My previous blog did evoke some interesting conversations on pros-cons on the Group Buying models. Mostly the argument for Pro group buying almost always veered towards group buying being a great model for service which has high-fixed cost and excess capacity. The examples almost always ended with Travel (Airline) and Hotel Industry and extrapolating that to SMBs!
To recap: High-Fixed cost services which has excess capacity (after recovering its fixed cost) tends to gain from every $ they earn for the same session (Airplane, Yoga Studio etc..) as the cost of acquisition is not significant there after. The Key here is "post fixed cost recovery" and "same session". This is a very Rational Viewpoint. The flipside is, behavioral economics, human beings and market dynamics are not Rational!
Lets take a Yoga Studio as in one of the examples. If the fixed costs were $2000 (lets say) per month (Lets call this a monthly session) and you have enough students who have already covered your cost. Now every additional student (assuming you have excess capacity) you add to the same session should be profitable for the Yoga instructor correct? Rationally Correct.
The challenge with this debate is exactly what the "all customer defects" scenario as per the Prisoner's dilemma presents. When the initial paying customers gets a wind of what you do to fill the remaining capacity of the Studio, they start defecting to wait for that Deal... and this catches on (is catching on). Airline and similar (Hotel) industry is only very few industry which can afford to operate in this model as people are 'pressed' to fly and cannot always wait for a deal. For everything else (which is not pressing), they will wait for a deal. This is already happening in the SMB markets in volumes as we speak. Regular paying customers are defecting to wait for deals. Also, they would now not mind to switch loyalty off the Merchants if someone else gives a deal.
We must exercise caution while extrapolating such models to SMBs right off. Unlike airline industry, the 'long tail' of similar merchants (Yoga, Cafe, Saloon...) is relatively much voluminous in a given city than a consolidated few flight schedules between two cities across airline players. which means, there will mostly always be a deal for me to defect.
When most customer's defect, then, the prisoner's dilemma feeds on itself to erode value out of the system. Talk to the SMBs to feel their pain and validate this.
A key metric on the current deal-seekers for Merchants now includes in excess of 50% (median) and as high as 90% in some formats of "existing" customers biting the deal! Did you add additional footfalls then? or are you defecting your current paying customers?
When most of them defect, the SMB will now be fully dependent on the likes of Groupon for filling seats to recover their high-fixed cost. Great if you are Groupon, Living Social, Google Offers..., Epic win if you are a Consumer, Sucks if you are a SMB. You know what SMBs will do if this happens right? (and what will be left of the business model.)
Bottom-line: The current avatar of group buying is just not a proven model yet and needs to focus on a whole lot of market dynamics to assure a equilibrium before we can claim that it works.
Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts
Friday, June 03, 2011
Thursday, June 02, 2011
Group Value, Where Art Thou?
There are exciting theories and debates on group buying, thanks to the promised land prescribed by Groupon who made Group buying the current rock-star of the fledgling US markets (post, recent down-turns that is). (Is it adding to inflation or aiding? Hmmm, tangentially different debate.) With today's S-1 filing, the heat (usually which allows a hot air balloon to raise) seems to be turned on. Don't get me wrong. Hot air balloons are the greatest invention which allowed mankind to fly. Just that its not a preferred mode of transport since the Heidenburg disaster. So is Group buying a proven model yet?
Quick recap: Retailers usually break down their sales life cycle largely into Acquisition, Retention and Servicing. The budgets for ATL (Above the line), deep-discounts and loss-leader line of products typically falls in the Acquisition cycles. The loyalty and BTL (Below the line) promotions fall into the Retention bucket. Upgrades and up-sell falls into the Servicing bucket. Smart Retailers do not aggregate a single promotional budget to track their consumer micro-segments. Instead, they spend their research and sampling $$ on new customers, marketing $$ on Silver profiles, retention $$ on Gold profiles and the Service $$ on Platinum profiles. Not all these budgets are equal. Most important of all, The ROI of each of these spends are significantly different for each micro-segment. Also, retailers trade-up during boom cycles and trade-down during bust-cycles (So the budget varies).
