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.

The Most Effective Booklet I've Written, To Date

The pundits are going to tell you how you should do things.

Or you can blaze your own trail.

In 2011, this booklet, Hillstrom's Catalog Marketing PhD, is responsible for nearly half of the projects I've worked on.

Publishers wouldn't touch this ... it's just 40 pages, but it shows you how to make a $100,000,000 business about $1,000,000 of additional profit, on an annual basis.  That's not too shabby, is it?


More than promoting the booklet, I'd like for you to take the lessons of the booklet with you.

• Pundits tell me all of the time that publishing books, and especially self-publishing books, is a worthless, pointless activity that doesn't pay for itself.  Well, it does pay for itself, not in book sales, but in consulting projects.
• Pundits tell you that "print is dead".  Well, more than half of the copies of this book have been sold via print.
• Pundits tell you to never, ever, give away or cheaply sell all of your proprietary methodology.  Wrong!  Any of my competitors could easily implement my ideas.  They choose not to implement them.  Go figure.

These lessons apply to your business, as well.  Everybody is telling you what you must do.  Don't do it!  Chart your own course to the future.  And be willing to share a bit with others, try to help other people!


Hillstrom's Catalog Marketing PhD:

• Print, $7.95 at Amazon.com.
• Kindle, $2.99 at Amazon.com.

Summer Schedule

On the day after Memorial Day, the blogging world changes.

Maybe you'll find this hard to believe, but readers actually find other things to do during the summer months.  It turns out that keeping up-to-date with industry-leading insights is not the top priority of a marketing/analytics expert when it is sunny and 77 degrees outside.

So, as I have done every year, I will reduce article frequency between Memorial Day and Labor Day.

You can expect the articles you've grown to know and love each Monday, Tuesday, and Thursday.  If there are situations warranting updates, I will add posts as appropriate.

It's time for some balance in your life.  Keep up-to-date with my musings, and spend a little more time enjoying the nice weather!

Hillstrom's 2011 Almanac: Still Relevant!

You probably already have your copy of Hillstrom's 2011 Almanac, right?

If you don't, well, here's the good news ... the factoids and comments for the first five months of the year are still relevant!

The Almanac has 365 factoids, comments, tips, or criticisms that can help you navigate the challenges we face in 2011.

Give the Almanac a try!

• Print, $14.95 for 170+ pages of marketing and analytics fun!
• Kindle, just $7.95 for a veritable plethora of digital enjoyment!

Loyalty Programs

Loyalty programs are popular, aren't they?

Too bad that they are often ineffective.

The key to a good loyalty program isn't the loyalty program.  Rather, it is the inherent customer behavior that is tied to the loyalty program.

Loyalty programs have a chance of working under the following conditions:

• An annual repurchase rate of 60% or greater.
• Customer places five or more orders per year.

In these situations, the customer has a need that can be met by a loyalty program.  Maybe the customer wants to feel special.  Maybe I want to sit in Economy Plus on United.  Maybe the customer wants to save 5% or 10% on a purchase.  Maybe I want to pay six cents less on a box of Mac 'n Cheese over the course of one hundred boxes over the course of a year.

In any of the above situations, the benefit is amplified by purchase frequency.

Too often, I witness loyalty programs tied to infrequent customer behavior, as if the reason the customer doesn't buy more often is because there isn't a loyalty program.  Wrong.  If a customer has a 35% annual repurchase rate, and only purchases 1.3 times per year, there's very little incentive for the customer to buy more --- the customer simply doesn't have a need to buy more often.

Loyalty programs have the best chance of working when the customer is already pre-disposed to buy numerous times per year.

The Most Popular Topic of 2011, Based on Your Feedback

Through nearly 1,900 blog posts, we've discussed a lot of topics.

Few topics have generated the interest that the topic of age generated over the past three weeks, both positive, and negative.

Here's the image that got it started:

And here is the image that got people thinking:

You offered a lot of feedback, and a lot of questions.  Let's review your questions:

Question:  Obviously, you work with a set of brands that are not representative of all catalogers, correct?

• Maybe so, maybe not.  Catalogers with a retail presence have a different set of dynamics, as different demographic profiles enter stores.  I'm confident, based on what so many of you have told me, that this is a problem for somewhere between 65% and 85% of catalog brands.

Question:  You can fix this problem with social media and a strong mobile or tablet presence, correct?  Just modernize!

• Oh boy.  Sometimes, we just don't think about what we're recommending.  Something like 5% of the population owns a tablet.  Only 1 in 3 Americans own a smartphone.  And the folks who own tables or smartphones are not currently in the catalog "wheelhouse", if you will.  In other words, it isn't easy for a catalog brand to attract a scalable audience of 33 year old tablet-toting social media experts.  Conversely, a 59 year old catalog shopper over the telephone isn't likely to squint through the process of ordering via a 2" smartphone screen.
• In other words, I don't think catalog brands fix this problem with social media and a strong mobile or tablet presence.  That doesn't mean the cataloger doesn't try things, it just means that there is an "audience disconnect" that cannot be easily resolved.

Question:  I know of a company that has a 32 year old customer, and they have a vibrant catalog business.  So is it possible, Kevin, that you're dealing with a biased sample?

• Yes, it is possible.
• Now, is it also possible that there are seven catalogers with 55-65 year old customers for every one cataloger with a 32 year old customer?
• We all suffer from sample bias.  We see what we want to see.  I am confident that there are more catalogers with the 55-65 year old customer problem than there are catalogers with a 32 year old customer base.

Question:  Kevin, this isn't a problem.  It's simply the audience that is attracted to a catalog brand.  Why not go out and acquire as many 55-65 year old customers as possible?  I think this is a good thing.

