Archives For Marketing

I was on a call with a senior guy at one of my portfolio companies recently, and asked him what the background noise was. He explained that he was at a “Daily Deal” conference. Of course I replied “WTF?”, and he explained that he was one of 500 attendees at the conference, and that it was one of 4 or 5 conferences entirely focused on the Daily Deal phenomena that were taking place this year. Thankfully, he was there as a vendor and not a YADDO (Yet Another Daily Deal Outfit).

If you’ve ever sat down and tried to calculate the lifetime value of a customer against your acquisition cost (and if you haven’t, you should), you will recall that the single most impactful cell in the spreadsheet is the assumption about how many times the customer buys (or, if it’s a service, how long they stay loyal). In the academic literature, and among the consulting firms that study these matters, it is a settled issue: loyal customers generate well over 100% of the profits of almost all businesses.

A long time ago, when I was doing some work in the telecom field, I recall pawing through vast reams of customer data to evaluate the different profitability profiles of different customer segments. Most of our conclusions were nuanced, subtle and open to refutation; the only one that was blindingly obvious was that customers acquired through promotional marketing techniques didn’t stick around long, and therefore were unprofitable. This led to a different kind of segmentation, what you might call behavioral segmentation. In other words, we found that people divided into two buckets, Loyalists and Switchers. There were all types of Loyalists, some who stayed because of inertia, some who were brand ambassadors and truly loved the company, etc, but there was only one kind of Switcher: the bad kind. Bear in mind that this was a telecom company, one of the only types of vendors for whom promotional marketing even stands a chance of working, in that the recurring nature of the service and the high switching costs should create at least passive loyalty. Imagine this math for a pizza place in a large urban area … a disaster.

There have been many critics of the daily deal model, who focus on how unprofitable the initial transaction is for the merchant. If we go back to our lifetime value spreadsheet, that critique gets at the cost of customer acquisition cell, which I will agree is important. Far more important to me, however, is the likelihood (or inevitability) that the customers acquired in this method will have low levels of loyalty, and will readily switch to competitors when the next deal shows up. Groupon’s mobile app “Groupon Now” is the apotheosis of this … by using it, the consumer is assured to get a deep discount on anything they purchase, thereby guaranteeing that they will never be a profitable customer for any merchant, ever again.

Another of the critiques of the daily deal model is the opacity of it, on the part of the retailer. The customer doesn’t even present a payment card, just a piece of paper, so the retailer gets little or often zero data about them. I would submit, however, that they get the most important piece of data they need, which is that the person is inherently a Switcher, or (more likely) has been trained to be a Switcher by Groupon, Living Social, etc. They’ve just walked into the establishment with a sign on their forehead reading “Unprofitable”. It’s kind of like the attractive young assistant who has an affair with his boss, eventually convincing her to leave her husband and marry him, only to be surprised a few short years later when she turns around and leaves him for another man. By cheating on her husband with you, didn’t she tell you all you needed to about her tendencies? Groupon merchants are “stealing” customers away from their competitors, don’t they think that the irrefutable infidelity of those customers will reoccur?

Let’s take this to its logical extreme. Imagine everyone in the US armed with a smart phone and some daily deal company’s version of Groupon Now. Every purchase we make takes into account which nearby vendor (or online vendor, depending on the category) is running the deepest discount. Retailers have margins ranging from 2% (grocery) to 19% (restaurants). If you slice even 25% off the average bill (vs. the 75% they give up now to Groupon), they are all dead. If you slice 25% off 25% of the customer bills, for a 6-7% hit to margins, most are dead and all are hurting. The only answer: raise prices across the board to compensate for the impact of the Switchers. This further drives the average consumer into the arms of the discounters, in a cannibalization race to the bottom, creating a Nation of Switchers.

This is not going to happen. Retailers know the value of loyalty, and will team up with companies like Foursquare and others to focus on rewarding loyalty, not switching. In two years, we will look back on those Daily Deal conferences with a rueful smile.

I was talking with one of my favorite entrepreneurs the other day, who was trying to choose a lead for his next financing round.  This is a guy who had plenty of options.  Facetiously, sort of, he said he was planning on picking the VC who had the most unique visitors to his blog.  That, of course, sent a chill down my under-publicized spine.  Again, i think he was kidding, but also kind of not.  He went on to explain that his biggest single job, and therefore problem, is recruiting, and a VC who can help him tout his company, and add credibility simply through association, is a major asset.

My response:  kill me now.

The fact is, relatively few venture capitalists I know went into this business because they were self-promotional.  Most of us are geeks who like technology and like hanging out with people who create new things.  The overlap between that personality type and the kind of folks who go on reality TV shows is roughly zero.  Despite that, a wave has hit our industry; a wave that previously hit the media industry and will go onto spill more broadly into corporate America.  The old methods of being successful, which were predicated on hand-crafted, person-to-person networking and leveraging the brand name of your firm, have been supplanted by the need to build your own profile online.

This has been playing out in the media for a few years.  As the traditional media brands totter and cast about for a business model, the onus has fallen more on more on the “talent” to forge relationships directly with their audience.  It is less the case that George Stephanopoulos works for ABC than that he leverages his position at ABC to build a profile for himself (and garners nearly 2MM followers on Twitter in the process.) The days when a cub reporter could get a job at the New York Times and simply do good work are, sadly, behind us.  That cub reporter had better be on Twitter, Facebook, Tumblr, etc, building an audience and creating quasi-personal relationship with her followers.  When her contract is up, she had better be able to point to the thousands of people who will follow her to her next gig.

This is becoming more and more true in the venture business, starting with those VCs that invest in social media, and moving beyond that sector.  This trend has challenged some of the incumbent leaders, many of whom are still on the sidelines as it relates to social media, and created room for new players.  Mark Suster is relatively new to the venture business, but has build a profile for himself that is second to few.  Having said that, I’ll bet if you quizzed 100 of his Twitter followers, fewer than half could name the firm he works for (GRP, by the way, who have been killing it lately.) This is a disruptive moment for our industry, and the new leaders will be individual VCs, rather than firms.

What’s next?  I think corporate America.  As with media and venture capital, right now having a well-known social profile is just an opportunity, not a threat.  Tony Hsieh at Zappos created equity value for his shareholders by being early and compelling on Twitter, but other CEOs are not yet feeling the pressure to follow.  That will change.  In 10 years, I believe that consumers will bias towards buying products (and retail investors will bias towards buying stock) from companies whose CEO they “know”, and have an online relationship with.  Personal publishing will move from being an opportunity, to a competitive advantage, to an absolute necessity.

As for me, I feel late but I’m running quickly.  Twitter is a better fit for me than blogging, as my musings tend toward the short and insubstantial.  [I feel certain my partner Bo would interject here that “short and insubstantial” could actually BE my personal brand].  I had a meeting today with an angel investor who I’d known previously only through Twitter, and I felt like we skipped forward at least two meetings worth, based on seeing each other’s faces every day.  I love the opportunity to praise and comment on my companies.  I continue to believe that there is no substitute for the “old” ways of doing things:  doing great deals, being a good guy and getting out and meeting people.  But there are new ways, too, and we ignore them at our peril.