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.

Group Buying fortunes on the up?

After bottoming out during the past few months, the fortunes of some Group Buying businesses seem to be on the up, albeit a significant number have collapsed or been acquired in the past six months and the outlook remains grave for many more!

The fact that the sector’s nose is slightly up is in part due to the weeding out of weaker and often less scrupulous competitors who often served only to undermine the reputation of the sector as a whole.

In fact out of the 50 largest Group Buying businesses assessed in April, only 29 remain intact just 6 months on. And given only 10% (5) of those businesses were acquired that supports the view that smaller Group Buying businesses are of limited real value. In such a crowded and undifferentiated market lifesaving investment is tricky too given a lack of brand equity, good will or asset strength (off the shelf web sites are common and subscriber base overlap with top-tier competitors is often well over 70%) resulting in the collapse of underperforming and debt laden Group Buying businesses.

A quick browse through the sites of the 29 still standing uncovered indicators of pending doom for some.

Here are the choking canaries of the Group Buying world:

  • A high degree of niche product deals, such as robotic vacuum cleaners or iPad accessories
  • No sign of “number purchased”, an essential component of Group Buying that is quickly discarded when numbers are low
  • Extended Deal deadlines, this industry was founded on deal a day for good reason!
  • A smorgasbord of deals on one page, suggesting desperate recycling of old offers

Group Buying remains a $1bn future industry in Australia, regardless if that industry seemed to lose its way and stall when it was only half way there. Regaining lost momentum will be down to the leading players showing the way once again with a combination of brilliant marketing and a commitment to helping consumers discover great business products.

The strongest already have their playbook (Living Social, Cudo and Ourdeal) and will extend their positions in the coming 6 months through a focus on back-to-basics Group Buying offers like quality restaurants, high value vacation offers and utility products such as Cudo’s Meat Merchant.

Although I suspect another 15 from April’s top 50 will be gone by April 2013, leaving only a dozen or so standing, I think I already know who they are, I wonder if they do?

Google, a lot like a corrupt SatNav!

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Google commands tens of millions of dollars each year (probably hundreds) through knowingly selling brand terms through AdWords (such as “cudo” for our business). Yet, users are increasingly using Google for everyday web navigation, so they knew where they wanted to go, they just wanted Google to help them get there.

This is a lot like punching a restaurant’s address into your satnav, but being taken to the highest bidding restaurant instead!

And as businesses grow their sophistication in SEO and they establish their listing at the top of the Organic pile for free. Allowing competitors to purchase a business’s brand term means the target business also has to buy their own
brand term else there is a fair chance an unsuspecting user will click on the competitor’s link, commanding unnecessary dollars from at least two businesses! This has lead to a Mexican Standoff between Group Buying sites, including the seven or so competitors currently spending their dollars on the term “Cudo” today.

In itself this is not necessarily evil of Google, it is opportunistic though.

However, once a business has been granted a trade mark they can then protect their brand from being bought on Google by law, yet Google seems to be oddly slow at applying any kind of block to AdWords, milking yet more dollars from a potentially struggling business over the 3 to 6 months it takes to limit the term in AdWords (Google may not block the term altogether!).

Why is it so hard to protect my mark on the world’s most sophisticated Search platform? Yahoo! and Bing seem to behave much less like a Corrupt SatNav with a clear policy on Trade Marks.

At Cudo we are spending over $50k each month buying our brand term on Google, that’s one expensive Mexican Standoff!

See below for an excerpt from a Trademark Case Study, found here

“Trademark Case Study

A Google Adwords client, who is a leader in the very competitive Network Marketing field, recently noticed a surge of infringements against their trademark which was being used in competitor ad copy on the Google Network.  Competition within the Network Marketing industry is extremely competitive and aggressive. The client became aware that their competitors were bidding on their trademarked search terms. This caused the cost to secure top positions for their ads to skyrocket from an initial $2.00 per click to $15.00 per click. Monthly expenditures increased from $1,200 to nearly $30,000. The estimated budget increased to $500,000+ for the year. Control of the top ad space in Google was their primary objective in order to dominate the ad-space for their branded trademarked term.

Given the level of aggression by the competitors and the extortionate cost been borne by the client, there was only one solution and that was to stop all advertisers from bidding on the terms.  Is it right that a business owner has to spend $500,000+ to buy their own branded name – a name that has already cost them millions of dollars to build?  This is $500,000+ the trademark owner has to spend because of a policy that disavows elementary business ethics.  Yahoo and MSN have recognized the injustice of such a slippery-slope policy and have taken steps to change it.  We filed trademark infringements with all three search egnines.  Yahoo and MSN results were clear within days.”

Profiting from the fundamentals of Group Buying: part 1… Focus

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Group Buying works for a reason, regardless of the service woes plaguing the industry (which have been driven by a combination of greed and inexperience, not the model itself) the principles behind Group Buying are sound. Over the next few posts, I will explain the key mechanics and position them in a series of non-Group Buying contexts.

There are six key mechanics inherent to the category that are designed to illicit an emotional response, such as an impulse purchase.image

This is the first of six posts I will write that describe those mechanics.

FOCUS ATTENTION ON ONLY A FEW OFFERS

Limiting promotional efforts to only 1 – 3 featured offers enhances the perception of those offers and likely uptake, minimising “noise” around those offers will further spotlight the chosen few. Featuring multiple offers on the other hand dilutes the “WOW” and runs the risk of Paradox of Choice effects.

Most email platforms will support controlled tests, such as sending one control group an EDM with multiple offers, one with the three best offers and one EDM with only a single “hero” offer.

Assuming the control conditions are sound, the likely outcome is that the Hero and “three best offers” EDMs will each provide a click through rate that is greater than the “multiple offers” EDM even though the multiple offers email included the featured offers from the other tests.

