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Wednesday, November 24, 2010

Group-Buying's Retail Math...

... & your long term business health !...
by David Bookout

Related Post: to-discount-or-not-to-discount.

Since the last post I've been talking, listening, reading and percolating on the "group buy" phenomenon as it relates to long term business financial health. In general there seems to be a void of conversation relative to how long it actually takes for a business to "make up" for the customer acquisition cost they take on when embarking on the group-buying path. To illustrate the retail side financial mechanics of group-buy I've created a few examples. This first one illustrates a high level income statement for what I would call a healthy transaction.

40 North is key ~ Business health is critical and just like physical health, understanding some basic principles can go a long way in keeping your business viable long term. To me, THE King ( or, THE Queen, if you'd prefer ) of these principles on the business side is "Gross Margin". Gross Margin is hands down the key factor to watch for each and every transaction. As a rough rule, businesses that are NOT generating a minimum of 40% at the gross margin level will have a difficult time sustaining long term Business Profitability. In short, the lack of healthy vital signs in these areas make for a short lived business existence.

But what if your business doesn't have enough customers ?

To Market We Go... Retail businesses need to sell their products and services, right ? To successfully do that the business must make a clear offer to a customer, and that customer needs to able to hear that offer, and be wiling to accept it in a way that provides for long term business financial health for the retailer. In short, a customer is NOT a customer until they pay for products and services. This is especially true for entrepreneurs and while there can be many reasons for a venture to be compelling, there is no better test of a business model than cash flow.

Our second example illustrates why, from a retailer's perspective, executing a Group-Buy offer may not be a good choice. Note the Net Profit LOSS of $65. Some might say "I'm not worried about that, that's just the first purchase, we'll make it up over time."

But what really happens ?

Well, let's take a closer look... it may be a very, very long time before you turn a profit... First, let's look at the customers second purchase, which in this case we've said will be without further discounting. But we still need to account for the $65 loss from the first visit, so that goes back into the equation. Note that the second purchase, at full retail, still only allows us to compensate $10 towards the previous loss. So, at the end of two transactions the retailer has lost $55 ~ remember, I said the customer must pay ~ so, it looks like the wrong entity is paying to provide the offer. Right ?

And, here's where people might say "Wait a minute, you've already accounted for the loss." But have we ? True, we've accounted for the original $65 loss, but we've only been able to reduce that loss to $55 after the second visit. So, we need to carry that same $55 loss into the next transaction.

Then again and again... in visits 3 thru 7 ~ If we are not including a second group-buy discount in any of these transactions why can't we move from the red ink of loss into the black ink of profitability ? The answer lies in the -$30 "below the line" expenses that are generated from a whole list of non-direct expenses such as phone, insurance, equipment leases, etc., etc. With $40 generated at the gross margin line we need to pay others $30 for those expenses leaving $10. Had we not carried the transactional loss into the equation we would be making money. But we can't just dismiss the loss and expect to maintain a healthy perspective.

Note that after 8 transactions we've made $5 !

Big Box Confusion ~ Entrepreneurs frequently work with the false interpretation that losses can be made up over time, or within volume. BUT NOT in most SMB situations, time and volume is pure fantasy. Why ? Because the Big Box Model ( read WalMart, Costco, etc. ) relies on an economy of scale that most small to medium businesses don't have access to. These big stores have sophisticated systems for understanding blended gross margin. They also the benefit of hundreds of thousands, if not millions of transactions per hour. They've also driven the below the line expenses of each store to the smallest percent they can ~ that's why they are called big boxes. Group-buy does NOT magically emulate these conditions, and as we've just seen, the group-buy model doesn't deliver quick profits.

So, who benefits from group-buy ? ~ Consumers, the group-buy company, and, perhaps, a very small fraction of small to medium businesses that have a healthy pricing model and a high transaction rate ~ but, why would such businesses then need group-buy ?... Thanks for reading, would love to hear your thoughts !! - db

Tuesday, September 21, 2010

To Discount, or NOT To Discount ?...

...that IS the ?...
by David Bookout


Discounting seems to be a popular concept in today's economic times, and a topic that a number of clients are working with as they navigate their respective markets. So, I thought I would share a few public thoughts relative to discounting and the pricing strategies behind them:

First, discounting is an announcement that the provider has lost faith in the originally advertised ( I use the A word loosely ) price. They are saying, in effect... hey, we didn't think that you; Mr., Mrs., or Ms. customer "really" believed the value proposition we ( or, the manufacturer ) offered, so here's what we are going to do...

