July 24, 2014

American Express and Foursquare on the path to justifying location based marketing

In June, AMEX announced it was going to partner with Foursquare nationwide to do some cool discount deals tied to check-ins at some national chains. Then they decided to help out small businesses with a Black Saturday deal. Consumers could:

  • Link their Foursquare account to their AMEX card
  • Go to a small business with the AMEX deal ($25 off if you purchase $25 or more with your linked card)
  • Checkin on Forsquare
  • Pay with their AMEX
  • Get a $25 credit on their AMEX bill

This was pretty clever and I used the deal at a local pub, Edgewood Tavern. I didn’t have to show my phone to the server or anything, it  just happened behind the scenes at AMEX.

However, last night I was at Pure Taqueria in Inman Park (Atlanta) and saw there was a $10 off deal from AMEX if I checked in on Foursquare. I’m in pretty tight with the folks over there, so I asked the GM how he set up the deal with AMEX – were they splitting the discount cost a la Groupon or what.

Here’s the thing. He had no idea the AMEX deal existed. Apparently, it was all on AMEX. What? (inflection should go from low note to high note)

I opened up Foursquare again and started scrolling through all of the local businesses around me. It was like an Oprah moment – everybody had an AMEX deal! After leaving Pure, I went to Savi Urban Market and got a $10 discount on a bottle of wine to celebrate (they had no idea the deal existed either).

What’s going on and why?

So, in it’s simplest form, I’m buying $10 worth of stuff, the business is getting $10 (minus AMEX transaction fees), and I get $10 back. Who’s paying for this and why?

Word on the street is that the program doesn’t drive any revenue to Foursquare, but it represents an initial foray into going “beyond checkins,” an effort that might soon roll in deals from Living Social and Groupon. That will be interesting, but who is paying for the AMEX deal? It seems like AMEX.

I found some insights here and there, but I thought I would add my own.

The arrangement in its current form doesn’t make sense. Foursquare doesn’t generate revenue and AMEX is having to cover the cost of all the discounts. Currently, it only would work for AMEX if the effort increased the number of AMEX users (driving revenue from annual membership fees), increased the frequency users chose their AMEX card over their Visa card (driving revenue from increased transaction fees), and/or dramatically increased the average transaction size for an AMEX user (again, increased transaction fees). Even if the deal included Foursquare sharing user check-in information with AMEX, what would it tell them that they couldn’t already get by tracking other card charges… except maybe if the user checked in at non-businesses like parks and transit stations.

Foursquare gets closer to being able to claim that its online marketing drives consumer behavior and leads to local business revenue. If they gain access to transaction amount data, they get some awesome insights on the value of this marketing. Of course, in my case, I was at two of the businesses uninfluenced by Foursquare… but my new bottle of wine was effective marketing. Also, Foursquare needs to generate some revenue from all of this.

The Future of Foursquare

Here is my prediction about where all of this is going. Foursquare is striving to be the clearinghouse of location based deals. It will remain focused on doing everything it can to gain adoption by users and then aggregate local business deals from whomever can make them – AMEX, Groupon, Living Social, local news papers, etc. Foursquare gets to focus on technology and lets all of these other guys field the sales force.

AMEX (and potentially other credit cards) will move away from eating the cost for their local deals and begin generating revenue from local businesses paying for these promotions – similar to the daily deals sites. This will be a marketing cost for the local business, but with Foursquare in the loop, they will gain more insight to user behavior, such as:

  • Was the deal redeemed by a new visitor or returning visitor (in Foursquare terms, a Newbie checkin) – works regardless of who sold the deal to the business
  • Did new customers redeeming the deal ever return (tracked through subsequent checkins) – works regardless of who sold the deal to the local business
  • Automated tracking of average customer spend, lifetime value, etc tied to the credit card (in AMEX’s case), regardless of what POS they use – only works if a credit card company sold the deal to the local business

That is pretty Rock and Roll!

The Hype of Location Based Services (LBS)

Ruud HeinA great article was posted by Ruud Hein about the second coming of LBS (Foursquare, Gowalla, Yelp, ScoutMob, etc.). The underlying message is: don’t get too carried away with the hype, we’ve seen this before. You should read the article for yourself, but one of the striking metrics provided was that 96% of people in the US do not use location based services. This is not to say that there won’t be more adoption, possibly even rapid adoption, but businesses should not get swept away with overly exuberant enthusiasm. They should make sure to closely scrutinize any initiatives they plan on taking and especially consider their own patron-base.

Scoutmob ROI

I finally got around to it… the ScoutMob ROI calculator! For the purposes of this post, I’m going to stick to the numbers and post-pone analysis for another time.

ScoutMob ROI Calculator

I’ve provided a link to the Excel ScoutMob Calculator which also includes a tab for the GroupOn calculator for comparison. Because they have different business models, it’s not a one-to-one comparison, but it should give you an idea of how things shake out – one of the biggest conceptually changes is how I represent COGS, so pay special attention to that. Unlike my first post regarding GroupOn, I won’t bore everyone with the details, but just provide an explanation of what the parameters mean.

The calculator is divided into 4 sections. The top left section is where you put in your numbers – everything else is automated. The section at the bottom left cuts to the chase and summarizes what kind of profits – if any – you can expect based on your assumptions. The two sections on the right are scratch work related to the Cost of Goods Sold and the income (not profit) from the whole endeavor.