Finding the right balance is critical, and running controlled A/B and Multi Variant Tests will find that balance.

How to maximise the impact of Price Discrimination

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[This post originally appeared on the ADMA blog]

Businesses have been discriminatory since the dawn of time. Recognising that not all customers are equal is essential and provides the key to maximising the effects of supply and demand.

Making the best use of discriminatory pricing means that you need to identify the price sensitivity of each customer group and target them with an appropriate incentive. For example, how willing are they to do work or take risk in exchange for a discount.

Airlines are the masters of price discrimination and there is a lot to be learned from their approach. Granted airlines have the luxury of sophisticated modelling and real time pricing however your business can execute a similar strategy with limited fuss.

Think about airlines’ ticket pricing as a set of incentives and it may become clearer. Imagine the advertising headlines read something like this:

Book this seat months in advance and we can be sure the flight will sell well. In exchange for that insight and the non-refundable dollars you are willing to give us (that will then sit in our account to earn interest) we will give you a generous discount”

Or

We are eager to maximise the bums on seats on this flight and as such here is a substantial discount”.

Right now, your business probably has a series of ongoing campaigns designed to incentivise price sensitive customers to purchase. Offers such as “half price Tuesday”, “book early to save”, “book late and save” or “buy one get one free”. These are all effective discriminatory price strategies.

The key is to deeply understand both your “price sensitive customer” and your “marginal cost of sale” i.e. the true incremental cost of servicing one additional customer now that your fixed costs are covered. The likelihood is that each additional customer can be serviced profitably even if they only pay 30% of the full advertised rate. You can profitably take utilisation from 65% (which is the typical breakeven point) to >80% even if each new customer only pays 50% or less of the advertised rate. There is a risk of course. If you broadcast the discount too largely your full paying customers may hear about the lower rate, they may be annoyed or worse still hold back from purchasing, therefore cannibalising your base revenue stream. Learning how to target your “price sensitive customers” is essential to profitable price discrimination.

Data driven marketing solves each of the issues described above. Find ways to identify and reach the “price sensitive audience” (geography, prior buying behaviour, acquisition source) then serve discrete offers designed to encourage acquisition behaviour, such as switching from an existing provider, prepayment, bulk purchase or even to drive
out of the area. The level of incentive you offer should be generous; if your costs have been covered you can afford it. Ensure staff treat all customers equally and focus on providing a great customer experience that will maximise profit, loyalty and word of mouth recommendation.

Remember, “price sensitive customers” are savvy, not cheap. Reward them with great service and you will earn their loyalty, except next time they will pay full price – no discrimination required

Why I don’t worry about Hitwise

As the CEO of a Group Buying business in the nascent and burgeoning category it was critical that I had a very clear view of marketing effectiveness, with Audience Engagement being the key indicator. There were a number of sources available to the team that purported to provide reliable Audience measurement and insights however I only depended on two to provide an accurate view, Omniture and Nielsen.

Alternative sources included Hitwise, Google Analytics and Alexa – Google Analytics is cheap/free but pretty unreliable and Alexa provides a Relative view only. Hitwise is the worst of the bunch though given their data collection methodology means it doesn’t represent the broader online population and worse still, it doesn’t necessarily reflect human activity!

Here are the two main issues with Hitwise data:

1. Hitwise does not measure individuals – it measures traffic.

This effectively means you could hit your website with bot traffic to boost your numbers and it would show as traffic in Hitwise. Nielsen Australia removed 50% of GroupOn Australia’s traffic in March because that traffic consisted largely of unsolicited clicks, meaning popups that appear as you close scurrilous ads (Congratulations, you have won $1,000,000!!!!!) – those clicks are still counted in Hitwise.

2. Hitwise doesn’t include key ISPs

Hitwise harvest data from partnering ISP’s, however Australia’s two largest ISP’s BigPond and Optus don’t participate. This is major a concern as a large proportion of internet users (about 58%) are not reflected in their data. This is a particular problem for a business like Cudo given its mainstream audience, and mainstream Australia do not typically use fringe ISPs.

Nielsen was recently selected as the official measurement partner of the Australian IAB, in their press release they said:

With the endorsement of Nielsen Online Ratings, IAB Australia is identifying people-based metrics, as opposed to browser-based, as the best and preferred online audience measurement system for the Australian online advertising industry.

This is the nub of the problem. TechCrunch called it out almost two years ago.

At Cudo we didn’t care about browsers for obvious reasons, we cared about people, they still do, like the 1,000,000 plus Australians who go to cudo.com.au each and every month, I couldn’t give a monkeys how many Bots swing by!

GroupOn here in Australia, Bait and Switch is tactic #1

I was disappointed to hear about GroupOn’s Bait and Switch issue concerning the Valentine’s Day offer with FTD, however I immediately jumped to their defence.

A large part of Cudo’s operation is focused on ensuring that the offers we provide are 100% genuine, not just because we advertise on TV and are subject to rigorous standards, but because we believe the long term success of Cudo is hinged upon trust.

Our Merchant partners have to trust that Cudo will do the right thing by them by providing a great audience of new customers, broad brand promotion as described and payment in full within five days. And our members have to trust that Cudo is all about genuine no-brainer offers!

GroupOn must also have a whole team of people focused on ensuring that offers are “as stated”, hence why I jumped to their defence. However after seeing the following “all you can eat” ad, I am no longer sure!

Clicking on the ad for $8 all you can eat Macaroons takes you to a sign-up page, no such offer exists.

Deceptive. Yes. Bait and Switch. I think so.

Unless I am missing something, this type of Bait and Switch advertising is way out of line and threatens to damage the market as a whole. One thing is for sure, Cudo will never resort to these desperate tactics.

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