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Families, Tribes and Organizations

The week after we sold Community Connect Inc., I didn’t receive any calls from Executive Search firms.  I remember waking up early one morning and feeling panicked not knowing what I was going to do next and more importantly that no one really cared.  Well, that didn’t last long as I soon started getting calls and being pitched CEO gigs.  When we sold Community Connect, we had about 130 employees and we were generating about $20 million in revenues.  Was the next stage of my career growing a company to over 1,000 people and 9 figures in revenues?  I had to take a step back and decide on what I really valued and liked to do.  Selling Community Connect gave me this enormous gift of having some financial independence and allowed me to  focus on what was going to really make me most happy.  So I reflected on the 12 years of running Community Connect and tried to recall the periods in which I was happiest and soon realized that I had the most fun in the early days.  Yes, I was in my early 20s and we were pioneering the concept of social networking before the term “social networking’ was even coined but what really made it so enjoyable was the people.  The environment and energy was incredible when the company was less than 50 people.  We all felt we were really “in it” together, everyone had this great entrepreneurial energy and most importantly we all became friends.  There was no sense of “corporate culture”, no formal corporate communication plans, no corporate processes.  Just a group of people trying to make things happen.  Organized chaos among a group of people that really enjoyed working and hanging out with each other.  That is what I missed.

I described this to a good friend and mentor – Bill Lohse.  Bill has had a very accomplished career including being President of Ziff Davis Publishing and he told me that what I longed for again is when a company is a family or a tribe versus an organization.  When a company is less than 20 people it really is like a “Family”.  Everyone is incredibly close.  It doesn’t mean that you all get along at all times but there is a level of connection and loyalty that is so powerful.  Everyone knows what is going on, there are no secrets.  Not because there are formal communication plans, it is because that you are all working so closely together that this complete openness is just organic.  When a company is between 20 and 50 people, it is like a “Tribe”.  The connection is still really powerful and there is this great underlying feeling of support from one another.  Greater than 50 people and especially over 100 people is when the company becomes an “Organization”.  There are HR policies, formality, hierarchy, roles and structure.  I enjoyed the challenge of growing an organization but I longed for the days of the family and tribe.  To this day, I think about those family and tribe members.  My family, there were obviously the co-founders: Pete, Mike, Cal and Grace.  Then there were those people that joined and help grow our family and tribe,: Betty, Omar, Candace, Ian, Stephanie, Alexis, Bea, Rashmi, Gary, Dan, Zakia, Edmund, Maheen, Mallie, George, Arul and Kingsley to name a few.  Those were amazing times and we all keep in touch one way or another.  Watching our careers evolve, attending each others weddings, celebrating the birth of our children.  I feel that the impression that was made on us from those days will last forever and be something that we all cherish.  I know I do at least.  This may be the biggest reason why I wanted to get back into start ups.  Having a chance to work with a group of people as a family and tribe is truly an awesome experience.  It may not be for everyone but I know it’s for me.

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The Evolution of the Group Buying Space

Just when you thought the Group Buying space couldn’t heat up anymore, Groupon goes and gets a $135 million investment from DST and Battery Ventures at a more than $1 billion valuation.  Groupon has proved how incredibly lucrative this business is as it has achieved a $1 billion plus valuation business in less than 18 months. In my last blog post, I discussed how the Gold Rush was over for Social Games.  Well, it just moved over to the Group Buying business!  A lot of things are happening in this space and the big question  is how is all of this going to shake out?

There will soon be hundreds if not thousands of Group Buying sites

There are now over 80 group buying sites in the U.S. alone.   I predict there will soon be thousands.  Let’s talk about the barriers of entry.  A service like Groupon which has scale in audience can go to merchants and ask for exclusives by guaranteeing high minimums and they will get them.  However, their value proposition is about being selective and curating deals that they think are the most relevant.  So in a city like NY where they feature 2 deals per day, they can only lock up about 800 merchants per year.  NY has nearly 2 million small businesses and I suspect a good percent would be a good fit for a group buying service.  Unlike flash sales sites like Gilt which have more scarcity in brands that they can work with, group buying sites have a much longer way to go before they actually really start stepping on each others toes.

