US Coupons IPO signals a return of the Online Deals mojo

RetailMeNot today submitted an S-1 filing as a precursor to a $230m float in the US, a clear indication of an upswing ahead for the beleaguered Online Deals market.

Some time back I talked about the diffusion of innovations curve, how deal-hungry consumers had adopted the burgeoning Deals market like a pack of clucky Brangelinas on Safari, driving the growth of the market place to breaking point. What followed was market disillusionment as the half-baked players fell short of their customers’ expectations time and time again. Now that the chaff has been swept away, or in some cases absorbed by the leaders the market is once again satisfying a powerful demand for online deals.

In Australia I expect the market to regain momentum toward a billion dollars in revenue, and $100m or so in EBIT. As a market the EBIT pool isn’t stellar, but given the winner-takes-most nature of the sector each of the 2-3 leaders will likely hold 20% of the market and share more than 80% of total profits, meaning $200m in revenues will yield ~$30m in EBIT, not bad.

Diversification in the Deals model is also apparent, with a clearer division between servicing a basic need versus impulse and discovery. The holiday category is growing with fully packaged vacations on offer turning long-haul travel into a $1,000 impulse purchase, and the utility categories such as wine and home-wares are solid. Ironically the original purpose of Group Buying, to fill every empty seat in your local restaurant, continues to miss the mark with offers appealing more to the price conscious than the culinaraly adventurous, disappointing proprietors and their staff alike.

Although no one has yet nailed the local restaurant marketplace, the prize is huge. I expect one of the leaders will emerge with a model that works and further accelerate the Australian Deals market to $1bn in revenues between now and 2016.

When brand is not enough

Great (british) service

On a recent trip I discovered that Virgin Atlantic aircrew behave like they’re between parties, parties I’m not on the guest list for. To be fair, old dags like me with four kids in tow are made to feel about as welcome as a recently discovered STI.

After three painful flights and a comedy of errors it struck me though, maybe all that cooler than thou jet-set party people bullshit is actually as God himself intended (Sir Richard that is).

My theory emerged when I spotted a peculiar magazine selection in the rack. Wallpaper and Style Street were propped at a jaunty angle, albeit they remained so for the entire 14 hour flight. Hardly surprising they didn’t find a reader I thought given the Virgin customers around me were less likely to want to read them than the Virgin staff. Yet those magazines were carefully positioned to enhance the Virgin Atlantic lifestyle and most likely described in nauseating marketing speak in some operations manual back at Party Town, aka Virgin HQ. I suspect somewhere in the depths of the Virgin Marketing Strategy is a view that there are enough <insert B-list celebrity here> wannabees to build them an airline that makes them feel like they’ve cracked the code of cool.

But here’s the rub. The party’s exclusive and customers are there to fill out the numbers. Virgin have recruited staff who look like the customers they wish they had, i.e. the low disposable income high spending b-grade party-set, and have missed the unfortunate side effect, those people aren’t interested in much beyond themselves – and it shows.  The smallest request is met with a gnash of veneers, and eyebrows are ever so slightly raised (I think) at the suggestion of a problem.

What I don’t get, though, it why Virgin Atlantic ads suggest they are something that they are not? Am I to believe from the TVC below that the airline who suggested you may just get into the Mile High Club on one of their planes is trying to be something different? Because it isn’t obvious yet. And until the service rhetoric has become service reality I’d dial back the messaging slightly.

All in all I’d say the biggest disservice Virgin Atlantic has done, to me and to other Virgin virgins, is to set the expectation too high. They have allowed their marketing message to get ahead of the organisation’s ability to execute which has led to a jarring customer experience. I have no intention of flying Virgin Atlantic again, or any of the Virgin branded airlines for that matter. Qantas just invited me to a BBQ.

Is your business gearing up for in-car Internet?

ABI Research are forecasting a significant growth in Internet Enabled cars, with 50m vehicles sold by 2017 with native Internet connectivity.

