Exploring how local organizations connect to their real world patrons
Someone responded to one of my previous posts about GroupOn ROI to share a story of bad experiences with participating in a campaign. To that point, I had never heard anyone complain about their experience so I want to share the link to balance the story out. Hope this helps!
http://www.spaboomblog.com/2010/dont-sell-your-soul-to-the-discount-devil
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.
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.
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:
Not too shabby.
There are some notes worth mentioning:
UPDATE 7/16/10: I’ve added an Excel calculator to make it easier to determine how GroupOn might work for you. It’s very simple, but uses all the logic described in this post.
UPDATE 7/16/2010 – I’ve also added a new post with real world numbers with a Groupon Case Study.
How do you know if GroupOn is right for you? I like numbers quite a bit and became obsessed with this, so I’ve put together an ROI calculation to try to answer this question. This post includes the calculation I came up with towards the beginning and the detailed breakdown of what everything means for any masochists that like that sort of thing.
At a very high level, the GroupOn pitch seems questionable. They want you to sell a certificate through GroupOn (say $30) for a deep discount (say $15) and they are going to take a percent of the income (say 50% or $7.50). In this example, you are getting 25% of what you would normally. Why would anyone do this?
There is one additional cost to also consider, though.
So should you do it? Let’s ignore the immediate Cash Flow benefit and make some assumptions.
Here it is… the total long term profit you can expect from this promotion is:
Total initial income … + … Loss from certificate redemption … + … New patron Benefit … + … Brand Damage
T*(S-G*S) …. + …. R*T*[(A-O)-(A-O)/(1+M) - O/(1+M)] … + … T*N*(L-L/(1+M) … + … (V-V/(1+M)) = PROFIT
or ….
500 * ($15 – .5*$15) … + … .8*500*[($50-$30)-($50-$30)/(1+.5)] … + … 500*.4*($150-$150/(1+.5) … + … (-$4,500-(-$4,500)/(1+.5)) = $3,750 … – … $5,332 … + … $10,000 … – … $1,500 = $6,918
For the purists out there, this is not technically ROI, which is defined as (gain from investment – cost of investment) / (cost of investment). Fine.
The cost of investment is:
What it costs you to redeem certificates … + … what it costs you to fulfill purchases beyond the limits of the offering … + … your cost of fulfilling lifelong purchases … + … brand value
R*T*(O/1+M) … + … R*T*(A-O)/(1+M) … + … T*N*(L/(1+M) … + … V
or …
.8*500*($30/(1+.5) … + … .8*500*($50-$30)/(1+.5) … + … 500*.4*($150/(1+.5)) … + … $4,500 = $37,833
NOTE: You should move the brand value to Gain calculation if you think it will be positive.
The gain can be determined as:
Initial revenue from offer … + …. income from sells beyond the limits of the offering … + … income from life long purchases
T*(S-G*S) … + … R*T*(A-O) … + … T*N*L
or …
500*($15-.5*$15) … + … + .8*500*($50-$30) … + … 500*.4*$150 = $41,750
ROI = ($41,750 – $37,833)/($37,833) = 10.35%
KEEP IN MIND THAT THIS ROI IS FOR THE PERIOD YOUR CONSIDERING FOR BRAND VALUE AND PATRON LIFETIME (if you’ve entered a value assuming 1 year, 2 years, 3 years, etc, this is the ROI for that period).
Also keep in mind that these are hypothetical numbers. Your numbers will most likely be different.
How much money do you receive from GroupOn the day after the sell? This is the total number of certificates sold minus GroupOn’s cut, or:
T*(S-G*S) = 500 * ($15 – $15*.5) = $3,750
For every certificate redeemed, you are going to have to give away a certain amount of inventory, service, etc (O=$30), but the cost to you will be less than the certificate amount because of your margin:
O/(1+M) => $30/(1.5)=> $20 (what it costs you to redeem a certificate)
You also will be able to make a profit on the average ticket amount above the offer amount, or the total income above this amount minus the cost:
(A-O) – (A-O)/(1+M) => ($50-$30) – ($50-$30)/(1.5) => $20-$13.33 = $6.67 (additional profit per redeemed certificate based on assumed Average Ticket)
So for each certificate redeemed, your profit is most likely negative:
(A-O)-(A-O)/(1+M) – O/(1+M) = $6.67 – $20 = – $13.33
But some people will not redeem their certificates, which means free money for you! Taking into account the total number of certificates sold (T=500) and the redemption rate (R=.8) leads to an updated equation of:
R*T*[(A-O)-(A-O)/(1+M) - O/(1+M)] => .8*500*[($50-$30) - ($50-$30)/(1+.5) - $30/(1+.5)] = -$5,332.