So selling to merchants is not much of a barrier, how about the technology platform?  Well, that is even more commoditized.  These platforms have proven to be pretty simple thus far and are quickly becoming a non issue.  New companies such as Group Commerce, Offer Foundry and AdBlade are already offering white label solutions to partners and only asking for a revenue share.  I am sure there will be more solutions in the market with even lower costs.  Some of these platform plays are also building out their own salesforce to bring in merchant deals.  That way they package both commodities – merchant sales and the platform.  The partner just needs to bring the audience.  So with merchant sales and the platform not being much of a competitive barrier, what is the competitive advantage?

Race to the Inbox and staying there

At the end of the day, the only main competitive barrier is distribution in the Inbox.  Email is proving to be the most effective way of delivering these deals.  From a user’s perspective, signing up for more than 2 to 3 of these services is just too overwhelming.  So the main goal for all of these players is to get users to subscribe to your email and to have them keep it there.  Who will win in this race to the inbox?  Well, those that can acquire email subscribers the fastest by either raising the capital to aggressively acquire users or who have existing audiences that they can get to sign up.  But once you have them, you need to keep them.  If you lack relevancy, the switching costs are so low that you will easily see them move elsewhere.  Relevancy will be based on how well you match up the deals to the taste and preferences of the user.  These services will offer greater filtering technology to show you relevant deals.  I think this will be led by aggregator services like Yipit, who ask users for interest preferences such as sporting events, restaurants or spas and comb through the 80+ sites to show you the most relevant deals.  The other route to go is for these services to be much more verticalized by demographics or psychographics.  An example of this is Gilt City which caters to more luxury offers.  So instead of offering the pizza place that Groupon features, Gilt City will feature the Michelin star restaurant.

So get ready for a new gold rush!  There will be an unbelievable amount of competitors in the space.  For consumers, great news as you will benefit from so many great offers.  As for the competitve players, it’s all about execution……..good luck!

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The Social Game Gold Rush is Over!

I have written a good amount about the success of companies like Zynga and how these apps should be called Viral Games and not Social Games.  It was the ability to utilize the different FB communication tools (Feed, notifications, wall posts, invites, etc.) that drove the massive scale of these apps.  Eventhough social games are only able to monetize at Lifetime Values of about $.40 per user, they made the economics work because the virality and scale of Facebook gave them a path to become large and profitable businesses.  This created the Social Game Gold Rush as companies were raising money and game developers were emerging left and right.  Well, I have news for you:

The Gold Rush is Over!

So what has happened?  Well Facebook has completely curtailed all of the viral mechanics that made these games successful.  To give you an idea of some of the practices that were stopped, here is an example.  Game developers were building aggressive practices such as showing a friend invite screen to anyone that first joins the game and then defaulting the invite so all of your friends are checked.  So you were defaulted to opt in to invite all your friends on Facebook.  People would mistakenly hit “Continue” not knowing that they just sent an invite to their hundreds of friends and then their friends would go through the same experience as they checked out that game and most likely fall for the same viral trick.  Facebook obviously found this “spammy” which they should and made a rule to all developers that they were no longer allowed to mass invite your friends to a game when you first join or they would be shut down.  This is one of many changes made by Facebook and some people would argue that reason why they are shutting down these viral channels is to force social gaming companies to spend money on advertising via Facebook.  That may definitely be true but I think the bigger motivator was that it just added a lot of “spam like content” on Facebook and users were getting fed up.  When you have a Facebook fan page titled  “I dont care about your farm, or your fish, or your park, or your mafia!!!” and it has over 6 million fans, pretty much proves the point that these virality mechanics were definitely getting spammy.

So where does it leave us.  Well, if you are a game developer without a hit game/app that has achieved scale then you are pretty much toast.  There were 3 legs of the marketing stool to FB apps/games – viral, cross marketing and paid.  If you are not already one of the bigger boys then you are now left with just 1 leg of that stool – paid marketing.  And unless you have figured out how to monetize your app or game so much better than everyone else, it is pretty impossible to make the economics work when your marketing costs are now so high.  For the companies that have already achieved scale, they survive for now by having the 2 legs of the stool they need to explore other avenues of distribution.  And from recent announcements from Zynga such as the distribution deal from Yahoo, it sounds like they are doing just that.