In car connectivity is already broadly available with smartphone-dependent products like HondaLink available in most markets today. However like any new technology, the real breakthrough comes when new applications are developed by a broader ecosystem, which, as far as we can tell, is yet to happen.

It’s quite possible that 30 – 40% of new cars sold in Australia will be Internet Enabled with 5 years, yet few business have connected cars in their 3 year plan.

Is Privacy dead, or just too hard?

Lorrie Faith Cranor and Aleecia McDonald from Carnegie Mellon conducted a study recently which repositioned the lack of online privacy as a time issue.

They reported “To read every [online] privacy policy you encountered in a single year would take 76 work days……”

So we all want our time online to be a more private affair, but find it impossible to wade through the policies and figure out what’s what? Further, even if you had the time to read them, would anyone but a Privacy Specialist understand them, and worse, be willing to forgo the benefits brought by Facebook and Google in an effort to maintain some sort of online anonymity? I suspect not in each case.

It’s hard to see how to solve this issue.

At a minimum it would seem appropriate to provide a simplified privacy policy, which would at least encourage consumers to become familiar with the terms they are signing up to. Controlling what your cookies are used for may also be key, Personalisation, yes, targeted advertising, no.

Over time I worry that the role of government will be to reign in on the issue if left unsolved, which would be a bad outcome for all.

What’s a great product without great service?

It’s rare that a great product would win without the support of great service, so why then are the two so quick to grow apart?

The problem, I think, is success.

Scale and its associated economies support the development of a product  but rarely do they support the development of the accompanying services. There are exceptions, of course, but not many; McDonalds is one, Apple another, Sadly I’m at a loss to think of a third.

It’s worth noting of course that Apple and McDonalds are are notable exceptions to the rule, albeit for vastly different reasons. McDonalds is a very, very large franchisor, and the “product” being sold does not come in a bun, the product is the Franchise. The Franchisee buys a proven recipe for fast food and efficient service. If McDonalds didn’t have control of the entire McD’s ecosystem through a tightly wound Franchise Agreement it would be impossible to maintain its brand of high-margin consistency that allows it to continue selling to franchisees at a premium.

Apple, on the other hand, is all about brand, and that brand extends through the product supply chain to the lifestyle, which includes the process of purchasing and ownership. Prior to Apple seizing control of its supply chain the service part was delivered by 3rd parties, now it is a powerful pillar in the house of Apple.

When a typical business grows, investment is poured into improvements in the production process, reducing the cost of goods and improving margins. The same can’t be said for service, great service at scale is costly, and returns to scale are minimal. In addition, training great service to new staff takes time, so the gap between product uptake and service delivery can grow rapidly if the growth was sudden and unforseen.

Improved margins are seductive, investments in service are not, and so the conflict begins.

As a business owner, you can get ahead. At a minimum there should be a record kept of a consistent service KPI such as Net Promoter that can serve as an early indicator of customer sentiment taking a turn for the worst. Where growth is happening at the expense of service the growth should be arrested until the issue is identified and resolved, hard as it may be to do so.

Positioning your entire business as a product is smart, have a McDonalds-like operating manual with detailed descriptions of service procedures and quality standards, or emulate Apple by asserting service as a key part of your brand, then live it with every touch-point!

To favour growth at the expense of service is a short term win, the positive sentiment that propelled growth in the first place is already evaporating, allow that to continue and chances are your brand will never recover.

Is your business suffering a Group Buying Hangover?

Group Buying helped good businesses access revenues that had previously eluded them, improving utilisation, buoying their P&L and promising a sustainable new revenue stream from this exciting new consumer channel.

But now that the sector has waned and desperate Group Buying businesses have become fixated on stack ‘em high sell ‘em low product chuff – those once buoyed businesses are left feeling a little queasy.

Just one of the problems they face stems from prepayment, one of the headline benefits touted by most group buying companies (including me).

