January 1, 2011, 12:00 AM

The Groupon effect

(Page 2 of 2)

But many consumers who bought those coupons went directly from Groupon’s site to Gap.com to see what was available, and 56% of them were consumers who had not visited Gap.com in the previous 30 days, according to Experian Hitwise. That suggests the apparel retailer attracted new customers through the offer, or at least consumers who were not recent Gap.com shoppers.

For American Apparel Inc., its nationwide Groupon offer in November of $50 worth of merchandise for $25 was aimed at encouraging consumers to try out new products the retailer had introduced in the past year, such as knitwear and a nail polish line. The retailer figured a Groupon deal would get the word out quickly. “There is simply no other opportunity around to do something like that on such a large scale,” says an American Apparel spokesman.

Doing the math

Shutterfly, a web-only photo printing and custom merchandise retailer that reported $246.4 million in Internet sales in 2009, also turned to Groupon to attract new customers and bring old ones back to the site. It offered a $30 photo book for $10, and CEO Jeff Housenbold views the offer as a reasonable customer acquisition expense.

Shutterfly’s typical customer acquisition cost is about $12 annually. And its gross margin for a photobook is about 55%. That means that even if no Groupon shopper took advantage of Shutterfly’s upsell or cross-sell offers, the difference between the e-retailer’s typical customer acquisition cost and the cost of selling a $30 photobook on Groupon was roughly $11.50, says Housenbold.

“That’s right in line with our overall cost of acquiring a customer,” he says. “It’s not dissimilar from other channels and you get the added benefit of generating brand awareness among Groupon’s e-mail base, which is just gravy.”

And competition and pressure from larger partners may lead to retailers paying less. American Apparel says it paid Groupon less than 50% of the voucher’s value, although it would not say how much.

And Davidowitz says that in time Groupon will have to lower its commission. “The fact that Groupon takes 50% is ridiculous and it won’t last,” he says. “You can charge that much when you have no competitors. But as Groupon’s competitors mature they’ll lower their commissions, which will force Groupon to lower its cut, as well.”

Growing sophistication

Groupon and similar sites are trying to justify their fees by offering other benefits besides exposure to new customers. For instance, LivingSocial aims to make its offers go viral by giving a consumer a free voucher if she refers three friends who buy an offer.

“We want to create an element of community around our offers,” says Eric Eichmann, LivingSocial chief operating officer. “From a business perspective a lot of the merchants we’re working with are local or small, without a good outlet to promote their stores. Encouraging consumers to share information about the stores we feature is an effective way for those stores to garner consumers’ attention.”

Groupon is trying to enable better targeting of offers, which would address a criticism from Housenbold of Shutterfly who would like to be able to tailor offers to specific consumers, such as women ages 40 to 65. In April Groupon hired Mark Johnson, previously Netflix vice president of software engineering, as its chief data officer to introduce Netflix-like personalization to the e-mails that are Groupon’s daily marketing vehicle.

In order to be able to make offers more appealing to more consumers, Groupon now presents several offers, instead of one, in some markets. Which offer any individual receives is based on where he lives, which e-mails he clicked on, what he purchased and which offers he shared on a social network, among other factors. “We’re trying to find those users who are most likely to find an offer relevant so that we aren’t wasting advertising real estate or our inventory of offers,” Johnson says.

The more targeted offers seem to be working. Traffic to Groupon in October, six months after Johnson started, was up 172%, according to Compete. If Groupon and other daily deal sites can manage to be even more effective, they might just become a customer acquisition channel that can’t be ignored.

zak@verticalwebmedia.com

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