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Groupon raises $30 million. LivingSocial raises $25 million. They are still underfunded!

Kara Swisher recently published an article titled Latest Trend for VCs Is Overfunding Group-Buying Start-Ups: LivingSocial Nabs $25 Million.  This LivingSocial investment comes a few months after Groupon raised $30 million which is amazing for a company that just launched its service about a year prior.  So is Kara Swisher right?  Are these discount group buying sites being overfunded?  I would argue that they are far from being overfunded for the following reasons:

1. The Value Proposition is a Great One

The product that is being sold is offering consumers steep discounts to try the services of local merchants.  These discounts are at least 50% off and are truly deals and as you know people love deals.

Even more importantly, merchants have found these type of promotions extremely successful in attracting a new customer base.  They are bringing in new customers into their stores and are willing to give big discounts to do so in order to have the chance to keep them as loyal long term customers.

These companies are just enabling this Win-Win relationship to happen.  With both parties greatly satisfied, you have a solid foundation for a great business.

2. The Potential Market is Huge!

The real interesting part of this business is that it is about connecting local merchants to local consumers via the Internet but the consumers are ultimately going offline locally to consume the service.  Local businesses continue to struggle with the challenges of online marketing hence the need for businesses such as ReachLocal and Yodle.  And offline retail is ALOT bigger than online retail.  Offline retail is over a $2 trillion market and online retail is approximately $150 billion.  What is interesting about that $2 trillion offline retail market is that by 2011 half of those purchases will be influenced by online research according to Forrester Research.  What businesses like Groupon and LivingSocial are doing is taking a slice of that $1 trillion market by connecting consumers with deals offered by merchants.  A slice of a $1 trillion offline retail market versus a slice of a $150 billion online retail market is a BIG difference.  A 1% slice could mean a $10 billion market!  Is a 1% slice possible?  Getting back to point 1 – people love deals.  So I say yes!

So how much capital should be invested in a market that may reach in the tens of billions of dollars?  I would say a lot more than the $55MM that Groupon or LivingSocial have raised recently.  These companies are far from being overfunded if they are really going after it!

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I Prefer to be in the Business of Recycled Ideas!

So I recently read Lessin’ Lessons written by Bob Lessin. Bob is an investment banker and investor with an incredibly accomplished career including being the youngest partner (at 31) at Morgan Stanley and former Vice Chairman of Smith Barney and now currently Vice Chairman of Jeffries. I have had the opportunity to have gotten to know Bob over the last few years and from every encounter I always feel like I take away a little nugget of wisdom. So I am glad he got to write some of his thoughts about what he has learned in life.

Well, lesson #27 in Lessin’s Lessons is :

“27. There are no new ideas, just recycled ideas whose time has come.”

He talks about how before Facebook there was SixDegrees.com which he was a first round investor in. SixDegrees was launched a few month prior to AsianAvenue.com and I have also got to know the founder and CEO, Andrew Weinreich, over the years. The concept of SixDegrees had so many similarities to Facebook but failed to dominate the digital world as Facebook has because of reasons that were really out of its control. Whether it be the fact that digital cameras were not pervasive (do you think Facebook would be that interesting without photos), the lack of an online ad market to support it or because technology costs were 100x more expensive as they are now. As Bob states in his book “Ultimately, like most great concepts, they ran out of money”. The success of Facebook has less to do with truly innovative ideas but more on taking the lessons learned in the past and taking advantage of market changes that make the business much more viable.

Compare a business like Gilt.com. People in the U.S. think that this flash shopping site was a great innovative idea. The truth as reported in New York Magazine was how Kevin Ryan, former Doubleclick CEO and head of New York incubator Alley Corp, just mimicked an overseas success story. “Ryan was aware that a French company called Vente Privée was raking in money by selling fashion overstock, and he thought its business model could work just as well in America.” Trying to launch this type of business during good economic times would have been impossible because you could not get luxury brands to “play ball”.  This type of discount play was perceived to be too risky in terms of damaging their brands. However, the recession and how fast it hit us left these luxury brands with tons of excess inventory and in desperate need of cash. The time for Gilt had come and they took advantage of it. It is reported that Gilt.com is expected to generate over $400 million in sales this year. Pretty good for a business that is only about 3 years old!