At this point the prospective purchaser says "Now you've got my attention ~ go on..."

But, is this really what they're saying ? It could be argued that they are REALLY now saying "Ah, I've got you where I want you...doubting the value of your own product / service, AND I'm going to wait to see how desperate you're going to get before I take advantage of you."

So, let's talk strategy.

Let's consider that discounting is a slippery slope, and once mounted, a difficult slope to gain traction on, let alone allow the climb to the heights of healthy, business building profitability.

From here we need to establish perceptual value and answer the question of exactly what pain the product, or service takes care of. The lower the pain ( read "concern" ) the lower the willingness to part with valuable cash. Especially when there is a question of where the replenishment cash is going to come from. Particularly true today.

So, strategically, and economically, we need to keep value high and remember that "recession" is where people don't have enough money, and "deflation" is where people wait until tomorrow to buy what they were going to buy today because it's probably going to be cheaper ~ upps, I meant to say "less expensive", tomorrow.

So, how do we keep value high ?

First and foremost by not folding to our own fear that what we're offering isn't valuable. The "market" ( a group of people ) ultimately decides what's valuable. BUT, the important thing to remember is that it takes actual declines ( no, thank you, not today ) that determines a price point. Effective price points don't get set arbitrarily, it's a two sided process, a two sided "conversation".

Second, if WE don't value the offers we're making who else is going to ? We alone know the "cost" that went into, or goes into making the offer we make. Discounting allows someone else to make this assessment. Just try and discount your cable bill, your phone bill, or the price you're going to pay for a dinner out this evening. Who do you encounter should you be so bold as to go here ? There's a difference between an employe who is unable to make a discounting decision and an owner who is willing to make a discounting decision.

Be an owner !

Choice ~ Actually, and I'm not advocating this as a strategy for everyone, but, some studies show that by removing price, and allowing the customer to pay "what they want" that the customer actually pays MORE for the product, or service provided !!!...

Some may argue that this is discounting to the max, but is it really ! ?

The effect is merely transferring the value decision to the consumer, a MUCH different strategy than discounting. Don't you think ?

In closing, here are five actionable steps:

1) Think about the brand identity that you want in the market place, and particularly the fact that the brand identity that you want may not be the brand identity that you're generating from the actions you and the rest of your company are taking. Brand consistency needs to be across ALL touch-points with your desired audience.

2) Think about the long term effects of any discounting strategy you're considering...

3) Spend just a little more time discovering the "true" value that your clients perceive in your product, or service offer...

4) Hold firm. Each transaction is a "conversation", even in today's world where you might not even get a chance to actually "talk" to a prospective customer. AND, most importantly, remember how you feel when you really want something ~ do you forget about it ? ~ no, you just keep going back until one of two things happen: (a) your situation changes such that you can "afford" to get what you want, or (b) the person selling reduces the price and brings what you can afford to a lower level.

5) Remember that it ( actually everything ) is a numbers game. So, if your only talking to a few people to base your product / service pricing decision, talk to more. There is a BIG difference between qualitative and quantitative study, particularly on price points.

Wednesday, September 8, 2010

Google Instant

Tickling the thinker in all of us, Google, today announced "Instant", their new predictive logic search feature that enables users to see real time results faster than ever before. To illustrate the time savings there were two side screens ticking off the number of hours saved ( approaching 50,000 ) by people using instant thus far. An amazing fact considering the increased horse power needed to deliver about 20x the results at the speed of light.

Silly me, I thought this feature had been available for some time, but, maybe that just wasn't in the full manifestation that was presented today by a team of Googlers that included Sergey Brin who was donning a pair of Vibram Five Finger shoes.

Amidst the questions in the Q&A of concern that the new feature had somehow altered results and crippled SEO I was personally impressed by the elegant UI / UX refinements that the development team, which included a cast of hundreds, had effectively designed into a box and a button ~ bravo !!!...

On the SEO front, I've always wondered why I've had difficulty optimizing this site to show up better in Googles rankings. After all Blogger is a Google property. After lunch I approached a member of the support team with my question. There weren't exactly sure, but, advised me to read the instructive literature available on the topic ~ { test } myquestionapparentlyabittoopedestrianforthepowersathand { end test }.

Of particular interest was the expansion of the new Instant feature to mobile and other languages, which were both promised to be coming in the next month. So, stay tuned.