So at this point, you have gained initial income of $3,750 and, over the course of several months, it is forecasted to cost you $5,332 leading to a net loss of $1,582… but there are some additional potential benefits.
We’ve talked about the obvious income and costs, but there are other benefits. The idea of paying for a print ad seems pretty reasonable because it might attract new patrons and you’re willing to pay money for it, so why not GroupOn? It is advertising and seems pretty effective at getting people to show up.
You’ve made an assumption about how much the average new patron will spend at your organization over their lifetime (L=$100). So the amount of profit you expect to make from the average new patron, after you take into account the costs associated with the transactions is:
L-L/(1+M) => $150 – $150/(1+.5) = $50
When taking into account the promotion by GroupOn, people sharing the information with friends, buyers bringing friends with them to redeem certificates, etc., you expect a certain number of new patrons tied to the number of certificates sold (T=500) and a New Patron Percentage (N=.4). This results in an expected increase of profit of:
T*N*(L-L/(1+M) => 500*.4*($150-$150/(1+.5)) = $10,000
There are 3 major things that should be noted:
With that being said, the running tally of the GroupOn benefit is now at a Net Profit (over time) of $10,000 – $1,582 = $8,418 in profits.
Do these deep discounts damage a brand’s image and lead to reduced sales? I don’t know, but we’ve assumed it does and have pulled out of thin air a number to represent the decreased regular income from running this promotion (V=$4,500). Since this is “top line revenue,” to understand the impact on the bottom line, we need to consider your Margin.
(V-V/(1+M))=> (-$4,500 – (-$4,500)/(1.5))=-$1,500
This was a lot of work so please let me know if I made any mistakes. Also, if anyone wants to build a calculator to run these numbers, let me know!
First, I want to make sure to emphasis that the term Flash Mob is not negative. My very loose definition for this post is “getting a large number of people to act in a certain way, usually through social media.”
There are a number of emerging (or emerged) solutions that follow a basic recipe for what I call Flash Mob Promotions:
The motivation for local organizations is to get a boat load of people to visit them in the hopes of turning them into patrons and possibly spend money beyond the terms of the offer. To help you better understand what these solutions are all about, below is a description of a few companies active in this area. The hope is that it helps explain what they are offering so you’re better informed when they come a’knocking.
Restaurant.com is what I consider the predecessor of this movement and I don’t technically consider them to be Flash Mob Promotions, but they are worth understanding. From what I’ve heard, patrons love the deals, but restaurants aren’t the biggest fans.
What they are selling is marketing. You give away $25 worth of food in exchange for new (hopefully) patrons and restaurant.com gets paid $10.
Groupon has great buzz from both patrons and businesses. They have a video to explain it, too.
The big benefit I see for businesses is cash flow – you get paid up front for all of the purchased certificates. You also hope the deal will drive traffic, gain new patrons that have a significant life-long value, and that the average ticket price will exceed any offer’s limit.
The concerns I have are related to cost. How many new patrons will you get, what do your margins look like, what will be your average ticket amount? In short, does this make business sense? Unfortunately, you have to decide that. Also, some business have expressed concern about how offering such deep discounts may affect their brand image.
NOTE: There are a few other sites, like LivingSocial that use a similar model.
Scoutmob is a newer entrant into the market and is based in Atlanta (yeah!).
One of the benefits that I really like about ScoutMob is the mobile app redemption… you actually know the number of people that were in your business (or really close by). Similar to GroupOn, the big goal is trying to drive traffic and, since ScoutMob doesn’t require people to pay anything up front, there is an argument to be made that more patrons will take advantage of their offers.
The concern is still cost. Does ScoutMob actually drive traffic, gain new patrons, and lead to ticket amounts that exceed offer limits? Maybe. They might even do it better than GroupOn, but with GroupOn you get the up front cash benefit, although with ScoutMob it seems like you get to keep more of each transaction.