So the lesson learned for me?  Look for recycled ideas that time has come.  These type of businesses tend to be a lot more capital efficient and therefore much more likely to succeed.

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Social Games are Not Social. They should be called Viral Games. Part II

So, in my previous post I went over Life Time Value (LTV) of a user of a social game and how the Facebook ecosystem dramatically improves it.  However, this LTV is not exceptionally high given that only 1 to 2% of Monthly Active Users actually pay each month.  LTV of a user for these games is only about $.40 which is actually low but the great thing about Facebook is that the marketing costs are so low and you can a ton of volume therefore you are able to scale.  There are two factors that makes marketing so efficient on Facebook:

1. Paid Marketing is really Cheap!

So there are 3 paid marketing channels if you want to advertise your social game on Facebook.  The first is on other social games that have a virtual currency system.  These social games allows you to buy virtual goods either through actual payment (credit card, paypal, etc.) or through offers.  Offers consists of getting virtual currency for actions such as signing up for Netflix or a credit card.  It also consists of installing another Facebook application.  You can advertise with companies that power these “offer walls” on a cost per acquisition basis.  A social game without any targeting with a basic sign up would pay about $.25 to $.40 per install.  Warning, these are incentivized offers and the quality of the users may not be that good given that they are not doing it primarily for the interest of your game.  However, if they are already thinking about paying for virtual goods on a social game one could argue that this would actually be a very attractive customer.

Another paid marketing channel are Facebook application ad networks.  These ad networks represent the ad inventory of many app publishers that serve up advertising within their app.  Given the explosive growth in Facebook and app traffic, the supply of inventory is greatly larger than demand so this inventory is very cheap.  This inventory is not incentivized and is served up as standard display ads.  You can also cut CPA deals with these ad networks mitigating your risk.  You should expect to pay about $.70 per install.

The third paid marketing channel is buying Facebook ads themselves.  These are the ones that you see on the right hand column while you are on Facebook.  If you haven’t seen the power of the Facebook ad platform, you are missing out.  You can buy on a CPC basis and the level of targeting is amazing.  Not only can you target by incredibly detailed demos but you can also base your targeting on specific psychographics whether it be interests and even more interesting if that person uses specific apps.  This type of marketing may be the most costly but you can still achieve $1 CPA or less with good execution.

So if the LTV of a user of a social game is only $.40, how do you make the economics work since your CPA costs from paid marketing is between $.25 to $1?  Well, this is when the Facebook Viral Loop kicks in.

2. Facebook Viral Loop Makes the CPA much better!

Successful social games know how to leverage all the viral marketing channels on Facebook by building incentives in the game.  Let’s take a look at how Farmville uses the Facebook viral loops.

– If you add more “neighbors” which consists of inviting your friends, you get to expand your farm.

– As you “level up” in the game they prompt you to post to your Newsfeed for all your friends to see.

– They constantly offer virtual gifts that you can give to your friends in order for them to join.

These are just  a few of the game mechanics to get users to share the game with their friends.  The main benefit here is that this is free marketing that really makes your marketing efforts much more efficient.  How well a game is at this viral marketing is measured and represented as a Viral Coefficient.   By effectively using the Facebook viral loop, an effective social game can reduce their effective CPA cost down to $.10 or less.

So let’s recap on wht the economics looks like:

If Life Time Value of a User > Cost per Acquisition then the game  will be financially successful.

So based on my estimates:

$.40 LTV of a user > $.10 CPA of a user = SOCIAL GAME GOLD RUSH!

As you can see the Social Game Gold Rush has less to do with any real paradigm shifts in game play or design.  Where the paradigm shift has happened is in Facebook being this incredible distribution system that allows the games to be viral.

What does the future entail?  Well, the economics of this distribution will change.  Cost per Acquisition will increase as it gets more competitive.  However, the quality of social games and apps will improve and monetization will become more effective.  This industry will be experience some serious growth over the next few years.