Bob Dylan also lent a hand in a video the team put together to illustrate how they were inspired by the challenges of delivering on the project ~ search on !!

Thursday, August 5, 2010

Micro Branding...

a Must Have Innovation, or Marketing Fad ??...
by David Bookout

See Updates { 3 } & Comments below:

As Micro Lending becomes a more popular alternative to entrepreneurial funding, a concept, and a term that I'm calling "Micro Branding", is just getting started within the Social Media Management Systems ( SMMS ) sector.

For years I've drudgingly researched the boring, unimaginative, and downright frightfully designed "offers" that hawkers have been promoting in the Social Media space. During that time I've landed on and reviewed hundreds, if not thousands, of "capture" and "squeeze" pages designed to separate me from my money. The ultimate test, right ~ transaction with a paying customer ? ! As I said, most of these "offers" were boring, un-differentiated, un-compelling non-starters.

Executive Summary: Technical innovation, message, including value proposition, clearly delivered in print and video, good tech support structure utilizing Zend, a rocking affiliate program, and the personal touch of Tammy as the persona behind the brand. Nice !!!!! ~ Update 1 ~ I still like it... ~ Update 2 ~ The lack of branding capability on the FB side of MarketMeTweets is disappointing, but liveable, if I first post to Twitter, which is then linked to FaceBook.

More recently, however, I came across "Micro Branding", which appears to be a new niche creatively identified by Tammy Kahn Fennell and Alan Hamlyn. And, as good niche identifiers do, they built a tool that they call MarketMeTweet, which is a downloadable application that enables the brands you manage to own precious real estate on Twitter and facebook and much, much more. In total the tool helps you manage Social Media communications for a number of different accounts from within a common dashboard. Nice.

Here's how it works on the Twitter Platform: Normally, your Tweets carry someone else's brand in the real estate below your 140 character wisdom, just like "...by twitterfeed" in this example:

But, with MarketMeTweet you're able to brand build for the brand of your choice, like we have used "EFFETTI" in this example:

For those of you that haven't already said, cool, and clicked on one of the MarketMeTweet links above to find out more, or just sign up ~ then, you discerning folks might be asking questions like: (a) How does this benefit from an SEO perspective, or (b) How does this work if I'm an iPad, or mobile user ?? ~ Good points !! ~ Should we get those answers we'll be sure to update this post...

Update 3: August 7th ~ MarketMeTweet's FB limitation seems blurry on the marketing side...

MarketMeTweet's Tammy says; "The reason the facebook one is not the easiest too is notice - when you click on it it must go to an actual application - whereas with twitter it goes directly to a website ;)"

So, we did more testing and found the MarketMeTweet Micro Brand Link actually goes to a FB landing page for MarketMeTweet { Looks like a "website" to me ;-}, where another click IS REQUIRED via the ( Go To Application ) button, to go to the actual application page itself, which is here ( http://apps.facebook.com/marketmetweet/ ). Keep working on it Tammy, we understand corporate sales, and still like the product ( v.2.2.9 ).

Update 2: August 6th ~ MarketMeTweet's Tammy responds to their tool's lack of "Brand" capability on the FaceBook side as "...we're working on it". With a work around, I still like it, and wonder about a cloud based version !?...

Update 1: August 6th ~ MarketMeTweet's FaceBook beta ~ I must be doing something wrong ?...

After quickly configuring the FB account within the MarketMeTweet application the first post above exhibits a MarketMeTweet brand, so I need to check the settings. Perhaps, you have to add ( duplicate for me because I already did this on the Twitter side ) the brands you will be managing ? Nope, it looks like the Micro Branding is currently, only available from the Twitter side of the application, which I hope is high on the list of upgrades for the FaceBook beta, please...

Thursday, April 8, 2010

WE Badge Test

Grooming your identity on the World Wild Web...

In real estate it's location, location, location ~ in cyberspace it's identity, identity, identity.

For those of you that employ the strategy of commenting on other people's blogs to increase the number of link backs to your website, or blog ~ here is a bit of history and tip on upgrading the look of your Gravatar.

Read the whole story at Soulati – 'TUDE!

Tuesday, April 6, 2010

Ubisoft's Tony Key on game marketing...

Marketing challenges ? As you can see from this article you're not alone in the "World Wild Web". Entrepreneurs may find this quick read interesting from a strategy perspective ~ but, don't get too carried away unless you've got budget...

Read the whole story at Games.VentureBeat

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