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Groupocalypse: Groupon loses its way August 20, 2012

Posted by David Card in Uncategorized.
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In my last few Weekly Updates, I’ve written about Zynga and Facebook, two companies whose business models I’ll continue to defend. But right now they make up a pair of the Horsemen of the IPO Apocalypse. I might as well add a third. Groupon’s second quarter results were about in the middle of its guidance, it showed a profit, and it cut way back on marketing expenses as a percentage of sales. The result? Its stock is at an all-time low. Can Groupon turn it around?

The opportunity

Unlike Facebook — a digital media leader and core technology platform provider — and Zynga — on a cold streak but with a plan — I’m pretty sure that Groupon is headed in completely the wrong direction. I have written that Groupon’s scale would be a huge competitive advantage as social commerce shook out. I thought its massive sales force, customer base, and merchant relationships would produce a terrific combo.

In theory, Groupon should be able to analyze its customer data to help it target and improve deal conversions and feed insights back to its merchants. Groupon should be building out other marketing offerings for those merchants, so that it could move beyond new customer acquisition into loyalty programs, and sell them services like paid listings and SEO. Groupon could be a local merchant’s one-stop marketing supplier in a way that even Google would have trouble matching.

Misdirected?

Instead, Groupon’s revenue in actual retail is growing faster than its high-margin deals business. It envisions itself as an e-commerce technology platform provider. CEO Andrew Mason says he wants Groupon to become the “operating system for local commerce.” And the company is bragging about being a leader in mobile commerce.

Does Groupon really want to build warehouses and compete with Amazon in multi-category online retail? Perhaps it wants to get into payments – no, that’s not a crowded field at all. Or how about in-store point-of-sale hardware for small business? Madness.

Yes, mobile commerce is promising. Groupon says that in July nearly one third of its North American transactions were completed on mobile devices, a figure that’s up 35 percent from the year earlier. Groupon’s mobile app has just as much adoption as those of Amazon and eBay, but does that mean Groupon could become a mobile transactions platform for local merchants and retailers?

Perhaps. But I expect big, national retailers that sell through local stores and affiliates are better equipped to handle sophisticated technologies like geofencing and real-time inventory liquidation than the local small businesses that are Groupon’s strength. Remember, airlines are the leaders in yield management. Your typical local restaurant or gas station is probably not thinking about balancing discounts versus empty slots that might go unsold via complex algorithms and business rules. Lots of Groupon merchants couldn’t even handle volume discounts profitably.

There’s no shame in being a force in local marketing. BIA/Kelsey projects that digital advertising will only comprise 11 percent of a $150 billion U.S. market by 2016. There’s plenty of opportunity – and plenty of competition already – for Groupon to offer services to support local merchants’ marketing needs. Make no mistake, there are some positive signs for Groupon’s core U.S. business:

  • Groupon’s targeting is starting to improve efficiency in cities where it has been using it longest
  • Nearly 20 percent of its merchants are increasing their use of Groupon’s other services.
  • Its Groupon Rewards loyalty program is gaining traction.

What momentum Groupon has is in marketing services. Once it embraces this, and shifts its development and sales assets accordingly, it will start to claw its way back towards prosperity.

Question of the week

How could Groupon turn itself around?
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Amex is all potential in social commerce March 12, 2012

Posted by David Card in Uncategorized.
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After attracting attention last summer for social commerce initiatives with Foursquare and Facebook, last week American Express announced a new coupons hook-up with Twitter. While Amex can bring valuable assets and much-needed experience in loyalty programs to the sector, its efforts are scattered and haven’t gained much traction to date. In other words, it has the potential to be a powerhouse in social commerce, but so far that potential remains unrealized.

The upside

As my colleague Ryan Kim wrote in a GigaOM Pro long view last year, Amex brings a lot to the social commerce and local deals party:

  • Closed loop. Unlike other credit card companies like Visa and MasterCard, Amex is both the card issuer and payment system. That means it can identify purchase patterns across different products and merchants by analyzing data from its almost 90 million cardholders. Then it can use that analysis to help its merchants plan, create and target offers to different customer segments.
  • Merchant relationships. It has established marketing relationships with thousands of small businesses as well as big brands that market both globally and locally. Amex offers a rich collection of marketing services, including help with digital advertising and search for small businesses.
  • Loyalty program. Daily deals needs to move beyond new customer acquisition — what most merchants use Groupon for — into retention and loyalty. Amex has deep experience in this space via its Membership Rewards program. While startups like Swipely and ChoozOn let consumers manage and connect multiple loyalty programs, they usually have to work with big brands’ affiliate programs rather than directly.

As Colin Gibbs points out, American Express commands consumer trust that other potential social commerce players like Facebook and Google risk losing via media hype over privacy gaffes. Amex is also a contender in NFC-powered digital wallets, but NFC is a long-term play more likely to be driven immediately by ads and loyalty programs than wallets. If Amex emphasizes the former over the wallet angle, it might be able to add wallet functions to social commerce apps within 24 months.