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Social Games are Not Social. They should be called Viral Games. Part I

I recently read a great blog post at Gamasutra that examined how social games like Farmville and Mafia Wars are not really social at all:

“It’s also important to understand something about ‘social games’: Most of them are not social. They tend to be single or multi-player games that use social networks (mostly Facebook) as an easy way to drive player adoption. What the industry is calling ‘social games’ are more accurately described as ‘viral games’. ”

When you dig into the success of these games, you realize why Facebook has been such an incredible opportunity.  Facebook offers incredible distribution for these games, making the formula for success much more viable.  Let’s take a closer look:

If Life Time Value of a User > Cost per Acquisition then the game  will be financially successful.

This is the basic formula for the financial success of any social game.  The interesting part about it is when you realize why distribution on Facebook has made the economics so much more favorable.  Let’s break down the components.  The first is Life Time Value of a User (LTV).  This is driven by 2 key factors.  The first is retention of the users.  In order to make money, you need to get that user coming back and coming back often.  A successful social game on Facebook is able to get over 15% of their Monthly Active Users coming back each day.  An extremely successful game gets that stat above 30%.  Facebook is so successful at driving high retention because it already gets their users coming back.  With over 27 billion minutes spent and nearly 45 billion page views per month, Facebook has quickly become for most people, their home on the Web.  You add the fact that as a social game application developer you can integrate your game into the Facebook core UI with communication points such as News Feeds, notifications and wall posts, you have this incredible opportunity to increase your retention rates by folds versus what they would be as a standalone web site.  Of course, you need a game that is also compelling to play.  However as important as good game play, your social game needs to be well integrated into Facebook’s communication system.

Lifetime value of a user also depends on your ability to monetize game players.  A good social game will convert about 1 to 2% of its Monthly Active Users to paid users who spend on average about $20 per month.  It doesn’t sounds like a high conversion rate and it isn’t.  However with such large scale from the massive distribution on Facebook, it can add up pretty quickly.  I think one way that this may improve is when Facebook rolls out its own payment platform to streamline purchases as how Apple has done with apps on the Iphone.

I have estimated that the LTV of a fairly successful social game is somewhere around $.40 to $.50.  That type of LTV is actually pretty hard to make work if you were a standalone web site because of the Cost per Acquisition of that user is usually significantly higher than the LTV.  However in the case of Facebook distribution, the LTV is actually much higher than the incredibly low CPAs that can be found on Facebook.  To be discussed in the next post.

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Impulse Discount Ecommerce is on Fire! Part 3

The third part of this three part series of impulse discount ecommerce companies is focused on pay to bid auctions such as BigDeal and Swoopo.  These sites have really interesting business models.  Basically how it works is that they put items up for sale in an auction format.  In order to bid for an item, you need to buy tokens and each bid costs a token.  Whether or not you win or lose the auction, the tokens are spent and are not refundable.   However, the tokens you spent may be given back to you as credit to be applied to gift cards to popular retailers such as The Gap.  This credit is limited so for example, you may only get to apply up to $25 of credit to a $100 gift card.  My guess is that these retailers give these companies a 25% discount so it really doesn’t cost them anything in giving credits to gift card purchases.  There are a whole bunch of interesting dynamics that happen because of one change in the economic model of the auction:

It’s not just about how much you are willing to pay but how much you are willing to lose.

Traditional auctions like Ebay pushes purchasers on how much they are willing to pay but adding the element of how much you are willing to lose adds another economic value to the process.  By adding that additional element, these sites are able to capture an economic value that is often greater than the retail price.  How often do sites like Ebay capture value that is above retail?  Not often at all.  On sites like BigDeal, it happens all the time.  Here is a quick sample of the last 10 transactions (as of Dec. 16 at 6:30pm EDT) on BigDeal and the economics of those transactions:

Last 10 Winning Bids on BigDeal.com
Winning Bid Retail Price Savings
Olympus SLR Camera $81.05 $449.95 82% Off
Nintendo Wii $90.93 $199.99 55% Off
Wiii Resort Sports $26.32 $46.99 44% Off
Ipod Nano $78.30 $179.00 56% Off
Altec Lansing Speakers $41.14 $164.98 75% Off
Canon PowerShot $32.23 $294.95 89% Off
Kindle $194.55 $259.00 25% Off
TV/DVD Combo $25.58 $229.95 89% Off
Platronic Earset $47.10 $84.99 45% Off
Nokia Smartphone $89.85 $549.99 84% Off
Cannon Printer $21.60 $75.99 72% Off
$728.65 $2,535.78 71% Off
But that is not the full story.
When you factor in the cost of the tokens, this is how much BigDeal really makes:
Winning Bid Cost of Tokens Big Deal Receives
Olympus SLR Camera $81.05 $405.25 $486.30 108% of Retail Price
Nintendo Wii $90.93 $454.65 $545.58 273% of Retail Price
Wiii Resort Sports $26.32 $131.60 $157.92 336% of Retail Price
Ipod Nano $78.30 $391.50 $469.80 262% of Retail Price
Altec Lansing Speakers $41.14 $205.70 $246.84 150% of Retail Price
Canon PowerShot $32.23 $161.15 $193.38 66% of Retail Price
Kindle $194.55 $972.75 $1,167.30 451% of Retail Price
TV/DVD Combo $25.58 $127.90 $153.48 67% of Retail Price
Platronic Earset $47.10 $235.50 $282.60 333% of Retail Price
Nokia Smartphone $89.85 $449.25 $539.10 98% of Retail Price
Cannon Printer $21.60 $108.00 $129.60 171% of Retail Price
$728.65 $3,643.25 $4,371.90 172% of Retail Price

When you use BigDeal, you first see what the winning bid was and you say to yourself “Wow!  What a deal!”.  You think BigDeal is getting the short end of the stick. Well, guess again!  If you consider the cost of the tokens which are $.75 each which only allows you to bid up an incremental $.15; for every dollar that the bid price goes up, it costs the bidders $5.00 collectively!  At the end of the day, the winning bidder is probably getting a very good deal but the losers of the auction are actually losing money.  BigDeal captures the value of what the winning bidder is willing to pay but also what the losing bidders are willing to spend to try to get a great deal.  That economic value is substantially greater than the actual retail price of the goods.  Based on the last 10 transactions, BigDeal was able to capture 172% of the retail value of those goods from the combination of the winning bid price and cost of the tokens.  Imagine if Ebay saw those economics! The trick to making this system work is to make it fairly difficult for the bidders to actually calculate how much they are risking per each session.  On BigDeal, you are buying weird lots like 30 tokens for $22.50 and each bid increments by only $.15.  They are trying to make it difficult for you to really know how much you are risking during your bidding process.  At the end of the day, about 83% of the value is captured from the tokens.  Bidders know they are risking money for each bid but most of the time they don’t really know how much they are spending to bid.  Bidders are also factoring that they can get the value of the tokens back in the form of gift card credits which also reduces the cost of the token/bid to them.  The economics then mulptiply because BigDeal captures the risk value across multiple bidders.   So for an $100 item, if 10 bidders are willing to risk $20 to get it at half price, you will get a lot more value from the bidders that lose than the actual person that wins.  The whole dynamic is brilliant!

These Pay for Bidding auction sites do an exceptional job of making the system very game like with the goal of the game being who can get the great deal.  With the example from BigDeal, the last 10 deals were sold at a range from 25% off to 90% off; there is an excitement of getting the great deal for users.  The sites allow you to track past winning bids for an item, what the track record is of the bidders involved and other information to allow users to develop strategies.  Combining the great deal with a game like environment brings a greater entertainment value to this impulse buying experience.  This is definitely not for everyone but for the risk taker/gambler that also like great deals – it is perfect!

Impulse Discount Ecommerce is starting to evolve to take many different forms.  It is exciting to see what they come up with next!

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Impulse Discount Ecommerce is on Fire! Part 2

So now to Part 2 on my thoughts on impulse discount ecommerce.  A new category has emerged this past year – Local Group Savings.  The two most popular sites are Groupon and LivingSocial Deals.  If you haven’t checked them out, here is how it works.  You sign up to receive a daily email for one heavily discounted deal in your local area.  It is basically a coupon offer of 50% to 80% off but you actually have to buy the coupon making it more of a voucher.  So you might buy a $100 spa package voucher for $50.   However, this deal is not active until a certain number of people actually buy it.  This encourages you to share with these deals with your friends via email, Facebook, Twitter, word of mouth, etc.