Where does group-buying fall into? Clearly the Acquisition bucket (which is NOT a capex spend but a marketing cost). The Acquisition is the big funnel that marketers fill in order to convert the footfalls towards the Retention bucket. One must make sure that they fill quality leads which aids in healthy conversion helping them move the leads to the Retention bucket. What are quality leads? Are consistent deal-seekers quality leads? Are Bargain hunters quality leads? Is the cumulative conversion index per consumption-segment positive? These are some of the questions which a optimized, organized retailer such as GAP, Walmart etc. asks. Are these measures different for a SMB retailer? I would argue that they are even more applicable for a SMB...
When does one deep-discount? typically, when you have end-of-line sale, surplus capacity whose account has gone into sunken cost, poor-utilization rates (Ex: Hotel Rooms), Expiring shelf-life, to clear product line whose GMROII is not positive, Projected increase in policy costs (Taxation changes on holding inventory), or adding large sampling to acquire new customer base for virgin markets or virgin products. (I may have missed few others for sake of brevity). Most of the above is a provisional measure for retailers who are operating in a larger scale of economy. What are the premise for SMBs then? In my umpteen conversations with the SMBs, deep-discounting occurs primarily to add leads to their funnel in the hope that the consumer shall experience the "Unique product offering, Service and Ambiance" which is a differentiation for the SMB to exist. Now this sounds like a virgin offering. So it clearly is for "Sampling" then for the SMBs.
Now, the Cost of Consumer Acquisition (CCA) should be paying off on the long run through two different measures that adds up.
1) NPV or the Net Present Value of the Consumer.
2) LTV or the Life Time Value of the Consumer.
The NPV for virgin footfalls does not exist. Which leaves the LTV. This materializes only after the conversion. Remember that the CCA of 'N' who are added to the funnel is used in determining the 'M' conversions and their LTV. Meaning the CCA cost of adding 100 virgin footfalls must be offset by the LTV of the 5 who gets converted (5% as a example).
The CCA and LTV are very segment specific (Beauty & Massage parlours, Small Eateries & Restaurants, Boutique Hotels, Convenience Stores etc..). The conversions are also segment specific. Not only are they segment specific, the country of operation, the consumer behavioral context, culture and current economy makes a huge difference in any of these measures.
As an example: A country like USA where people leave a tip in the Restaurant on the original price of the meal-offer (Not on the group-discounted price) makes a significantly large difference in the operating cost for the Vendor as against in India where people usually do not like to leave tips or have a standard 5 Rupee coin for whatever the ware maybe.
Also the LTV is a layered value derived based on effective frequency of visit. Meaning, How many of them visited 1 time, 2 times etc... and the relative spend thereafter. Also, there is a break even frequency at the same cost before a positive value can be derived (Here is a simplified calculator)
Not all SMBs are also geared to service a peak footfall that occurs during this group-buying frenzy, which results in diluted service/offering. This hampers the conversions badly. Most of the SMBs are not seeing a conversion above 3% (median) of the footfall. I have been following rants about SMBs saying that they shall never go back for Group-buying again . I have also heard rave reviews about some Up-sale (NOT conversion) during such frenzy, especially in the Beauty Segment (people walk in for 500 RS worth of ware but spend 10K), These guys love the group-buying models... besides, there has been theories that deal-seeking bargain-hunters are never loyal (There are stats to prove this)... All of this has to play out towards a equilibrium in the long run.
The point is: Group-buying in its current avatar (Independent of what ever the top-line suggests for Groupon) is not YET a proven model for SMBs. It cannot address the economy of scale challenges of the big retailers either. So where does it fit as a positive operational model? I am not saying that this will fail. Its just that there is a lot more nuance and context specific treatment that is required to make this a classic. I am sure the markets will figure it out eventually...
For now, how many of you are standing in the line for the Groupon IPO? Make sure you do not sell your house as of yet to invest :)
Quick recap: Retailers usually break down their sales life cycle largely into Acquisition, Retention and Servicing. The budgets for ATL (Above the line), deep-discounts and loss-leader line of products typically falls in the Acquisition cycles. The loyalty and BTL (Below the line) promotions fall into the Retention bucket. Upgrades and up-sell falls into the Servicing bucket. Smart Retailers do not aggregate a single promotional budget to track their consumer micro-segments. Instead, they spend their research and sampling $$ on new customers, marketing $$ on Silver profiles, retention $$ on Gold profiles and the Service $$ on Platinum profiles. Not all these budgets are equal. Most important of all, The ROI of each of these spends are significantly different for each micro-segment. Also, retailers trade-up during boom cycles and trade-down during bust-cycles (So the budget varies).
