October 23, 2014

Groupon Case Study

I have real world numbers from a GroupOn campaign to share with the world! This in combination with my very sexy equation from a previous post and my newly added, downloadable GroupOn Excel calculator allows us to get all kinds of insight.

The businesses I know that have participated in these campaigns have seemed pretty happy with the results, but none of them tracked their numbers. That meant I had to make some assumptions, but no longer.

Case Study

Here are the metrics from a real GroupOn campaign. I would expect that results will vary from business to businesss and especially between different industries. If you need to better understand these numbers, read the previous post.

  • Business Type: Very Casual Dining
  • Business Age: Fairly new business
  • GroupOn offer: $20 certificate for $10
  • GroupOn’s commission: 50%
  • Total Sold: 1,225
  • Redemption Rate: 68% (32% were never cashed in)
  • Average Ticket Amount (with certificate use): $20 (people spent pretty close to the face value amount)
  • Estimated number of new, recurring customers: 75%. This is expressed as a % of the total number of certificates sold. These are people that will come back even without a certificate.
  • Estimated Long term, recurring customer income: $20. Without a certificate, the average ticket is about $10. This means that it is assumed the new, recurring customers mentioned are expected to come in about 4 times over the “long term”
  • Normal Margin on sales: I did a loose calculation because I knew the net result… 230% margin or COGS is about 30% ticket price.
  • Brand Value: $0. This is such a fuzzy number, that I left it as zero.

The real world result is that this business owner was paid $6,000 with costs around $5,000. According to the super-awesome spreadsheet – using the numbers above – the analysis shows:

  • Campaign Profit: $1,076.52
  • Total Long Term Profit: $13,883.33
  • ROI over the “Long Term”: 130.77%

Not too shabby.

Footnotes

There are some notes worth mentioning:

  • The business was paid by GroupOn in three, equal payments over 1-2 months. They were happy with this.
  • Purchases with certificates with Tickets less than $20 don’t get change. Typically, they would order something else to get over the $20 level.
  • Redemption volume was heavy in the first and last month, the numbers were:
    • Month 1 – 225
    • Month 2 – 150
    • Month 3 – 100
    • Month 4 – 50
    • Month 5 – 50
    • Month 6 – 250
  • The number of new, recurring customers is very difficult to determine and is basically a gut-check. Unfortunately, it is largely responsible for the determination of the Long Term Profit… so be careful how you use it.
  • I assumed “Long Term” meant over the course of a year when determining some of the more “magical” numbers. You can assume whatever you want, but make sure you understand what it all means.
  • The calculator is intended to be functional, not fancy. It’s pretty basic, but still very, very sexy.
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Comments

  1. Eddie Chow says:

    Hi Marcel,

    Great job on the case study! This is actually exactly what I was looking for in order to compare the pros and cons of marketing with a group buying website like groupon or ibuyubuy.com in Asia. I feel that some aspects of this type of ad medium are somewhat flawed and presents the advertiser with results that seem better than they actually are.

    What are the advertisers top goals in advertising with a site like this? In the case study it seems to be new patrons, they want new patrons to try their place and they will retain 75% of them as longterm customers ( That figure seems a bit high to me, the 40% seems a bit more realistic and would take the ROI down to 97%).

    How much is the advertiser actually paying for this benefit? Here is where things start getting a bit confusing, once you throw in the initial cash flow earned the very next day, it all seems great. Like your not spending ANY money on advertising, but you are…. in the long term.

    What is the potential income lost IF you could find another advertising medium that could produce comparable benefits of new patrons or benefits over time without the heavy discounts and commissions up (75%) front that don’t seem like a loss because you get CASH FLOW for products or services sold for less than your actual COGS ? (sorry for the run on)

    Thats a big IF in there, I know. It seems to me if the advertiser in the example could produce similar results for the cost of Investment in the example ($10,616) , the ROI could be much higher while offsetting the potential harm to brand value. I know most small or even medium sized businesses do not have that kind of capital to invest in a campaign and that is why this type of model works for them. ( $10,606/12=$884/mo) But, lets just say there was a platform that could deliver….. Would the potential income lost be around the $13,000 range? Or is there another way to think about this?