Slow going so far

Amex’s “Link, Like, Love” Facebook app draws on social graph data like friend connections and check-ins and on user preferences via Likes. And the app has presented attractive deals from big brands like Whole Foods Market, Dunkin’ Donuts and Sheraton. But after an initial rush, it doesn’t seem to have caught on. As I write this, the app has fewer than 37,000 fans on Facebook, and market tracker Inside Facebook shows static usage with fewer than 1,000 daily users recently. This  could be a promotion and discovery problem: Apps need a critical mass of adoption before viral promotion can carry the load, especially as Facebook gets more cluttered.

The new Twitter effort has some implementation quirks that make me think it will have a hard time gaining user adoption too. While it has viral promotion built in (users tweet a hashtag to their followers to qualify for the offer), offer discovery may be pretty random, lost amid Twitter’s 600 tweets per second. Would-be coupon redeemers may or may not see the offer in their ever-moving feed and have to visit an American Express Twitter page to see what’s available. It’s not like they are getting a daily email or a personally targeted or geotargeted message. These coupons don’t require a purchase or expire instantly, but there is no place for a user to store them where they will be reminded they actually have them. The refund isn’t instant or acknowledged at purchase: It just shows up in the credit card statement some time later, perhaps as long as months later.

I have worked with American Express as an analyst, and like many big companies it has multiple business units that sometimes don’t seem to know what the others are doing. Amex’s social commerce initiatives feel pretty scattered, without a single driving focus point. Some of that isn’t the company’s fault. Although small businesses may be gaining digital marketing sophistication, they are not going to be able to use potentially powerful Amex data for preference analysis and personalization anytime soon. That’s an analysis service best suited to big merchants that target locally — the Facebook and Foursquare advertisers rather than the small business-focused Twitter self-serve products.

Perhaps American Express’ ultimate social commerce role is as a kingmaker rather than a king, a behind-the-scenes supplier of infrastructure services rather than a consumer-facing source of daily deals and flash sales offers. There would be no shame in that. GreyLock Partners’ Reid Hoffman thinks credit cards could be compelling app platforms because they connect the physical world with the digital. Even Facebook has gone back and forth on Offers and check-in deals: Its latest API enhancement for location services is aimed at third-party apps rather than its own Offers product. Amex would be in good company.

Question of the week

Will American Express emerge as a social commerce powerhouse?

Facebook store flops demand a shift in emphasis February 22, 2012

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Last week, a pretty negative Bloomberg story about Facebook storefronts got wide pickup. It described how GameStop, Gap, J.C. Penney and Nordstrom had closed their Facebook stores. Social commerce is doomed!

Well, not exactly. I have been bearish on how many commerce transactions stores on Facebook would generate since the concept of “f-commerce” was introduced, but that doesn’t mean retailers should give up. Instead, they should put their Facebook stores in the hands of their marketing and promotions staff and prioritize marketing objectives over sales.

I have described before how storefronts built on Facebook pages face at least two significant challenges. Most e-commerce arises from directed shopping that exploits the Internet’s searchability and price transparency rather than the impulse purchases a buyer might make on a social media site. And I have also suggested some ways to accelerate Facebook storefront success: in-stream promotion, social commerce integration and ties to brick-and-mortar loyalty programs. Plenty of smart companies are implementing the first two, but they are still thinking too hard about sales volumes. Just like daily deals, f-commerce efforts should initially concentrate on customer acquisition, engagement and loyalty.

Feeding the feed gains user attention

E-commerce sites like Ticketmaster, TripAdvisor and Fab.com were quick to take advantage of Facebook’s October Open Graph enhancements that enable “frictionless” auto-sharing of activities without a user creating a post or pushing a Like button. Social commerce believers like Yardsellr.com think it is best that promotions come from customers rather than marketers. And store builder 8thBridge reports that 90 percent of Facebook shopping activity comes from friends sharing with friends.

That approach makes sense, but it oversimplifies some issues. “Frictionless” sharing doesn’t show up in Facebook’s main news feed but rather off to the right, in the live ticker. That means those kind of shopping activities may be quick to appear, but they will also disappear just as speedily and likely won’t be called to a user’s attention by Facebook’s ranking algorithm. In contrast, Ticketmaster and Lucasfilm encourage their customers to pass the word — leading to new customers — and actively engage in logical social activities like group travel-planning or event-planning.

Another store builder, Payvment, is also using Open Graph, but not the way Spotify does, where every interaction with the app is broadcast. Payvment is conscious that shopping activities might require more privacy and user control than music listening. So Payvment is focusing on the new action verbs, like Want and Own and claims they are starting to catch on. But the new actions are mostly on apps or Facebook company pages and have not spread outside Facebook on the Web the way Like buttons have.

