Wednesday, 23 November 2011

Businesses which have potential potential

Yesterday's Telegraph Online had an interesting article about the Groupon and voucher phenomenon. I have blogged on this before and had struggled to see beyond laser hair removal and teeth whitening where the relevance was for people like me (although at my age teeth whitening is definitely relevant). Lately, the offers have picked up some momentum and there have been interesting holidays, breaks and restaurant ideas which are beginning to hit the mark.

But the question remains about the sustainability of the models around these. If you were an investor in Groupon or similar you would be very alarmed at the cost of customer acquisition. For example, on the Boiler Service type offers at around £40, Groupon take around half the money but if I refer this offer to three people I am credited £6 for each referral. Right now Groupon is racking up serious losses because of this and I guess the white knuckle ride for an investor is whether the cut over time to profitability will ever occur.

Let's not forget the boiler person in this - at around half the offer price flowing back to them, the cost of time and travel means they make zip on the whole deal. The only way they make money is if a percentage of the customers have faulty boilers. 

The other worry has to be whether the whole discount offer thing is a child of the times - we are in a recession and sometimes you have to invest to get growth (as Gordon Brown would advise). That's sensible in some respects but if a restaurant makes a fabulous loss leading offer and targets 400 coupons being sold and actually gets 4,000 then suddenly the bookings will start blocking the spaces that could be sold to normal full price payers, so doubling or more the cost of the offer. It becomes a double whammy and it's why, over time, we have seen BA and others revising the terms of their air miles schemes so as to make them a shadow of their former schemes - almost unusable in the end as so few air mile seats are available on each flight.

Are people like restaurant owners really thinking through the offers as part of a longer term strategy? For example, if a restaurant offers the deal between the hours of 2pm and 6pm on a Saturday then they get people in during the times when business is low and costs are high - it doesn't matter if they continue the offer as they are getting marginal returns on the costs instead of losses. If those who take up the offer are told this is now available every week at the same time only to those who took up the coupon then maybe they create a sustainable model. But if that is the only time the customer ever visits then the only way to get them back is to repeat the offer which doubles the cost of customer acquisition.

However, I loved the example of the baker who sold 100,000+ cupcakes as that is perfect - a low cost manufactured, perishable product enjoying peak sales but with it's own sustainable model in that if people liked the taste they would come back - that is great marketing.

Then there is the problem of whether it is truly generating repeat business for businesses. If the restaurant makes a great offer, do people actually come back again and pay full price? Also, if the loss leader is on the food and the restaurant ups the price of drinks, when does the customer get wise to the fact that the normal offers are better (take a look at the supermarket rage of changing offers rapidly so as to block our ability in calculating the actual discounts on offer). The key for all companies making offers is to get sustainable business but if that is always at a loss leading or low margin price then all you have succeeded in doing is extracting profits from your business.

The other issue for Groupon is this is really a non-unique business proposition. There are loads of voucher offers, Gourmet Clubs, loyalty cards and whatnot. This is not a magical new idea although the execution is great. Google, Amazon and others will launch similar and they have deep pockets, wide reach and the systems to really take this concept by the scruff of the neck. 

It all argues that this whole voucher business is a sign of the times and is largely unsustainable in its current, high cost format. Something has to give. More likely, as the economy picks up, less businesses will be eager to make such deep offers and so the engine for the vouchers will slow down as punters have more redeemable cash in their pockets. The stories are great at the moment, but you have to think that there is something unsustainable about the whole package.


It brings me back to Twitter. A networked colleague has been selling knock down courses on how to use Twitter to promote yourself and your business. That's great and there is no doubt that Twitter is a great block in a rounded marketing plan. But it's highly transient in that your Tweet evaporates very quickly - I certainly hardly ever search back more than a page when I log on to see what has been said and I rarely look at it for more than a minute at a time. So if something has not caught my eye in those transient moments then it never will.

Moreover, I tend to screen out out blatant adverts and look for some interesting news or insight (I love Tom Peters' rants and he replies to you too - wow). So my thought is that while this is an incredibly useful and dynamic communication tool, how on earth will it ever make money? And sustainably so?

Some businesses are only ever created to be sold. I suppose the reach to millions by the likes of Skype, Facebook, You Tube and Twitter is a measure of pent up money but the reality is that none have yet capitalised. The businesses have what I call 'Potential potential'. They have the potential to make money - potentially.

I can see Facebook and Skype charging for things but I would say that the percentage willing to pay is a fraction of the user base. That's just a fact - the lure of these platforms is that fact they are free as well as the neat things you can do. Had they ever charged at the start perhaps they would have never have taken off. Or would they?

Mobile phones is a more physical manifestation of this sort of model. Who would really have thought that we would pay loads of money to talk anywhere? We did and we talk more than ever with calls increasing and lasting longer. The small back channel installed by engineers to update phones was exploited for texting and who would ever thought that it would grip us the way it has. Massive profits for a marginal increase in costs. The thing about this industry is that charging was there from the start - no one ever thought to give us all these facilities for free even when the cost of providing them was peanuts. No one really quibbles about using the phone abroad until we get the bills. So you can charge upfront and still create a monster.


Anyone can make a business plan or run a business that loses money - that's pretty easy and takes little imagination or skill. But creating a sustainable profitable business is much harder but infinitely more preferable.

We may get through this phase of high cost of customer acquisition with the hope of recouping later. Some companies did this well like, Amazon, Google and others but ultimately few who set out on that journey actually survive. Could Vodafone have ever grown this far if it decided at the start to give free calls? I doubt it.

History has shown that if you give something away for free, you had better start charging soon after or else you lose the momentum to get people to pay. Or, you find a premium that people will pay for that always keeps you ahead of the freebies.

And, as we eventually emerge from recession, will high discount schemes fall by the wayside as consumers fuel growth? Are such business models transient?

I may be getting a little cynical in my old age but I think these 'Potential potential' businesses have but a short window to deliver their game plan. You can't be free or effectively so forever. Until then, I may get my teeth whitened some day but I just wish that the boiler service offer would extend to Hertfordshire - it was very parky this morning and I think my radiators and boiler need checking.

You know what? In a cold snap, I would pay full value for such a service. Offering it at £39 now is just silly.

Marketing is as much about the timing as the offer. 

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