Although quick access to cash is manna from heaven for most business owners, prepayment has left behind a tequila-like side effect.

The problem is this. A top priority for all online businesses should be around Funnel Conversion, i.e. the ability for the business to convert leads into dollars, however in a world of prepayment, conversion becomes somewhat unimportant. In fact, if breakage (unused vouchers) is a profitable exercise for the merchant, higher conversion may actually mean lower short term profits.

Now that Group Buying is providing an ever declining proportion of revenues, many online businesses that signed up to breakeven or lossmaking campaigns in order to grow their subscriber base, now find they are unable to monetize that base due to poor site performance, especially in the area of conversion.

Faced with lower than expected revenues, these companies often head back to Group Buying to find that like-for-like offers work only half as well as they did before. Now the business is in a pickle, the drug is half as effective, risk its brand by doing twice as much? Surely you know your drug dealer is never your friend?

The key is to get the fundamentals of your businesses working right before looking to Group Buying or any type of Marketing for that matter. Ensure that the purchase funnel is converting 60% or more of the people who hit “Buy Now”, that your Subscription Channel is effective, and your email strategy is delivering appropriate Open, Click and Purchase rates.

When cloaked by the shiny veneer of Group Buying dollars your site performance will look a whole lot better than it really is. Time to sober up, shake off that hangover and see if your bedfellow looks as good as you remember.

The seismic shift toward Online

I met with Business Spectator’s Alan Kohler and recorded an interview for Qantas inflight Radio in June. I was flattered to be invited to the show, the interview is now available below.

A link to the file is here.

Alan was particularly interested in a topic I have spoken about on a  number of occasions, the slow but steady adoption of the internet by all but the most tech-resistant and the impact that shift is having on traditional commerce.

Now that over 3/4 of the Australian population have a connection to the web, businesses of all types are finding that their typical customer is spending an increasing amount of time online and can be reached there quite cheaply for Brand building as well as ecommerce.

Two other significant factors beyond the amount of people online are – the nature of connectivity, i.e. fast connection speeds are no longer the preserve of early adopters – and that almost all internet users are willing to shop online, with only 5% of internet users showing concern about online security.

The shift towards fast access speeds has been so rapid that in 5 short years the issue of access for all has all but disappeared. Mobile internet use has also accelerated with many online businesses signalling that 10% or more of page impressions are from mobile devices and mobile transactions are catching up fast.

Where the online activities of the older demographics were once limited to banking and email, this is no longer the case. Over 20% of the discount shopping audience is 60+ suggesting that older folks enjoy the process of shopping online even if they don’t have to.

I think it’s fair to say that not being online in 2012 is akin to not having a mobile phone, at some point it looks a bit weird!

Meanwhile, as the Internet population has swelled to include your parents and most their friends, technology has evolved that enables Advertisers to single out their target customer and provide a customised offer on the fly – further extending the economic advantage of online commerce.

For the first ten years of the web the economic engine that powered its growth was display advertising (And subscription Porn but that’s another post!), publishers funded their growth by making money from page impressions – a refit of the existing TV and Magazine advertising model. In 2000 Google started selling ads in a new way – through search keywords which provided advertisers with a way to talk to customers based on what they were looking for, rather than what they had already found.

Now the model is shifting again, more people and more data means that publishers are now making an increasing portion of revenues from who you are, rather than just your location on the web. publishers can connect advertisers with their target Market with reasonable precision using browser tags. No longer are marketers confused about which half of their dollars are wasted, in the new world of the Internet, they spend half as much and almost none is wasted.

The rapid shift towards a more personal web has occurred in the past couple of years and the pace of change is accelerating. It was only 5 years ago that Facebook emerged as a public service, touching a Billion or so lives since.

The amount of change we see in the next 5 years will be as dramatic as the last 5, with an even greater emphasis on devices, mobility, personalisation and online commerce, bring on 2017!