* Special thanks to David Payne from ScoutMob for giving me the 411!
All of this is really, really cool stuff and is only going to get cooler. The biggest problem I see is tying the business decision to ROI… I smell a future blog post!
I would love to hear about people’s experiences using these or similar offerings as well as from the providers themselves!
I just finished Twitterville: How Businesses Can Thrive in the New Global Neighborhoods by Shel Israel that describes the growth of Twitter with numerous stories about how it has been adopted and used by numerous people and organizations. For local organizations, this might not be the best book, although for a more general understanding of Twitter I would recommend it.
Twitterville has a boat-load of stories about how Twitter is being used to reach target audiences. This includes heavy hitters like Dell, H&R Block, Comcast, American Airlines, and Zappo’s. There are also accounts of how government, hospitals, and individuals are discovering innovative ways to build communities.
Unfortunately, the stories related to small, local organizations using Twitter – outside of politicians – is limited to about 8 pages (156-164). Because of this, I would recommend this to local organizations if you are looking more for a resource that can explain the Twitter phenomena on a large scale than a strategy guide (there are 4 pages on getting started with Twitter in the Afterward, though).
This book is great for:
Over the past year or so, there have been a lot of complaints about Yelp using questionable business tactics when soliciting businesses for advertising dollars. It looks like some businesses have decided that these tactics go to far. TechCrunch announced that two law firms – Beck Lee from Miami and The Westin Firm in San Diego have filed a class action lawsuit against Yelp for unfair business practices.
For people that don’t know, Yelp is a “local search” site that allows users to review businesses. Kinda like a yellow pages where people post comments on their experiences. Users can search for a business – like an Italian restaurant in Atlanta – find results and see the business’ profile along with all of the reviews that business has received. Each review is tied to a registered user with their picture and a little bit of personal information about them, which gives business owners a way to better understand who the reviewers are. Users of Yelp build credibility in the system through these reviews that are rated by other users as funny, cool, useful, etc.
Businesses seem to like Yelp because there are a ton of people using it, it provides them with feedback, but mostly Yelp lets them advertise. In that search for Italian restaurants mentioned above, at the top of the list will appear a restaurant that is paying Yelp for sponsored ads. As a user browses the site, additional sponsored ads appear on the right side of the page. Yelp provides businesses with information on the number of people that visit their Yelp profile which presumably translates into “butts in seats.”
The biggest reason businesses don’t like Yelp is because they sometimes get bad reviews and these are visible to anyone that visits the site. One can convincingly argue that people are entitled to their opinion and Yelp is simply providing a venue for those opinions to be expressed so that other people might make better informed decisions.
For a long time, businesses just had to take the negative reviews. Then Yelp allowed businesses to respond directly to a reviewer to try to address complaints in private. This led to some abuses as users posted negative comments in hopes that business owners would bribe them into changing the review. Last summer, however, Yelp started letting business owners respond in public to reviews. This was a little better, but businesses still don’t like negative comments (obviously). Rooz Cafe in Oakland even created a “No Yelper” policies.
There are a couple of reasons for this. A minor one that is frequently mentioned is that Yelp will show ads from your competitor’s business (who are paying) on your non-paying business’ profile. This practice isn’t that egregious, though and I think is up for debate.
The biggest reason stems from complaints from multiple businesses, the accusation that Yelp offers to squash bad reviews if they pay for ads (see the comments section on the TechCrunch article to get a feel for this). The business story generally goes something like this:
I had some negative reviews on Yelp and was contacted by a Yelp sales person that said if I paid $300 per month for advertising, those reviews would disappear.
That’s what all of the hullabaloo is about … these alleged sales calls.
Is all of this just business owners that are so upset about bad reviews they are making wild accusations or errant sales people within Yelp offering benefits off script? Maybe, but a quick search of Yelp extortion turns up a lot of results, dating back to 2008:
http://www.switched.com/2010/02/25/yelp-embroiled-in-bribery-extortion-and-defamation-dispute/
http://www.eastbayexpress.com/eastbay/yelp-extortion-allegations-stack-up/Content?oid=1176984
http://consumerist.com/2009/03/more-business-owners-accuse-yelp-of-review-extortion.html
http://blogs.sfweekly.com/thesnitch/2008/11/is_yelp_extorting_san_fran_bus.php
http://www.theregister.co.uk/2008/08/13/yelp_sales_pitch/
There is even a website dedicated to the topic:
http://www.yelpscam.com/press.html
Yelp tries hard to present itself as a place to get quality reviews – their tagline is “Real People. Real Reviews.” Although, I guess that is still true, even if some of those reviews are removed. But the community question is: If these allegations are true, even if Yelp is not what we might want it to be, are they guilty of extortion?