    Anyways, just some thoughts from the advertisers point of view. Thanks again!

    • Marcel Crudele says:

      Wow! I’m impressed you actually went through all the details. Mostly I wrote this post as a cathartic exercise for me because I’m a dork.

      My impression is that the driving force behind using a solution like GroupOn is to get new patrons in the door and hope they return without a certificate. The perfect candidate – in my opinion – would be a new business that isn’t worried about damage to their brand – a restaurant with average ticket item below $10, a neighborhood retail store, etc.. While I think that is the ideal participant, it seems like more mature businesses are pretty happy with their GroupOn experiences.

      On the topic of brand damage associated with offering a deep discount, I don’t know how real this damage is. I’ve been told by high-end restaurateurs that it is a very real problem although I don’t know if there are any hard numbers to prove it. I like numbers whereas I think this concern is more of a gut instinct based on experience, but I added a factor for it for robustness sake. It’s not my place to question veterans of industries ;) Also, it is worth noting that my gut says if there is brand damage for a high-end business, there is a brand benefit for lower cost businesses… which is why the Brand value can be set to a positive or negative number.

      The new patron percentage of 75% is the number that was given to me by the business that did the GroupOn Campaign. Again, it’s not my place to question these numbers, I just crunch them. Some of the factors in the equation are valid but very difficult to measure. If you know the exact numbers, this is a decent model, but it’s likely you are going to have to guess on a few, specifically New Patron Percentage, New Patron Long Time Income and Brand Value. New Patron Percentage is very fuzzy – someone bought a certificate and brought a friend who told their cousin who brought in his niece, who …

      Onto the question of opportunity cost or doing GroupOn versus another form of advertising (I think I’m setting myself up for a sales pitch for another advertising solution), I think it comes down to Show Me The Money. GroupOn’s appeal is this: No money up front (actually the business GETS money up front) and measurable performance. As long as a business knows its Cost of Goods (which they should), there is an unquestionable way to measure success. Ignoring the fuzzy new patron factor, the business in the Case Study knows – without a doubt – that they had a profit of $1,076.52. They can play with the new patron number, but even lowering it to 10% results in an additional $2,784.09 profit because of the campaign.

      Also, the question of opportunity cost is muddy because the campaign is floated with money up front. The cost that you calculated per month ($884) is proportional to the campaign’s success. If the campaign isn’t successful, this number drops, if it is successful, the monthly cost increases, but is tied to associated revenue, so simply looking at GOGS isn’t as clear cut as it may seem. This, of course, leads to all kinds of test scenarios – 100% redemption with 0% new patrons, 10% redemption with 450% new patrons, ….

      If I understand your hypothetical scenario, it seems like you are proposing a solution that would focus on delivering the same volume of new patrons for a certain monthly fee without offering deeply discounted certificates. To compare apples to apples, you would only focus on the Lifelong numbers of the model, so a cost of $5,568.18 in expectation of new income of $18,375. That is about $464/month ($5,568.18/12) cost to get the same, long term patron benefit (Note: this would lose the $1,076.52 profit recognized from the GroupOn certificate campaign).

      The biggest concern I would have about this type of solution is how difficult it is to prove that it drove NEW patrons to the business. How do you not count people that are already patrons and track the chain reaction of word of mouth adoption? The GroupOn Case Study made an unquestionable profit ($1,076.52) and the new customers are just gravy on top.

  2. Eddie Chow says:

    Hi Marcel,

    Thanks for the response! Regarding the hypothetical scenario; I wanted to produce an even comparison with the assumption that the proposed solution had ability to track new patrons and show the potential long term results of both models. So, based on the case study I extracted the following from the Groupon model:
    1) Volume of sales: 1225 groupons (redeemed 825 over 6 months)
    2) Cost of the initial campaign: $5048.48 (not measuring long term results since the % recurring customers, long term value, and long term profit should be the same if same # of new customers are driven in the same timeframe).
    3) Advertiser was offering: 75% off of retail price (50% discount to the customer, 25% advertising cost to Groupon)
    4) Revenue Received up front: $6125 cash flow (at the time of sales of 1225 Groupons, assuming $24,500 of redeemable services.)
    4) Profit: $1,076.52. (before long term results, $13,880 after)
    I think these are all true based on the actual results generated right?

