The real reason why merchants use Groupon

If you haven’t heard of Groupon, it’s a site which emails users an offer each day. The offers provide deep discounts (around 50%) on all manner of things – meals, consumer products, services, and so on – based on the premise that there’s power in group buying.

This premise would intuitively lead you to believe that Groupon can get these discounts because it’s able to buy in bulk. The upside for the merchant is they get a guaranteed chunk of revenue, and also introduce new customers to their business. However, when you think about it a bit more, you start to wonder how merchants can make any money when they discount their goods by 60%. Surely, their margins can’t be that high? And then you have to factor in Groupon’s cut – which has to be significant for it to earn its multi-billion dollar valuation.

It turns out that Groupon actually splits the sales revenue 50:50, which means that merchants cop a markdown on their goods or services of about 80%. There are very few businesses in the world – especially when it comes to consumer goods – that have that kind of margin, so the conclusion is that the merchants lose money. Why do they do it?

You see, for the merchants, it’s not about making a profit on these deals. For merchants, the value proposition is advertising. Groupon is a marketing channel for merchants, not a sales channel.

This post on NY Times’ blog does a great breakdown of all the factors weighing into whether it makes financial sense for a merchant to use Groupon:

There are eight key calculations you need to consider to determine whether this is a better advertising vehicle than something else you may already be doing:

1. Your incremental cost of sales — that is, the actual cost percentage for a new customer. If you are giving boat tours and have empty seats, your incremental costs for an additional customer are next to nothing. If you are selling clothes, your incremental costs might be 50 percent of the sale price. Food might be 40 percent. In any case, don’t include fixed costs that you would be incurring any way.

2. The amount of the average sale. If the coupon is for $75, will the customers spend more that that? I have seen more than one retailer complain that nobody spends more than the value of the coupon. That’s unlikely but I am sure it can feel that way, and that is my point: Keep track.

3. Redemption percentage. You don’t really know until the end, but from my experience and from what I have heard, 85 percent is a good guess.

4. Percentage of your coupon users who are already your customers. I’m sure this number varies tremendously depending on the size of your city, how long you have been around, and the type of business.

5. How many coupons does each customer buy? (The more they buy, the fewer people are exposed to your product or service.)

6. What percentage of coupon customers will turn into regular customers? Again, it can seem as if they are all bargain shoppers who will never return without a discount, but that’s almost impossible. Is it possible 90 percent won’t return? Sure.

7. What is the advertising value of having your business promoted to 900,000 people — that’s the number on Groupon’s Chicago list — even if they don’t buy a coupon?

8. How much does it normally cost you to acquire a customer through advertising? Everything is relative.

  8:52pm  •  Business & Finance  •  Tweet This  •  Add a comment  • 

Legal industry notes

LawRiot’s notes from the 2010 National Asian Pacific American Bar Association Convention:

On Hiring, Reading Your Resume:
(1) Where you went to law school matters most
(2) Then they look to where you went for undergrad, any other grad degrees
(3) Then they look at your grades and activities (don’t bother writing Moot Court if you didn’t win any external competitions, it carries little weight without some standardized method of ranking)
(4) Then they look at experience, especially technical experience if patent-related position sought

It’s troublingly fascinating that the brand name of not only your law school, but also your undergrad school, appear to outrank how well you actually did at law school when lawyers consider who to hire.

Biglaw bonus season has started, and with Cravath having announced yesterday (and Skadden having matched today), it will be as anemic as last year. Which can only be an almighty kick in the face for those that billed in the high 2000s (or more), because profit per partner figures are expected to rise from the nadir of 2009 and bonus compensation at most biglaw firms is lock-step.

  8:08pm  •  Law  •  Tweet This  •  Add a comment  • 

Three moving capos

Trace Bundy plays a song on his acoustic guitar with three moving capos:

See also this song, where he uses 5 capos. And here’s a clip of him playing Pach’s Canon with Korean wunderkind Sungha Jung.

