Customer Acquisition, Upsells, Lifetime Value: Thoughts on Advertising vs. Groupon

June 14, 2011 by · 2 Comments
Filed under: Business Intelligence, Data Analysis 

I have to admit that there are some days when a certain meme grabs me and I allocate some time for reading and research (as I call it, although one of my colleagues might call it “lollygagging”). The one today that was particularly intriguing was this one (and a series of others that I found) about the wisdom of using Groupon to drive the acquisition of new customers.

First of all, I am doing a bit of paraphrasing here. Much of what I have read suggests that the intent of offering a daily deal such as the ones done by Groupon is to help you to grow your (local) business via discounted demand generation. Here’s how it seems to work:

The daily deal vendor approaches you, the local business owner, and asks you to provide a daily deal in which you allow the vendor to sell your product for at a 50% (or so) discount. They collect the payment, and in return they take a cut, somewhere around 50%. They pay you the rest, and when the purchasers walk into your store, they can redeem their coupon for trade value.So let’s say you sell a coupon good for $20 worth of goods at your supermarket for $10. The coupon vendor takes $5 and gives you $5. So basically you are discounting your product 75%.

So far it does not sound terribly appealing, but there are some justifications:

1) A blast email to all local members may drive new customers to your local business

2) Individuals purchasing the deal coupon may also spend more once they are exposed to your products/services.

OK, so the goal here is an investment in advertising, creating a loss-leader for demand, new customer acquisition, and upselling – the same stuff we are always talking about. However, before I would pounce on top of that arrangement, I’d have to consider some other criteria, much of it tied up in the underlying data and statistics:

  • What is the conversion rate for new customers (as opposed to existing customers who will take advantage of the deal)?
  • How do I even determine whether someone is a new versus a returning customer?
  • How many of these coupon customers actually buy more than the coupon value amount?
  • Do I have a process in place to motivate return business?
  • How many of these new customers return?
  • What is the lifetime value of these newly acquired customers?
  • How does the deep discounting impact the lifetime value of my existing customers?
  • Are the products I am selling considered “excess inventory” that I would not sell otherwise (such as hotel nights)?
  • What is the marginal cost of the products I have discounted?
  • Can I afford to provide unlimited deal coupons?

Personally, I have bought some of these daily deals, but usually for a business that I already use, to buy stuff that I normally buy at the regular price, so in fact I am probably an example of that business’s worst-case scenario.

As long as the local business owner has some idea about how to answer those questions, he or she can make an informed decision. And that means access to the data. Do these coupon vendors provide access to the data?

I know this is a bit off the data quality topic, but what the hey, you gotta have some place to provide an opinion…