Where does group-buying fall into? Clearly the Acquisition bucket (which is NOT a capex spend but a marketing cost). The Acquisition is the big funnel that marketers fill in order to convert the footfalls towards the Retention bucket. One must make sure that they fill quality leads which aids in healthy conversion helping them move the leads to the Retention bucket. What are quality leads? Are consistent deal-seekers quality leads? Are Bargain hunters quality leads? Is the cumulative conversion index per consumption-segment positive? These are some of the questions which a optimized, organized retailer such as GAP, Walmart etc. asks. Are these measures different for a SMB retailer? I would argue that they are even more applicable for a SMB...
When does one deep-discount? typically, when you have end-of-line sale, surplus capacity whose account has gone into sunken cost, poor-utilization rates (Ex: Hotel Rooms), Expiring shelf-life, to clear product line whose GMROII is not positive, Projected increase in policy costs (Taxation changes on holding inventory), or adding large sampling to acquire new customer base for virgin markets or virgin products. (I may have missed few others for sake of brevity). Most of the above is a provisional measure for retailers who are operating in a larger scale of economy. What are the premise for SMBs then? In my umpteen conversations with the SMBs, deep-discounting occurs primarily to add leads to their funnel in the hope that the consumer shall experience the "Unique product offering, Service and Ambiance" which is a differentiation for the SMB to exist. Now this sounds like a virgin offering. So it clearly is for "Sampling" then for the SMBs.
Now, the Cost of Consumer Acquisition (CCA) should be paying off on the long run through two different measures that adds up.
1) NPV or the Net Present Value of the Consumer.
2) LTV or the Life Time Value of the Consumer.
The NPV for virgin footfalls does not exist. Which leaves the LTV. This materializes only after the conversion. Remember that the CCA of 'N' who are added to the funnel is used in determining the 'M' conversions and their LTV. Meaning the CCA cost of adding 100 virgin footfalls must be offset by the LTV of the 5 who gets converted (5% as a example).
The CCA and LTV are very segment specific (Beauty & Massage parlours, Small Eateries & Restaurants, Boutique Hotels, Convenience Stores etc..). The conversions are also segment specific. Not only are they segment specific, the country of operation, the consumer behavioral context, culture and current economy makes a huge difference in any of these measures.
As an example: A country like USA where people leave a tip in the Restaurant on the original price of the meal-offer (Not on the group-discounted price) makes a significantly large difference in the operating cost for the Vendor as against in India where people usually do not like to leave tips or have a standard 5 Rupee coin for whatever the ware maybe.
Also the LTV is a layered value derived based on effective frequency of visit. Meaning, How many of them visited 1 time, 2 times etc... and the relative spend thereafter. Also, there is a break even frequency at the same cost before a positive value can be derived (Here is a simplified calculator)
Not all SMBs are also geared to service a peak footfall that occurs during this group-buying frenzy, which results in diluted service/offering. This hampers the conversions badly. Most of the SMBs are not seeing a conversion above 3% (median) of the footfall. I have been following rants about SMBs saying that they shall never go back for Group-buying again . I have also heard rave reviews about some Up-sale (NOT conversion) during such frenzy, especially in the Beauty Segment (people walk in for 500 RS worth of ware but spend 10K), These guys love the group-buying models... besides, there has been theories that deal-seeking bargain-hunters are never loyal (There are stats to prove this)... All of this has to play out towards a equilibrium in the long run.
The point is: Group-buying in its current avatar (Independent of what ever the top-line suggests for Groupon) is not YET a proven model for SMBs. It cannot address the economy of scale challenges of the big retailers either. So where does it fit as a positive operational model? I am not saying that this will fail. Its just that there is a lot more nuance and context specific treatment that is required to make this a classic. I am sure the markets will figure it out eventually...
For now, how many of you are standing in the line for the Groupon IPO? Make sure you do not sell your house as of yet to invest :)
Monday, May 23, 2011
Where lies the rhetoric?
Its amazing how many debates exist out there on what should be the 'right' reasons to start a business. There are so many theories around making-meaning, start-to-scale, greed-is-good, fast-company etc... The proportions of these principles contradicting each other is high. Equal number of empirical evidence exists to hold each of these theory on its own. The empirical evidence is mostly either in the form of demonstrated success stories and strong learning post-success or some are retro-rationale (as some call it). Are there enough based on the principles of failure in this culture and economic context? Are there enough which are from here (India) and not pre-canned?