  10:53pm  •  Music  •  Tweet This  •  Add a comment  • 

Another TSA backscatter machine story

This story’s a good one. The TSA is making US citizens pass through the backscatter machine on re-entry into their own country. Obviously the TSA didn’t think this through thoroughly enough. You can’t deny a citizen re-entry into his or her own country, which means you can’t really deny them re-entry if they don’t step through the machine. Otherwise you’re looking at false imprisonment. The most the cops can do is arrest someone for walking through without going through the machine, but that would pre-suppose that there is a law which requires people to follow the TSA’s instructions on that – and for that law to be constitutional. This led to this scenario:

This new line led to a TSA security checkpoint. You see, it is official TSA policy that people (both citizens and non-citizens alike) from international flights are screened as they enter the airport, despite the fact that they have already flown. Even before the new controversial security measures were put in place, I found this practice annoying. But now, as I looked past the 25 people waiting to get into their own country, I saw it: the dreaded Backscatter imaging machine.

Now, I’ve read a fair amount about the controversy surrounding the new TSA policies. I certainly don’t enjoy being treated like a terrorist in my own country, but I’m also not a die-hard constitutional rights advocate. However, for some reason, I was irked. Maybe it was the video of the 3-year old getting molested, maybe it was the sexual assault victim having to cry her way through getting groped, maybe it was the father watching teenage TSA officers joke about his attractive daughter. Whatever it was, this issue didn’t sit right with me. We shouldn’t be required to do this simply to get into our own country.

So, since I had nobody waiting for me at home and no connecting flight to catch, I had some free time. I decided to test my rights.

  9:58pm  •  Law  •  Tweet This  •  Add a comment  • 

In the business news

Ireland’s debt troubles are continuing, and it hasn’t been doing the Euro any favours. Bond yields are spiking and the economy is in bad shape. It looks like they will need to get financial assistance from the IMF and EU. However, as a condition of making this aid available, Ireland’s creditors-to-be are angling to change its tax policy. Ireland’s 12.5% corporate tax rate is one of the lowest in the EU, which has caused a whole bunch of IP-heavy companies to set up large offices there (Google, Microsoft, and some pharma). I wonder what effects this will having.

Is there another startup bubble in the Valley? "Certain areas of the Internet, there are some crazy things going on. Getting overheated. People are getting crazy, they’re showing up to their first meetings with term sheets. In the early stage market, two-, three-person teams are getting $30, $40, $50 million valuations. That’s not right." That sounds pretty crazy. There are lots of very early start-ups that seem to be managing to score $5m valuations as angels (and even some VCs) pile on, but $30-50m?

Meanwhile, the legal market in the US is still sluggish. As biglaw associates around the nation hold their breath waiting for bonuses to get announced (they’re really late this year!), things seem to be going quite healthily in Australia. And Google is hiring like crazy as well: 2,000+ job openings, including more than 50 legal job openings! I know two SLS people who were recently hired for the Brazil and Italy offices.

Twitter is try to raise funding at a $3 billion valuation. A few weeks ago, Michael Arrington wrote that, "The company is still effectively revenue-free." They have their promoted tweets… but they are hardly generating the revenue, let alone profit, that you would expect a $3bn company to generate.

  10:11pm  •  Business & Finance  •  Tweet This  •  Add a comment  • 

How they do airport security in Tel Aviv

US airport security has not been having a lot good press lately. People these days now have a choice between a TSA backscatter machine (which experts worry may be carcinogenic and which reveal more about people’s bodies than they like) and a pat down by a TSA officer (which has been described as legalized sexual assault). Israel has been grappling with terrorism for a very long time, and this article explains how incredibly efficient getting through security at Ben Gurion is:

At the check-in desk, your luggage is scanned immediately in a purpose-built area. Sela plays devil’s advocate — what if you have escaped the attention of the first four layers of security, and now try to pass a bag with a bomb in it?

“I once put this question to Jacques Duchesneau (the former head of the Canadian Air Transport Security Authority): say there is a bag with play-doh in it and two pens stuck in the play-doh. That is ‘Bombs 101’ to a screener. I asked Ducheneau, ‘What would you do?’ And he said, ‘Evacuate the terminal.’ And I said, ‘Oh. My. God.’

“Take Pearson. Do you know how many people are in the terminal at all times? Many thousands. Let’s say I’m (doing an evacuation) without panic — which will never happen. But let’s say this is the case. How long will it take? Nobody thought about it. I said, ‘Two days.'”

A screener at Ben-Gurion has a pair of better options.

So, can the TSA learn?

  10:17pm  •  Travel  •  Tweet This  •  Add a comment  •