Don Dodge on The Next Big Thing

MeCommerce - How to disrupt e-Commerce and Retail

MeCommerce is all about me and you. It is disruptive and can be applied to any business. I had a fascinating discussion today with Matt Lauzon, founder of Gemvera, about how he applied MeCommerce to the jewelry business. The core MeCommerce principles are; Customization, Customer Care, and Convenience. Some businesses do one or more of these already, but very few can execute on all three principles.

Customization - Dell Computer was one of the first tech companies to sell completely customized computers that were "built to order". Dell didn't have finished goods inventory. They built everything to the customer's order. You choose how much memory, size of disk, graphics card, processor speed, and a bunch of other options to get exactly the computer you want. Customization could be applied to almost any business. Having no inventory allows a business to reduce capital costs and respond quickly to customer demand. Nothing new here. It is only when you add the other two principles that you get disruption. 

Customer Care - For many years L.L. Bean mail order business had the best customer service anywhere. Tony Hsieh of Zappos took "customer experience" up another level with what he calls the WOW Experience. Great customer care makes the customer feel like they really care about me. Customer Service is more than just an expense, it is great marketing. It is building a loyal relationship with me.

Convenience - Make it easy for me to buy. Make it easy for me to find exactly what I want...even when I don't know what I want. Better yet, allow me to create exactly what I want. Suggest products to me based on what I have bought, or what others like me have purchased. Amazon does a great job of suggesting products to me. Netflix can suggest great movies based on what I have watched in the past, and what others like me suggest. This requires sophisticated technology and extensive data mining.

Take the best of Dell (customization) and Zappos (customer care) and Amazon (convenience) and you have MeCommerce. Matt Lauzon, founder of Gemvera, has applied these principles to custom made jewelry, and built the fastest growing online jeweler. The jewelry business already has great profit margins. But, the cost of carrying millions of dollars of inventory, thousands of different product SKU's, and no product differentiation, brings those juicy gross margins down to small net profits. Gemvera only sells online, carries no inventory, and provides the custom "me experience" to all their customers.

Think about how you can deliver the MeCommerce experience to your customers. Think about how to customize your product so you can have true differentiation. Think about how to deliver great customer care so your customers tell everyone they know how great you are. Think about how to make buying and discovering your product convenient. Sounds simple, but it is really hard to make the trade-offs to get it right.

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Grocery Groupon - connects online marketing to offline loyalty cards

The "holy grail" of advertising is to show direct results to a consumer sale. Groupon may have figured it out. More about that in a minute.  Advertisers complain "50% of advertising is a waste, we just don't know which 50%". Making a direct connection between an ad or offer and a specific sale is nearly impossible. TV, radio, and print advertising struggle to show correlation between advertising and improved sales, and have no way to actually prove it, or connect it to a direct sale.

Cost per click (CPC) search ads changed everything -  The Internet made online advertising easy. Search ads made it effective by showing a direct connection between a consumer clicking on an ad, visiting the web site, and purchasing the product or service. Search ads are a huge billion dollar business because they can make this direct connection better than any other form of advertising. But, this only works well for online sales. What about the billions or trillions in sales that happen offline in the traditional retail store?

Groupon connects online marketing to offline sales - This simple innovation, the holy grail of advertising, has propelled Groupon into a billion dollar company in just 2 years. The Groupon daily deal delivered online through email, paid for in advance by the consumer, and redeemed at the point of sale in the store, elegantly closes the loop between online advertising and offline sales. Awesome! But, can retailers afford 50% off deals? Do they really result in long term customer loyalty and increased sales?

Grocery Groupon uses loyalty cards to track post sale behavior. Wow! This solves several problems. Groupon already makes the connection between online marketing and offline sales. But now, with loyalty cards, advertisers can track the customer buying behavior beyond the ad or offer, to see if it really does result in additional sales.

How does Grocery Groupon work? It works like regular Groupon but with a special twist, loyalty cards. Most grocery stores already have loyalty or rewards cards. When a consumer buys a Grocery Groupon they enter their loyalty card number. Rather than get a Groupon certificate, the deal is automatically loaded onto their loyalty card. They simply scan their loyalty card at checkout and the item is already paid for.

