business model calibrated to an 18-44 year old audience.  This model is not likely to include a traditional catalog strategy, though print can be used from time to time.  This model requires fundamentally different thinking.  It is my opinion that we must invest in this audience, this audience assures our future.

Right now, "The Big Shift" is steamrolling us.  We are essentially addressing the 55+ audience, and wondering why our businesses are eroding?  We must begin investing in the 18-44 year old audience, if we want to remain relevant in 2020, while optimizing profitability from catalog mailings to the 55+ audience.

Groupon SEC Filing Tidbits

By now, you've had an opportunity to thumb through the Groupon SEC Filing (click here to read it).

I want for you to digest this for a moment:

• 2010 Annual Revenue = $713,365,000.
• 2010 Annual Loss = $413,386,000.
• 2011 Q1 Revenue = $644,728,000.
• 2011 Q1 Loss = $113,891,000.
• Customers like Groupon.  Groupon loses money.  Retailers, on average, lose money.  Oh boy.

Now, I'm no Carnac the Magnificent.  But this seems to be headed in one of three directions.

1. Groupon blows up like Amazon.com, becoming a social commerce institution, redefining online and physical retail in the process.
2. Groupon blows up like Pets.com, and is talked about for a decade or more as a symbol of the social commerce bubble.
3. Groupon is blitzed by rampant competition, becoming something that didn't scale, but didn't fail, either (this is my guess).

Other Notes:

• 83,000,000 subscribers to-date, only 28,100,000 Groupons sold ... and only 15,800,000 customers (meaning about 2 sold per customer, weighted down by Spring 2011 blitz).
• Maybe $25 revenue per Groupon sold.  Keep doing the math ... about $50 per customer, to-date.  That's not a lot of cheese, folks.
• Company spent $241,000,000 in marketing in 2010.
• Company spent $179,000,000 in marketing in Q1-2011.  Just think about that one for a moment.  That's called "buying scale".
• If Groupon sends an e-mail every day to a subscriber, and there were a weighted average of 65,000,000 subscribers in Q1-2011, and 28,094,000 Groupons were sold, then the conversion rate of an e-mail campaign is (28,094,000) / (65,000,000 * 90) = 0.48% ... or one in 208 subscribers buy a Groupon.  In other words, that's a rate that is fairly consistent with many e-commerce brands, except that the AOV is, by definition, much lower.
• Gross Profit in Q1-2011 is about 41%.  It was about 39% last year.  That's less than the 50/50 share that is widely publicized.
• Pay attention to the marketing channels used by Groupon:  Search, Social Networking, Portal Ads, E-Mail Marketing, Affiliates, Television, Radio, and Print.  It's amazing how the social commerce mudheads cheerlead their channel, and yet, look at the traditional advertising channels used to drive a prospect to a social commerce brand.  Primary ad channels were Search and Social Networking, by the way.
• In Q1-2011, the company is spending about $8 in marketing cost to generate each Groupon sold.
• Marketing is 32% of revenue in Q1-2011 ... that number is a bit beefy, folks, though not terribly unusual (yes, social commerce experts, I get it, they're "ramping up" in an effort to "scale" prior to going public).
• 46% of revenue from North America.
• Customers are consistently around 20% of the subscriber base.  Keep that metric in mind, and pay close attention to it, going forward.  Subscribers will tap out in the next few years, in all likelihood, so growth must come from an increase in the conversion rate, or from complimentary products.
• If it truly costs $6 to $9 of marketing expense to acquire a customer, then it will take just one Groupon sold, plus/minus, to pay for marketing costs, after accounting for gross margin ... that's not unreasonable, folks.

Profit Models

I get to see a lot of different business models.  Each model has a clear path to profitability.

There are businesses that have high return rates.  These businesses require high levels of customer productivity, in order to generate profit.

Demand		$5,000,000
Net Sales	75.0%	$3,750,000
Gross Margin	55.0%	$2,062,500
Less Marketing Cost		$750,000
Less Pick/Pack/Ship	10.0%	$375,000
Variable Operating Profit		$937,500

Many businesses do not have a returns problem, meaning that customers keep what they purchase.  When that happens, customer productivity doesn't need to be as great in order to generate profit ... in our case, productivity is twenty percent less, and yet, profit is the same.

Demand		$3,905,000
Net Sales	96.0%	$3,748,800
Gross Margin	55.0%	$2,061,840
Less Marketing Cost		$749,760
Less Pick/Pack/Ship	10.0%	$374,880
Variable Operating Profit		$937,200

I work with a lot of businesses that are struggling.  You can tell that the business had to manufacture profit via efficiency ... it becomes obvious when looking at the metrics.  Take a look at this one:

Demand		$2,540,000
Net Sales	90.0%	$2,286,000
Gross Margin	65.0%	$1,485,900
Less Marketing Cost		$457,200
Less Pick/Pack/Ship	4.0%	$91,440
Variable Operating Profit		$937,260

Productivity is really, really low in this case.  However, the business managed to optimize gross margin dollars, and are running an efficient distribution center.  As a result, the business generates a healthy amount of profit on low productivity.


The internet world loves business models that "scale" ... meaning that you generate profit on low margins and high volume.  Here's an example:

Demand		$14,525,000
Net Sales	90.0%	$13,072,500
Gross Margin	15.0%	$1,960,875
Less Marketing Cost		$500,000
Less Pick/Pack/Ship	4.0%	$522,900
Variable Operating Profit		$937,975

This is a very different business model, isn't it?  You need a high level of demand, a high level of marketing productivity, and an efficient expense structure.  Combined, you end up with the same level of profitability that you obtained via the other business models.


The pundits will tell you what kind of business model you have to employ ... hint ... they really like one that "scales", one with low margins and high volume.


The reality is that there are many ways to generate profit.  Chart your own course.