    Or

    Alternative two would be If there was no way to measure new patrons, then like you said, the focus would shift to Lifelong numbers and the new income $18,375. This one would be a lot harder for any alternative advertising campaign to compete with since at this point the customers are already recurring without any need of promotions or additional advertising due to the original Groupon promotion. The only cost associated with these customers retained from the Groupon campaign is the COGS, which also apply to the new advertising campaign.

    In any case, I didn’t want to take up too much of your time, but this is such a great analysis especially with the handy formula. I just think this is a fun exercise…here are some conclusions after playing around with it.

    1) Advertiser bottom line – If its New Patrons then I think that group buying sites and other site that can drive measurable amounts of customers into a business are worthwhile choices for advertisers. (with consideration of the opportunity cost or up front marketing cost). The bottom line is to get the customer in, and then it’s really all up to the business to retain them as returning customers in order to offset the costs associated with the campaign.
    BUT, determining whether these are new or existing patrons will be difficult to measure. I think that a site can usually only prove that they drove customers into the business, not necessarily new customers. There are exceptions such as brand new businesses, failing businesses which had no customers to begin with, or businesses that retain a customer contact list so that they can compare it with the list generated by the advertising publisher. I feel like existing businesses that have a steady or even low volume customer base wouldn’t really be able to track whether the acquired target was really a new customer or current customer enjoying a discount without actually surveying them to find out.

    I think I would be a good example of this… the vouchers I actually purchased from a similar site were for Outback Steakhouse and a local movie theater, both of which I am already a customer. Also, shame on me, but I bought multiple vouchers because I know I am going to go more than once in the future. They may have me on a list as a new customer, but I am actually I returning customer just enjoying some really nice discounts. But either way, the goal is met. I haven’t been to Outback in about six months and it got me back in, so I guess that’s what matters right? (Plus I may bring someone new.)

    2) Target market – The audience of Groupon is defined as savvy young urbanites, who are hip, active with money to spend. They are mainly college educated single females who go out 2 or more time a week. They are the hardest market to reach and are willing to try new things.

    One thing worth mentioning is the reason a lot of people (mainly women) go to these sites, good old fashioned bargain hunting. A lot of the members and subscribers are looking for deep discounts, and are willing to try new things that they feel are worth it if they can enjoy it for a low low price. Is it more difficult to convert these kinds of consumers if they are not actually within your target demographic or income range? I agree with you when you say that the ideal candidate is a new business with a fairly average ticket item. They would probably have the easiest time converting new customers into recurring ones if the customer was happy with the service.

    3) ROI- I noticed in the calculator for the case study, the New patron life long income is T*N*L without calculating the R(% who actually redeemed). In their case, 75% of 1225 Groupon certificates sold would attract 920 recurring customers, but if only 68% of 1225 Groupon purchases actually came in to redeem the certificates that should bring the actual conversion to 625 recurring customers and would take the ROI down to 75%. ( Or is the R already taken into account and offset by the potential of multi party patrons?)

    4) This is how I see what happened before the results were able to be quantified.
    a. Advertising cost up front: $0
    b. Recurring Advertising cost: $0
    c. Revenue/cash flow up front: $6125 (all awesome!)
    d. Redeemable Services owed: -$24,500 (Yikes! – whether redeemed is another question)
    e. COGS on Redeemable Services owed: $7350 (which could potentially get you a lose of $1225)
    f. Potential customer capture: 1225 (nice! + or – depending on redemption rate, multi purchases, and if the patrons come in alone or with a party. )

    5) After the results
    a. Profit – $1076.50 (nice)
    b. New patron % – 75% based on owner estimate (919 without taking into account how many tickets were not redeemed)
    c. Now patron long term income – if based on 75% of 1225 = 919 patrons then 68% of that = 625 patrons then $20 each would be $12,500 (also without considering multiple buys, due to low ticket price or patrons bringing a friend or two)
    d. ROI – based on that figure would be around 75% (not so good…)
    e. Actual results are so hard to really quantify…This totally falls within your notes stating : “The number of new, recurring customers is very difficult to determine and is basically a gut-check. Unfortunately, it is largely responsible for the determination of the Long Term Profit… so be careful how you use it.”