Big Y, a grocery store chain in Massachusetts, is the first to use Grocery Groupon. Customers can buy a $39.99 seafood grill pack with lobster tails, clams, mussels and other seafood for $24, a discount of 40%.

Groupon is working with HaloEffect for marketing and Incentive Targeting for loyalty analytics for the Massachusetts pilot project. “Consumers in the US spend over $550 billion a year on groceries, and CPG companies devote $35 billion annually to marketing and promotion,” said Tom Schneider, President of HaloEffect, in a press statement. “We see this partnership having the potential to revolutionize the grocery marketing landscape.”

Ben Sprecher, founder and VP-marketing at Incentive Targeting, said using loyalty cards solves lots of problems around coupon fraud, and allows the advertiser to see the longer term results of the ad campaign.

If Grocery Groupon works it could be a billion dollar bonanza for Groupon. If it doesn't, the whole concept of 50% off deals to attract new customers is exposed as a myth, and Groupon fails. A billion dollar gamble.

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How does Groupon work? Is the business model sustainable?

Groupon is the fastest growing company ever. From nothing to a stunning 7,000 employees and billions in revenue in just two years. Groupon just filed for an Initial Public Offering (IPO) and revealed the financial details behind the media hype. TechMeme is ablaze with negative stories on Groupon. Minyanville says "Groupon is Effectively Insolvent". MG Siegler calls it "Grouponzi". Yipit says "Groupon S-1 Reveals Business Model Deteriorating". Not a single positive story to be found. Naturally my contrarian nature perks up.

How does it work? The core of Groupon is 50% off deals from retailers of all kinds, sold via email directly to consumers in a "one day only" sale offer. For example, a $40 hair styling for $20. The consumer pays $20 to Groupon and gets a certificate to redeem at the hair salon. The certificate may expire in one year or less. Groupon keeps 50% of the revenue, $10 in this case, and remits $10 to the hair salon. So, the customer gets a $40 hair styling for $20. Groupon keeps $10 and the hair salon gets $10.

Isn't this a 75% discount? The way the Groupon model works the retailer is effectively disounting their product or service by 75%, the consumer gets 50% and Groupon takes 25%. The retailer gets new customers, and is betting they come back and become loyal customers. In this way Groupon is a customer acquisition cost, much like advertising. 

Groupon's customer acquisition cost - Groupon itself, just like its customers, is spending huge sums to acquire new customers. Groupon lost $102M in the first quarter of 2011 on revenues of $644M. Analysis of some "older" markets show that while revenues are still increasing in total, the revenue per subscriber is dropping. I recall Amazon when it went public back during the dot com bubble. It was unprofitable for 6 years, but eventually turned the corner and is now very profitable. Can Groupon do the same thing? Will investors be as patient?

Can retailers survive 75% discounts? It depends on their business model. Companies that have high fixed costs and low variable costs may be able to afford 75% discounts. For Groupon to succeed long term the retailers must find the Groupon service attractive and come back for more deal offers. If they can gain loyal repeat customers it might make sense for them. 

Buy one, get one free - Retailers and restaurants have used "buy one get one free" offers for years. The difference is that they ran these offers themselves. They brought people into the store. And, they kept 50% of the revenue, not just 25% like the Groupon case. In restaurants the "buy one get one free" offer might apply just to the entree, not the drinks or deserts, so those were full price and profitable. Or, it might be "get $10 off a check of $20 or more" so they were only discounting the first $20...the rest was regular retail price.

Who can make money with Groupon? Consider health club memberships, yoga classes, harbor cruise boats, music concerts, sporting events, classes, theater productions, etc. Software, Music, Movies, and DVDs are the classic high fixed cost, low variable cost businesses. Every additional customer is almost pure profit once the fixed costs are covered. Any business that has a low variable cost might find Groupon attractive.