• It can be a good thing.  If the average age of your customer has been 59 years old for the past decade, you are about to have the biggest cohort of 59 year-olds move through your sweet spot in history.  Start printing money!
• But if your customer was 49 years old in 1998, and is 59 years old today, then you have a serious problem brewing.  Look at the productivity in the second image ... productivity declines with age, as your customer moves into the 60-69 age range, productivity falls off of a cliff.
• You keep telling me that customer acquisition is getting harder and harder ... that only makes sense if you end up attracting a 55-64 year old audience that spends less than other demographic cohorts, while the 35-54 year old demographic tunes out catalogs, right?

Question:  You're always talking about B2C.  This isn't a problem in B2B, is it?

• I'll grant you this ... B2B issues are different than B2C issues.  I'd rather have a relationship with a 62 year old decision maker in B2B than a 62 year old customer in B2C, no doubt.

Question:  How do I create a catalog that fixes this problem?  In other words, how do I create a catalog that speaks to a 29 year old customer?

• I get this question a lot.
• I would not try new creative that speaks to a 29 year old customer, then send it to a 62 year old customer ... I've witnessed that one too much over the past twenty years to care to mention!
• I'm not convinced that the majority of us can create a catalog that resonates with a younger customer.  Some of us can, you are always quick to point those brands out to me, but by and large, it's hard work folks, it's hard work!

Question:  Let me restate my question.  Should I extend my brand to a younger audience?

• Your brand and your marketing attract an audience.
• It is my opinion that if you want to attract a younger audience, you create a brand specifically for a younger audience.
• It is my opinion that catalogers, through the style of marketing catalogers practice, attract an older audience.  This isn't fixed by going younger, you simply alienate the older audience and you struggle to attract the younger audience.

Question:  Is this my fault, or a simple aging of the population?

• According to the US Census Bureau, the average age of a person in the United States is 35-39 years old.
• This means that the average age of a consumer is somewhere between 40-49 years old.
• In many ways, this is our fault.

Question:  Why is this my fault?

• By and large, we bought into a concept called "multichannel".  This concept sounded seductive, and given the landscape of the world in 2000-2004, it made sense.  We were told to keep mailing catalogs to customers, because catalogs caused customers to shop on the internet.
• In the past five years, the world changed.
• Today, we have a disconnect, a disconnect that is our fault.
• Customers age 60+ largely respond to catalogs as they always have.
• Customers age 50-59 are willing to shop online after receiving a catalog (these customers were 40-49 when we were told we must be "multichannel" ... so that makes sense).
• Customers age 40-49 tend to go in a lot of different directions ... shopping online after receiving catalogs, or being willing to enter the magical world of social commerce, or using Google as a Shopping Sherpa, or buying after receiving a 20% off plus free shipping promo via e-mail marketing.
• Customers under age 40 do a lot of different things as well, but the catalog-inspired aspect of shopping drops off significantly as the customer ages.
• Co-Ops, who in many cases contribute 50% or more of the new names to catalog brands, have unconsciously (or consciously) targeted 55+ rural customers.  These customers are the easiest to track, because they shop via keycodes over the telephone.  Our dependence on co-ops provides a feedback loop that results in a skew in our customer base to 55+ rural shoppers, who demand creative and merchandise that works among 55+ rural shoppers.
• We never addressed the "free shipping problem".  Younger customers have addressed this problem, they found Amazon and Zappos and Social Commerce brands that offer free shipping.  Our way of addressing this was to integrate all channels, charging $14.95 for shipping and handling, alienating a younger audience.
• Take a look at catalog creative.  A professional recently told me that catalog creative looks like something that "old people" would like.  Just look at your creative.  Which audience do you think your creative will attract?

Question:  I don't append age data.  How do I know if my customer base has aged significantly?

• If more than 2% of your direct-to-consumer orders come in via the mail, with a check inside the order form, your customer base has aged.
• If more than 40% of your direct-to-consumer orders are taken over the telephone, your customer base has aged.
• There are, obviously, exceptions to these guidelines.

Question:  We're multichannel, so this doesn't impact us, right?

• The vendor community sold us a bill of goods on this multichannel thing.
• By tethering our online experience to the catalog, we limited our ability to be relevant to younger customers.
• By limiting our ability to be relevant to younger customers, we found that older customers responded to our marketing activities.
• This caused the co-ops to optimize their models around older customers who responded to catalog-tethered online activities.
• As a result, we acquired older customers at a disproportionately fast rate.
• As our customer base aged, we calibrated our merchandise and creative to appeal to this older audience.
• Our merchandise and creative did not appeal to younger customers as much.
• This feedback loop keeps on self-reinforcing upon itself.
• Get the picture?  This is what multichannel marketing did to us.  We just couldn't have known this in 2001 when we went down the multichannel path with vim and vigor.

Question:  But social media and mobile don't work, so what do we do?

• Social Media and Mobile are not likely to work among a 55-64 year old customer.
• So, we have to make a decision.  Here's my opinion:  We ride the Baby Boomer generation into the sunset with our catalog marketing activities.  We craft new brands that resonate with a younger audience, using the profit thrown off by the catalog business to fuel the startup.  Or, just milk the profit generated by a 55-64 year old customer, until that audience is no longer productive, there's nothing wrong with that.
• Honestly, I don't think we solve this problem by trying to calibrate our brands to be attractive to younger customers.  We either ride one audience into the future, or we attempt a new brand focused on younger customers.
• This is simply my opinion.  Your mileage will vary.

Time for your thoughts.  As I mentioned, the two charts at the top of this post have stimulated more conversation than almost any other topic I've written about.  How would you address this issue?  Do you believe this isn't an issue?  Tell us what you think.