    Just for the record, I am not knocking the business model ( I think its actually awesome) or that this type of advertising works. The numbers and testimonials obviously show the success and willingness of advertisers to use again. By working through this, I just wanted to better understand the decision making process of the advertisers based on how this particular advertising model is presented to them and what the advertiser is actually measuring as the actual result of the campaign (new customers, rev, or profit). Is it in line with their initial goal or do they have a clear idea of what their goal is? New Patrons, Revenue, Profit or all three? If its just new patrons, what if they don’t generate enough revenue in the long run to make a true profit because you gave away too much in the beginning? Is there a better way to achieve the goal? Does the cash flow/revenue in front somewhat hide what they may be really paying over the long haul to get potentially “new” patrons ? Can’t you just offer a buy one get three free deal for a day or two to produce the same results, (the math works)? Ok that last one was kind of out there. Seeing your blog and analysis has really helped me to understand more from all sides, Thanks!

  3. Mike says:

    To Eddie Chow,

    I think you forgot to change the COGS for lifelong purchase cost. That would bump up ROI back up to 110%.

    There are many 1st level goals for advertising, from brand awareness/recognition, to promotions, to acquiring new customers. The end goal ofcourse is to earn more money.

    For young, service heavy businesses, group buying is excellent because it gives us small businesses a chance to get our name out there, get customers in the door, and worry about paying later. And if you are good at upselling then you can really add value to what you paid the group buying site that you used.

    • Marcel Crudele says:

      Good comment Mike. Your right that a drop in the long term customer percentage would be mitigated by reduced COGS, however, the spreadsheet takes that into account so I still get a 98% ROI assuming a reduction of conversion to 40%.

      You do point out 2 very good factors that group buying helps. Being a newer business would seemingly reap huge gains from the promotional side and being on the service side improves that even more, especially if overhead is a fixed cost and you have the bandwidth to handle the new flow of customers. I realize that any accountant would cringe at this loose definition of COGS, but if you are a strict service provider – like an accountant – you should tie in hourly service cost to the COGS variable in the calculation. Again, this becomes more complicated depending on if you are paying salaries (fixed cost) and what your percent utilization is at. If you can respond to the increased demand with salaried employees without adding new headcount, it is fantastic, otherwise, you need to consider the change to labor cost.

      The other point you bring up about upselling is also well-taken. In the case study, the price point was low, so there wasn’t any benefit recognized from exceeding the “Offer Amount” of the certificates. IF your average ticket does exceed the special offer, you definitely get the benefit of your normal margins (the spreadsheet takes that into account as well).

      Thanks for the feedback!

  4. Christopher says:

    Hi,

    Thanks for all of this. I have been considering doing a Groupon offer for my business and I think my business could offer a different perspective on some of this and maybe you could tell me what you think.

    I own a popular niche video store. We were going to limit the Groupon offer to new customers only, which can be tracked due to the fact that people have to get a membership to rent. So we know if they’re new or not (and hopefully the customer remembers as well). The idea would be that they could also use their Groupon dollar amount over a period of time, as we would put it on their customer account. Technically they could come in 10 times on a $20 credit. Then maybe they would be a regular.

    The problem then is irritating all of our old, loyal customers who are not eligible for the offer. I would love to include them, but I believe we would be totally overrun and while they might be happy, it wouldn’t achieve our goal of getting new customers. I also envision them saying “when’s your next Groupon”.

    I’ll take whoever I can get but I’m also uncertain about the Groupon demographic being the type of people we would be able to retain long term.