High margin businesses might also like Groupon. Jewelry, perfume, wines, and high end fashions are a few examples of very high margin businesses, where the retail price bears little resemblence to the actual costs. Believe it or not there are some businesses where the retail price is 200% to 500% the actual cost. A Groupon 75% discount could work in these businesses.

Breakage is 100% profit - Most people forget about what the industry calls "breakage", a paid certificate that expires unredeemed. The consumer just forgets to redeem it, or doesn't care. Gift card dealers make a fortune on unredeemed gift cards. In the United States each state could have different laws concerning gift cards, certificates or discount coupons. For example, in California gift cards can not expire. In other countries there are no laws concerning unexpired certificates of cards. If just 10% of the consumers don't redeem their certificates that could mean hundreds of millions in profits for Groupon.

Is Groupon sustainable? No one knows for sure. Time will tell. Competitors are sprouting up everywhere. Margins are likely to tighten. Competitors will offer the merchants better deals with lower discounts. Will consumers become loyal repeat customers after using a Groupon? If not, the whole concept doesn't work. On the other hand, as we have seen with Facebook, Twitter, YouTube, Amazon, Google, Skype, and many other iconic brands, once a huge customer base is established, it is very difficult for a competitor to lure them away.

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Twitter litter - do followers really follow you?

The definition of "Follow" on Twitter is different for everyone, but for me it means I read every tweet from the people I follow. I purposely limit the number of people I follow to under 100 because I can't realistically keep up with anymore than that. I simply don't have the time. Some people play the “I will follow you, if you follow me” game in an attempt to amass more followers. Not me.

I do find Twitter immensely useful to keep my finger on the pulse of what is happening in the tech world. The people I follow provide not just the news, but insight and perspective on why it is important. In return, I try to keep my Tweets focused, useful, and insightful...to the extent that is possible in 140 characters.

I wrote the post below two years ago. Since then "Twitter Litter" has exploded. Scoble and Kawasaki have many more "followers", and the meaning of "Follow" has been completely destroyed. Read this post and please respond with how you use Twitter, how many people you follow, and how you think about "followers".

Twitter Litter most followers don’t really follow you

Robert Scoble follows 80,141 people on Twitter. Do you think he really reads the “tweets” of all those people? No way. Not humanly possible…even for Superman Scoble. Guy Kawasaki follows 97,276 people on Twitter. Clearly, follow means something different to them. The reality is that many Twitters engage in the “I will follow you, if you follow me” game in an attempt to amass more followers. The result is that no one really listens (follows) anyone. Twitter Litter.

Robert and Guy are great guys, sensational networkers, and friends. I have the greatest respect for both of them. But let’s be clear, this is just marketing.

What do they get in return? Kawasaki has entered 20,337 tweets and Scoble 19,228. That is a lot of work, lots of tweets, lots of following random people. What is the return on all that work? Kawasaki has 89,472 “followers” in return for his following 97,276 other people. Scoble has 73,030 followers, while he follows 80,141. Is it worth it? Do phantom followers have value?

Jason Calacanis, another sensational marketer, offered $250K to be on Twitters “suggested user” list. Today he upped the offer to $500K. Jason admits that his offer was “half bluffing” and a great way to get buzz, but he justifies his offer with some interesting math. The numbers all compute, but they rely on some questionable assumptions. Puzzle out this one “If I was able to reach three million followers, and kept half of them (1.5m), that means every tweet would get 15,000 visits. Five a day means 75,000 daily visits, and over two million visits a month–or close to 50m visits of two or three years. Some percentage of those two million would participate in Mahalo by asking or answering questions, and if that number is also .5 to 1%, that means I would get about 250,000 new members for my service.” There are a lot of “ifs” and assumptions in there. Maybe he is right. The outcomes of these opportunities are never obvious.

So, what is a Twitter follower worth? Do they really follow and read your tweets? Can you really say anything meaningful in 140 characters? Will Twitter come up with a profitable business model? Is Twitter worth the $500M acquisition price that was rumored? Is being on Twitters “suggested user” list worth $500K? Hmmm…maybe Mahalo Answers can help? Which is precisely the result Jason Calacanis, founder of Mahalo, is hoping to get for his $500K. Good luck!

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