Continuing on the Numbersense: the business analysis

I am not going to go through the whole book but there are a couple of analysis Kaiser goes through that I would like to write down, at least for myself. This post will briefly talk about the Groupon discussion in Chapter 3.

The Groupon analysis in Chapter 3 was really interesting because he is including financial analysis and showing how folks can get carried away if they don’t dig deeply.

Apparently, a few of the merchants unexpectantly lost money on the Groupon deals. The deals generally run like thus: a coupon is offered at 50% off the total value; Groupon keeps half of the coupon sale and the merchant gets the other half. So if the value of the deal is $100, the coupon would be for $50, $25 of which would go to Groupon.

If I’m reading between the lines correctly, the media (and the merchants) lost their head over the  potential of gaining new customers at no cost. Revenue flows straight to the bottom line.

Or does it?

What if not all of the customers are new but are current customers who usually pay full price?

Or let’s get really extreme and assume there are no new customers, so all Groupon customers are really current customers who lucked onto a new deal. You may end up with some profit but you are actually reducing your income because you have converted all of your current customers to deal seekers, if only temporarily. The trick is to attract more new customers to offset the loss of income from your regular customers. That might not always be easy to do. If your new customer brings in $20 in profit and your regular customer brought in $60 before the Groupon deal, you would have to bring in 2 new customers for every regular customer converted to the Groupon deal to get back to $60 in profit.

Kaiser talks about using the counterfactual analysis – the what could have been. For example, if you have a lot of current customers taking the Groupon deals, you have to compare the resulting reduced income against what you could have had if your customers had not taken the Groupon deal. Economists probably call this reduced income the opportunity cost of using the Groupon deals to try to capture new customers.

There were also some discussions in the book about the characteristics of the new customers brought in by the Groupon deal. It resonated with me because I see some of this happening at where I currently work. The new customers coming in may not be your best customers because they are there just for the deal and may never come back again. Kaiser mentioned that for the merchants, the tips were rather miserly. So, not all of your new customers will be desirable customers.

The place where I work offered a different deal (and not associated with Groupon). The deal was only for new customers who came in for class during the first week of the month. This was a smart way of tailoring the deal to avoid loss of income.

Last month, the owner also offered a free class if you had already purchased a full month of class. Quite a few folks showed up for that. Not everybody took advantage of this deal. A handful of those who come in month after month did take up on the offer; these are good customers who pretty much “earned” the free deal because they help sustain the business. Then there are others who almost never come to class and all of a sudden, they start showing up in class because of a free deal. These folks probably won’t come back when the free class is done.

Bottom line: you have to think about what might have been when analyzing a business opportunity or deal. You could lose money like some those merchants that tried out the Groupon mania.