    I’ve put my Groupon contact through the ringer for months but right now I am at a stalemate.

    Thanks for any input.

    • Marcel Crudele says:

      That’s a tough one. One issue is that, assuming Groupon has no problem with you limiting this to new members, they are unlikely to enforce it on their end (it would be hard to enforce). So even if they state it clearly up front, what happens when one of your existing customers spends $10 for the $20 certificate and can’t redeem it? Even though it was stated upfront, they may not read the details because it is not a standard restriction. Although you would be right, explaining that to the dissatisfied customer could lead to the loss of the customer.

      Then there is the issue of limited inventory. A restaurant can staff up and order extra food to deal with an expected increase of business… plus they can enforce reservations to control the flood. For a video store, once a SKU is out, it is out. One consideration would be to make sure you have extra copies of the videos most likely to be in demand (not sure what niche you serve, but maybe new release Indie films?). That would increase preparation cost that would help mitigate customer dissatisfaction and might be reasonable, but should be included in your ROI determination.

      What city is your business located in? Another option might be something like ScoutMob, although I haven’t had time to build a calculator for them.

      I don’t run a video store so I can’t provide any great insight, but I would say your risk is annoying existing customers that can’t use the promotion (maybe after accidentally buying it) and running out of inventory so people are frustrated with the selection. The upside is possibly a phenomenal growth of customers. Will Groupon let you talk to other video stores that have used the promotion to see what they thought? That might be the best way to gauge the success.

  5. Ron says:

    Marcel,

    I found your case study at a most opportune time as I am getting ready to launch a national roll-out using the local Groupon model. Although thoroughly dorky, the spreadsheet and algorithms are close to what every business owner and manager needs to consider prior to working with this promotional vehicle.

    As I roll out my business model I will keep you informed. I would enjoy your feedback.

    Thanks for your good efforts!

    Ron

  6. Ron says:

    Marcel,

    Have you worked up a NPV spreadsheet?

    Be well,

    Ron

    • mcrudele says:

      I have not done a NPV… I thought the ROI was kind of overwhelming and didn’t want to over do it. Since so many of the variables are “soft” numbers, it was mostly just a way to apply some kind of process to help establish a gut check of value.

  7. Lauren says:

    I was talking to a bakery owner few days ago that ran a GroupOn promotion (along with a few other Daily Deals). Her numbers were similar to your case study, however she said one big problem was that many of the coupon users were already regular customers. She also mentioned that most of the local bakeries were trying GroupOn or similar which made it difficult to retain customers. She was not sure how many new GroupOn customers returned, but estimated less than 25%. It is impossible to track what the retention rate is, and yet this is what the whole value proposition depends on. I recently read a HBR article on this topic that may interest you: http://blogs.hbr.org/hbsfaculty/2011/01/to-groupon-or-not-to-groupon-n.html

    Like many others programmers, I have been talking to business owners with hopes of creating a better promotional mousetrap. If you have any thoughts for your dream promotions platform, I would love to hear.

    Thanks,
    Lauren

    • mcrudele says:

      Very good points. I buy these discounts for places I already know about so I’m not really a new customer to them. For the few I try for the first time because of a deal, I might return to half of them. It’s tough to measure if these efforts are effective or not.

      The counter argument is, consider how much you would spend on a print or radio ad and compare that to the cost of a Groupon campaign where you KNOW the promotion resulted in someone showing up, even if you can’t tell if they are a new customer.

      The counter-counter argument is, there are lots of ways to reach target audiences nowadays for free (social networking/media, community sites, etc), the challenge is being great at using those channels without spending 20 hours a day online.

      My personal opinion is that the issue is inefficiency of knowledge exchange. Organizations want to connect to patrons (obviously) and patrons are looking for organizations to be passionate about – solve that problem and I think there would be lots of happy people and you would be a Community Cultivator ;)

      I gots me some ideas, but am going to keep them under wraps for now…. mwah! :)

  8. Darcy Moen says:

    Marcel,

    I used to own a dry cleaning store and have done a lot of marketing and promotions over the years. I’m going to ask a question that might throw a wrench into your COGS and ROI thinking.