Let me know what you think and tell me about your experiences with Yelp – good, bad or neutral.
Apparently I’m over a week late on this, but Facebook has announced they are working on a revamping of their messaging platform to implement a full on email platform that will rival gmail (Yahoo Mail, AOL, etc.). This is to include POP3 and IMAP support (that means you can use it outside of Facebook).
Why is this such big news? In 2009, the time spent on personal email was surpassed by time spent on social media sites. Email is becoming more and more for business purposes while social media is the venue for personal messaging (even business use is shifting to some degree).
Is Facebook up for the challenge? Keep in mind that Google launched their social media platform – Orkut – one month before Facebook saw the light of day. If you’ve never heard of Orkut, it’s because it failed to gain adoption in the U.S… although it is huge in India and Brazil the same way David Hasselhoff is huge in Germany. One of the lessons to be learned is that huge companies – even Google – don’t always win.
But Facebook already has adoption and knows who your friends are. Plus, people are already using it for some messaging needs. It’s a crazy world.
So here’s the run down:
Google is doing everything including mobile phones and a new Operating System (Chrome) to rival Microsoft, Apple and even Linux. Plus they continue to try to push deeper into local search as evidenced by their failed attempt to buy Yelp.
Apple is trying to do everything, too. Recently, they have been in talks with Microsoft to use Bing as the default iPhone search engine instead of Google (what?!?!?!). To add insult to injury, Apple refused to accept Google’s Voice app into their App Store. All of this, of course, comes after Eric Schmidt (Google’s CEO) resigned his position as a Director at Apple based on a conflict of interest. Oh yeah, Apple also wants to be your cable TV provider.
Microsoft still has huge market share, but seems to be muddling by on its laurels. Although one of the reasons that Google’s $550 million bid for Yelp fell through was that Microsoft counter offered $700 million.
And Facebook continues it’s march to try to dominate how people interact online.
This is going to be a huge battle akin to the battle for delivering data to homes that pitted phone, cable, and satellite providers at odds when they all realized that fundamentally they were trying to do the same thing – deliver information.
So… how does this affect local organizations trying to reach their target audience and build patron relationships? Dunno, but unfortunately, I think this is going to get more muddled for the foreseeable future. In the meantime, hang in there and good luck trying to figure out where to put your time and money.
Let me know what you think!
Is Your Audience Listening?
This is a topic I’ve struggled with over the past few years. There are so many people that measure success based on the number of followers/fans they have, but I question how valuable these numbers are. Those companies that do email blasts to a billion people see success as a 2% click through rate…. they’re playing the numbers.
I’m currently in the camp that believes quality is better than quantity. I actually read the profiles and posts of people I follow on Twitter and I don’t automatically follow people that follow me. If I get a friend request on Facebook, I check to see if I know the person and, if not, I check to see what friends we have in common. The justification I have for both myself and the organizations I work with is, having an engaged audience is more valuable than the raw numbers. I equate people that blindly follow others on social media to someone grabbing one of those business card fishbowls you see in restaurants – you can add all of these people to your contact list, but will most likely never do business with any of them. What’s the point?
The counter argument is that the more people you can reach, the more likely it is that your message will fall on friendly ears. If 2% of those fishbowl contacts is actually interested in what you are doing, then that is one successful connection for every 50 cards you filch.
I like analytics quite a bit, but I think that the real measurements that have value are in absolute numbers, not ratios. How many people are actually interacting with you through retweets, mentions, direct messages, comments, likes and wall posts? If you can push these numbers up that show engagement (without annoying people) by following every single person, then your ratio is shot, but so what? If you can do it by exerting more energy to vet your audience – fantastic.
Here are what I believe are the secrets:
I’d love to know what strategies others are using. Let me know what you think.