There seems to be camps which discourage entrepreneurs-in-the-making (EIM) to first find the 'right' reason. If the reasons does not match the eye-of-the-beholder, they are quick to dismiss the EIM as a wannabe. There is also a term 'wannapreneur' for such dismissals. This seems to be applicable to the ideas as well, which gets discouraged cause the beholder has a strong opinion against it. Woah!!!
Funnily enough, these dismissals does not come from the Investment community. Most of the investors I have come across or heard of have mostly NEVER dismissed an entrepreneur based on the stated right or wrong reasons of the EIM. Generally, the Indian investment community (I have no interactions with others) is really a mature lot in understanding that there is no point being predictive and judgmental about the reasons. Also the investors confess that they have no way to even tell, as a matter of fact, if a given idea is a great scalable idea which will have huge returns or not. They have invested in ideas they think are awesome and failed (Ok, there are many reasons to fail. I agree), and have passed great ideas, where they did not have enough gut-feel (yes, that feeling in their stomach, not the brain) but later found that it was a big hit (Yes, there are equally many reasons to succeed).
Shouldn't people start business based on whatever reasons, principles, theories they believe-in is right? If the reasons are 'strong enough' to make a difference then it shall find the early-adopters, and if it is 'right enough', they will cross the chasm.
If the markets are the best course of correction, then, shouldn't we encourage every one who is willing to crossover, to do so, independent of their reasons? Shouldn't the eco-system have a healthy amount of failure for everyone to figure out the cost of failure (or a new path to succeed) for whatever the reasons may be?
I am of the belief that India lacks by huge margins (yet) in the number of startups per year (given the per-capita measure). Also, it is way-early to define reasons/principles of success which are context, economy and culture specific, as there are very few successful startups or number of exits (yet). The only way to increase this is to initially increase the size of funnel before applying any "qualifications" to the funnel. The qualifiers are not known yet. Even if (hypothetically) known, its not reason enough to stop the inflow of entrepreneur-energy-capital.
Entrepreneurial-Energy is a scarce resource. Kindly, encourage them to start...
There seems to be camps which discourage entrepreneurs-in-the-making (EIM) to first find the 'right' reason. If the reasons does not match the eye-of-the-beholder, they are quick to dismiss the EIM as a wannabe. There is also a term 'wannapreneur' for such dismissals. This seems to be applicable to the ideas as well, which gets discouraged cause the beholder has a strong opinion against it. Woah!!!
Funnily enough, these dismissals does not come from the Investment community. Most of the investors I have come across or heard of have mostly NEVER dismissed an entrepreneur based on the stated right or wrong reasons of the EIM. Generally, the Indian investment community (I have no interactions with others) is really a mature lot in understanding that there is no point being predictive and judgmental about the reasons. Also the investors confess that they have no way to even tell, as a matter of fact, if a given idea is a great scalable idea which will have huge returns or not. They have invested in ideas they think are awesome and failed (Ok, there are many reasons to fail. I agree), and have passed great ideas, where they did not have enough gut-feel (yes, that feeling in their stomach, not the brain) but later found that it was a big hit (Yes, there are equally many reasons to succeed).
Shouldn't people start business based on whatever reasons, principles, theories they believe-in is right? If the reasons are 'strong enough' to make a difference then it shall find the early-adopters, and if it is 'right enough', they will cross the chasm.
If the markets are the best course of correction, then, shouldn't we encourage every one who is willing to crossover, to do so, independent of their reasons? Shouldn't the eco-system have a healthy amount of failure for everyone to figure out the cost of failure (or a new path to succeed) for whatever the reasons may be?
I am of the belief that India lacks by huge margins (yet) in the number of startups per year (given the per-capita measure). Also, it is way-early to define reasons/principles of success which are context, economy and culture specific, as there are very few successful startups or number of exits (yet). The only way to increase this is to initially increase the size of funnel before applying any "qualifications" to the funnel. The qualifiers are not known yet. Even if (hypothetically) known, its not reason enough to stop the inflow of entrepreneur-energy-capital.
Entrepreneurial-Energy is a scarce resource. Kindly, encourage them to start...
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