Wednesday, August 17

Amending IPOs: Does Groupon Really Work?

GrouponJust hours after the Wall Street Journal was reveling over the Groupon IPO last week, the unexpected happened. The "fastest-growing company in the history of mankind" had some wind knocked out of its sails over odd accounting. There's more to the story than record revenues.

It was also able to sustain its rapid sales growth, bringing in $878 million in net revenue, a quarterly increase of 36 percent. High expenses, however, resulted in an operating loss of $102.5 million in the second quarter. — Forbes

Most people know that the day deal site is big on marketing. It spent $165.2 on online marketing to gain new subscribers last quarter, which is lower than the $179.9 million it spent the previous quarter. Where people need to look under the hood is exactly what marketers talk about on a regular basis — what's the marketing ROI and how many people need to manage it.

Straight math might suggest that the company makes $4 for every $1 of marketing. However, that doesn't necessarily account for everything else — staff, consultants, and time-to-creation. Those are the numbers you might want to look at, and then you might wonder about some other things too. It would be a shame to discover Groupon is a company that loses even $.01 for every dollar it spends. Because if that were true, then the company is only growing by continually spending ahead of itself.

Groupon is a good idea, but advertisers need restraint.

There is plenty of truth to the old adage that everything is okay in moderation. A glass of wine with a meal, for example, can even be healthy. Ten bottles, not so much, but only because it comes with the hangover. And that's the question, isn't it? What happens when the party ends?

Personally, I know many social media pros who are down on Groupon. I'm not one of them, but I have expressed some caution. It's has nothing to do with Groupon as much as it has something to do with marketing.

Companies that rely too much on coupons and fire sales can create some unusual problems unless they know what they are doing. And unfortunately, not all companies know what they are doing. What problems?

Sometimes, wildly successful campaigns can hurt you too.

If you have ever worked with a restaurant (or a retail establishment), you might might be familiar with the story. If a modestly successful business suddenly has a surge that overpowers staff on hand, the experience changes significantly.

Not only does the restaurant suffer in terms of quality food and customer service, but people might also be turned away — except one customer, who happens to be a reviewer ordering the one dish that you're suddenly out of. To make matters worse, if the coupon counts exceed regular patrons, the revenues might look good, but the company could still take a loss.

The same holds true for non-restaurants too. When demand outpaces supply, those turned away may never come back. When discounts become the norm, people stop buying until the next deal. When one-time buyers flood the space, loyalists are accidentally pushed aside. When the experience isn't perfect, that's the day the reviewers show up. And when you have a math error, revenue records can carry a negative profit.

The best coupon campaigns are those with objectives that go beyond immediate sales. Product introductions, short-term, reason-specific campaigns (back to school, for example), or short-term engagements (special guest or limited time product) can help maximize exposure and market penetration, especially while working in conjunction with a public relations and/or social media campaign. And, always anticipate a response greater than expected, even if it never happens, and never take a loss on the offering.

So what about Groupon? It really depends. If Groupon is built on companies taking losses with impossibly attractive offers that are fueled by advertising at a loss for greater reach, there might be a pretty big problem. But if Groupon is everything that it says it is, short of creative accounting, then that might make sense for some. What are your thoughts about Groupon?
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