Groupon and LivingSocial take about 25% to 50% of the sales receipts as their commission.  Yes!  50%!  So as a local business, if you offer a 50% discount, you may only be getting 25% of the original pre-marked down sale price.  Crazy right?  Well not so fast.  Local merchants have been very happy with the results.  Here is their value proposition of why you should accept it:

  1. Chance for upsells while customers are in the store. A business that offers a voucher of $100 for $50 also gets the benefit of upselling the customer for over $100 while they are at the store.  Anything over the $100 completely goes to them also improving the margins of the voucher.
  2. New Customer Acquisition.  Since these vouchers are bought from impulse buyers and are sometimes even limited to new customers (such as dentist patients), these customer tend to be first time customers.  A lot of these businesses are looking for new ways to acquire customers and will take any loss in margin as a cost for acquiring a new customer which they hope will eventually pay for itself in repeat business.
  3. Shot of Cash. These businesses often get paid net of commission within 10 business days of the sale.  This is a nice injection of cash for businesses that deal with month by month cash flow issues.  Certain business have seen a remarkable surge.  Take for example, this story about a sky diving school which signed up 1,600 customers in one day.  They normally only do 6,000 for the whole year!

So, it sounds all great.  What are some predictions?  Well, the main problem I have with this business is the lack of competitive barriers.  Starting up these businesses requires very little capital .  The most intensive part is the business development with the local merchants.  However, what happens when all local merchants understands how these things work and know the benefits then there will less of a sales barrier and you can probably get them to sign up via telesales reps or some self serve interface.  Then all of the players will start reducing their commissions to close deals putting margin pressure on the business.  I can even see a player going in and offering 0% commissions in order to build an advertising supported model around this.  So my prediction will be that this market will expand rapidly but may end up actually shrinking later down the line (the money that the group discount providers make) due to low barriers of entry.

Any other predictions?  Please add your thoughts in the comment section below!

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Impulse Discount Ecommerce is on Fire! Part 1

2009 was the year of emergence for impulse discount ecommerce.  First of all, what is impulse discount ecommerce?  It is when a consumer buys a good or service without originally seeking it and that good or service is heavily discounted (usually more than 50%).  Three categories have emerged (1) Online Private Sale Companies (2) Local Group Savings and (3) Pay to Bid Auctions.  Each of really interesting business models and value propositions.  I will share some of my insights of these 3 categories into three different post.  Here is part 1:

Online Private Sale Companies

You probably have already heard of them: Gilt, RueLala, Ideeli and Hautelook.  These companies are trying to replicate the sample sale by putting up excess inventory of luxury good or services online.   Why have luxury brands used these sites?  Well, selling excess inventory via outlets or discount store such as TJ Max and Filene’s Basement is usually brand suicide  It sends a message to your consumer that they shouldn’t buy at regular prices because the stuff is on sale at these stores and regulary available.  These sites protect that by offering these sales for a limited time.  In fact, if you have shopped on Gilt.com you realize that a sale may be sold out in just a few minutes.  If there is scarcity in the discount experience then it protects the core retail business.

However, the past year was an incredible time for these sites.  When the economy fell off a cliff, these brands had inventory stocked for a good economy.  This gave private sale companies plenty of inventory from them to choose from and sell.  However, what do you do now that these brands have adjusted their production quantities for a tough economy?  If you can’t offer enough inventory, you create a bad user experience because there will be a lack of merchandise and consumers will stop coming back if they can’t find anything they like or they never have a real chance of buying it because there is never enough of it.  Well, one thing they are doing is going to the designers and actually not selling excess inventory.  They are actually buying wholesale just like other retailers and ordering merchandise for production.  How do they avoid conflict with the retail channel?  Well, they order changes to the collection and create a different sku just for them that way they won’t have the same items as a retail channel thus avoiding the conflict.  Will this work?  Well luxury brands have been doing this for a while via retail channels such as H&M, Target and Gap.  Luxury brands such as Stella McCartney and Jimmy Choo have created lines to be placed in H&M with much success.  In fact some of these brands are basically treating their regularly prices luxury lines as loss leaders to create their brand as high end and then creating lines or goods at lower price points whether it be the H&M collection, the $200 sunglasses or the $50 bottle of perfume as the way they make money.  Therefore, be prepared to see these online private sale companies evolve just to be another mass retail channel and there really won’t be anything “private” about them.

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