    In the dry cleaning industry (and as in most restaurants and other service businesses) some of your costs are fixed, (such as rent) and some of your costs are variable (such as labor). If you have 1,000 garments brought in for cleaning, and it costs you $1.000 to process the garments, one can determine COGS fairly easily, it’s $1.00 per garment.

    One could experience an increase of garments to 1,100, and the cost of rent stays the same, but labor may rise somewhat. Over all, in the dry cleaning business (and I think in the restaurant business), once you hit break even (covered your FIXED costs and your VARIABLE costs), your marginal net profit varies because your business experiences certain efficiencies as work may be processed faster. I’ve experienced situations where one has processed 1,400 garments in a week and NOT seen an increase in the cost of labor (work was obviously expanding to fit time allotted).

    So, once one has hit break even, the costs do not rise at the same rate as sales.

    If one had 1,000 garments come in at $1.00 per garment, and it cost 1,000 dollars to process that work, you break even. If one then had 1,100 pieces come in with 1,000 garments at full regular price of $1.00 each, and an ADDITIONAL 100 garments came in on a promotional offering at .90 cents each, and your costs come in at $1,010, you make a profit of $80 (80 cents marginal net profit per garment).

    Basically, the more garments you can bring in OVER and ABOVE the break even point, the MORE PROFIT you will make. The marginal net profit on those extra garments (and if a restaurant, the more bums in seats eating meals) ABOVE and BEYOND costs are rather generous. Those extra pieces (and meals) have some pretty big dollars that fall to one’s bottom line.

    So, when I look at how you are determining ROI, I see you are factoring COGS as a constant value (per plate, per garment). I don’t see any accounting for the variable profit margins on garments over and above the break even point that have fat profit margins. Therefore, the more I look at your ROI, the more I question its accuracy.

    Please discuss. Thank you,

    • mcrudele says:

      Absolutely! Great points all. You’re right that I assume the main cost is COGS, but one restaurant pointed out they also wanted to take into account increased labor cost that scaled with additional volume. For them … they could use COGS + Labor percent in place of COGS and the calculator will take that into account. Your point of non-linear cost scaling beyond certain break even points is also well taken. Of course, then you would have to take into account discrete cost bumps. For example, it might take the same variable labor cost to process 1,000 garments as it does for 1,400, but if you reach 1,500 there is a cost bump for adding a new person for at least 20 hrs/wk and a certain cost (just as an example).

      I’ve found that many business owners didn’t have a clue how to evaluate one of these deals and my goal was to give them a starting point that wasn’t overly complicated… kind of like ROI 101. It gives you an idea of how the math works so you are least better informed. If readers ready for ROI 201 read through these comments, they might come up with how to better customize the starting point to their specific business.

      Thanks a lot for the comment!

      • Darcy Moen says:

        Your points are bang on! Yes, COGS + Labor percentage would work. And, your point of cost bumping by adding an extra person is EXACTLY the point myself, some clients, and a lot of us dry cleaners in the industry are discussing.

        As you state, as one of those ready for ROI 201, I’m trying to construct my own calculator to take into account either method. I, was hoping to open a dialogue with you via email to discuss/compare. If you can, great, if not, I understand, and no hard feelings. Your posts have been MOST informative. Thank you for your efforts you’ve put into this.

Trackbacks

  1. GroupOn ROI says:

    [...] UPDATE 7/16/2010 – I’ve also added a new post with real world numbers with a Groupon Case Study. [...]

  2. [...] One more important thing is that, instead of attracting new customers with the deals through Groupon, some of the deals might actually be used by existing customers instead. Advertising with discounts through Groupon might not always have the intended effects of getting new customers! And I’m telling you Groupon is not cheap they take 50% commission ! [...]

  3. [...] Note: All of these numbers are based on the statements in the linked articles.  I have no idea if they’re accurate.*According to this extremely detailed post and this case study. [...]

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