And friend-to-friend sharing faces other scale issues: Payvment concedes that most users don’t have enough friends to deliver the kind of volume that big retailers want. So it is promoting the idea of a “taste graph” that aggregates interests — as described by Likes, Wants and Owns — across strangers as well as friends. That would enable offer targeting and the personalization of Payvment’s mall of Facebook stores. It is an intriguing big data play, but companies like Groupon and LivingSocial, with far more resources and data than Payvment, have yet to pull off customized targeting that would improve sales conversion. These are longer-term payoffs.

It’s all about marketing

So before f-commerce stores can generate many sales, smart sellers are treating social commerce as a means of branding, customer acquisition and loyalty building. Heinz says a “get well” soup campaign in the UK generated the sale of one can of soup for every eight fans, and it had to buy plenty of Facebook advertising to deliver that much. Wisely, Heinz was more concerned with adding fans and generating PR than selling soup. Similarly, ad agencies and marketing firms like TBG Digital think that over time, those new action verbs will be a key part of Facebook advertising.

Meanwhile, retailers looking to get the most out of Facebook for the next 18 to 24 months should reassign some of the merchandisers and retailers working on their Facebook storefronts. They should move staff in marketing, promotions, advertising and customer acquisition onto the job. The measure of their success will come from metrics like new customers, visit frequency and brand lift. That is where advertisers and marketers have expertise. Then two years down the road, the retail experts can start thinking about total sales, conversion rates, cost of sales and other transactional measurement.

Question of the week

How else can retailers use Facebook?

A field guide to surviving the shakeout in daily deals October 31, 2011

Posted by David Card in Uncategorized.
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Groupon is on its pre-IPO road show, and the daily deals giant still inspires both love and loathing, even though it’s playing down controversial accounting and has cut its losses. Daily deals are the social commerce segment with the highest profile, and the market is overcrowded with hundreds of players. Winners in daily deals will have to achieve scale, mine their troves of data and deliver a collection of marketing services to merchant partners.

The shakeout is under way. Early entrant BuyWithMe had trouble raising money and laid off half its staff. Web traffic data shows Groupon and LivingSocial pulling away from the pack. Is it a two-horse race? Not yet. Even though Facebook scaled back its own daily deals plans, Google is accelerating. Last week Google signed up 14 new deals partners. Most of them are second-tier players, but Google is also working with Gilt Groupe, one of the bigger brand names that has flash sales, daily deals and more-traditional online retail products. (More on each’s prospects for success below.)

Some day, wallets and technologies like NFC for wireless transactions and geofencing for real-time offers will be important social commerce components. But consumer and merchant adoption of these technologies is years away. So even more important than adding new consumer products, right now daily deals players need to focus on the following:

  • Scale. To offer an effective variety of deals, companies need to work with many merchants, and local merchants need the support of a large direct sales force.
  • Data. With user and merchant scale comes enough data for actionable analysis. Then companies can target their offers to increase conversion based on understanding customer buying habits and purchase intent.
  • Marketing services. While national sellers are used to data-driven marketing, local small businesses have little expertise or dedicated staff. Deals companies need to develop simple marketing campaign management tools for them and offer them other marketing services like online display and search ad buying. Such services will lock in merchant loyalty and raise switching costs, dissuading them from using competitors.

Who’s ahead

Groupon clearly has the scale, but it hasn’t proven data expertise. It is more focused on new consumer products than on merchant services. If Groupon is smart, it will invest some of that IPO money in data analysis — it has relatively few employees in technology — and in marketing services for its massive sales force to sell.

LivingSocial’s success is driven more by high-margin offers like tours than on understanding data in support of merchant programs. Amazon, which has an investment in LivingSocial, will add both scale and data expertise to LivingSocial. But so far, while I’m a big Amazon Prime customer, the only targeting I’m seeing from Amazon’s LivingSocial deals is a broad definition of my neighborhood as “downtown New York City.”

Google has the data expertise, the easy-to-use analytics, and the powerful search and advertising networks. It’s a compelling platform for local merchants, but it sells technology, not services. Its network of merchants won’t want to share data or customer relationships, so Google’s potential scale loses effectiveness for them. Google could buy a Yellow Pages company if it wanted a big sales force to “own” those end-user customers.

The potential big three are emerging, but each has flaws. Groupon and LivingSocial have the direct relationships with customers and merchants, but Google has the analytics. To beat the other two, Google needs to migrate from platform to service provider. If it stays a platform, the other two will gain advantage by combining data with services. Meanwhile, there are new entrants: credit card companies with partners and attractive loyalty programs, and an energized AT&T building off its Yellow Pages base. Scores of deals startups will shake out, but big new competitors are just getting started.

Question of the week

Who will be the ultimate winner in daily deals?