Calculation Variables

  • Discount (D) – What is the percent discount you are offering. Typically, this seems to be 50%.
  • Maximum Discount (X) – What is the maximum discount anyone can get when redeeming the offer.
  • Average Discount Ticket (A) – What is the face value of the average ticket before the discount is applied. Any amount above X/D is the happy place where you will make your normal margin.
  • Cost Of Goods Percentage (G) – What percent of the sell price represents your costs. If you are a restaurant and your costs represent 33.33% of your sell price (it costs $10 to sell something for $30), that is the number you use. Ideally, this includes overhead and labor costs as well, but use it as you see fit.
  • Number of Actions (T) – How many people take action on your offer. This is a combination of offers redeemed through smart phones, text messages and emails.
  • Printed/Texted Action (P) – What percent of people will request a printed/texted version of the offer instead of using a smart phone application? I have no idea what this is, but all the cool kids use smart phones, so I set it low at 10%.
  • Redeemed printed/texted certificates percentage (R) - What percent of the printed/texted certificates will actually be redeemed? I set this to 68% because that is the number from the one real-world case study I have from GroupOn. I actually think it is lower for ScoutMob because the consumer doesn’t pay for the offer so is less likely to use it, but there ya go.
  • Cost for Smart Phone Use (S) – How much does ScoutMob charge for each redemption through their smart phone app. The word on the street is that it is “a couple of dollars” so I used $2.
  • Cost for printed/texted coupon redemption (C) - the amount ScoutMob charges for each emailed or texted offer. Again, I’m not sure what this is, but $.50 seems in line with the word on the street.
  • New Patron % (N) – When it’s all said and done, what percent of the people that took advantage of a ScoutMob offer (through smart phone, text or email) will actually return to your business without a discount. This is one of the weakest parts of this model so be wary – I assumed 75%, although I completely made that number up and honestly think it is high, but it’s in line with the number I assumed for Groupon (which I also think is high).
  • New Patron Long Time income (L) – How much will the average returning customer calculated above spend over their “lifetime.” Lifetime is up for interpretation, but I think of it as being over the next year so the ROI has a nice, set length of time.
  • Brand Value (V) – Business owners have indicated a concern over how deep discounts might affect their brand because it could be seen as a sign of desperation. Others have said that there is a lot of value in the gained brand recognition. I have no idea how to determine this so I shifted the burden to the business… enter how you think the promotion will affect your business’ profits in real dollars – positively or negatively.

Results Section

This section is super easy to interpret, but keep in mind that it is based on all of the numbers you entered above and that Garbage In = Garbage Out.

  • Campaign Profits – What profit will you make from all of the people that use a ScoutMob offer
  • Total Long Term Profit - What profit will you make due to revenue generated because of the campaign beyond the special offer. Again, I think of this as over the course of a year.
  • ROI – a very simple ROI calculation that compares the profits you made to how much the promotion cost you.

Cost of Investment

What does all of this cost you?

  • Total number of redeemed offers - this is kind of important. It assumes that 100% of people that redeem through a Smart Phone are actually at your business and complete the transaction. Added to this are the people that had the offer either emailed or texted to them and applies the redemption rate parameter (R).
  • Discounted COGS – the cost to provide the goods or services within the discounted amount. For example, if you offer 50% off with a maximum discount of $10, this is the cost for the first $20 of the average ticket ($20*50%=$10 maximum discount).
  • GOGS for ticket beyond certificate amount - this is your cost in the case that the average ticket value exceeds the maximum discount limit (i.e. the $20 mentioned above). Building on the previous example, if the average ticket value is $35, the first $20 is within the discount window and the next $15 benefits from your normal margin … your costs for that $10 is shown here.
  • Amount Paid to Scoutmob – this is the amount you pay to Scoutmob for all of the redemptions
  • GOGS lifelong purchase costs – This is your costs for all of the people you hope will return without the discount incentive.
  • Brand Damage Cost – if you specified that you think the promotion will damage your brand (by entering a negative number for V), that number is represented here.

Income from Investment

This section is the scratch work for the other side of the equation – how much coin will flow into your bank account based on the promotion.

  • Initial Discount Offer Income – This is the amount of income that will be generated from offer redemption within the maximum discount range
  • Income from sells beyond Certificate Amount - If the average ticket exceeds the maximum discount range, that income is reflected here
  • New Patron Long Time income - The amount of income that will be generated from all of those returning customers you are counting on.
  • Brand Benefit Income - If you specified that you think there will be a brand benefit from the promotion (by entering a positive number for V), it is reflected here.

Summary

There is no clear-cut way to evaluate if you should do one of these promotions or not, but at least you now have some tools to assist in the decision. If you have any real world numbers from your promotion, I’d love to have them. Let me know what you think!

Getting noticed in the Facebook NewsFeed

The Daily Beast recently posted an interesting article about how they think the Facebook algorithm works to decide what information people see in their news feed. The article goes into a lot more detail, but there are a couple of guidelines that resonate with commone sense. The gist is:

  • Get lots of people to interact with your profile – view images and videos, post on your wall, and especially comment on your posts. How you do this is a science in itself.
  • Posting links is better than just posting text status updates
  • Posting photos and videos is better than posting links