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Groupon spent $208 million in marketing for the first three months of 2011, this represented 77% of its $270 million of gross profit for the same three month period. Groupon’s marketing spending for these three months was driven by customer acquisition in international markets it had recently entered. International sales represented 54% of Groupon revenue for this period.
By comparison, Google spent $246 million in sales and marketing in 2004, the year of its IPO; this represented 14% of its $1,732 million in gross profit for the same twelve month period. International sales represented 34% of Google revenue for 2004, up from 29% in 2003.
Even allowing for Groupon’s relatively faster penetration of international markets, one might ask: what is it about Groupon’s offering that is requiring it to spend such a high percentage of its gross profit? After all, coupons have been around for decades prior to the launch of Groupon, while Google’s AdWords product was truly new to the marketplace. Is there something about the range of possible financial results for merchants on a Groupon promotion that requires more convincing, leading to the need for a relatively high marketing spend by Groupon?
To further explore this question, I asked the students of my Managerial Accounting and Finance class at Polytechnic build a simple Return on Investment model for a hypothetical restaurant owner using Groupon for the first time.
In this hypothetical exercise, a restaurant owner had 1,200 couples per month visiting his restaurant prior to running a Groupon promotion which attracted 240 customers, entitling them to a $100 meal, one that cost the restaurant $40 to serve. Assuming that half these 240 couples were existing customers, and half were new customers, I asked the students to calculate what percentage of the newly found customers had to become “regulars” for the restaurant to get a reasonable 15% Internal Rate of Return (IRR) on the cost of the Groupon promotion.
The answer…… nearly 25% of the newly found customers had to become regulars.
For a free copy of the merchant Return on Investment model described above, please send a request at David@RudofskyAssociates.com. It provides an easy way for business owners to model what the Internal Rate of Return of a Groupon promotion might be for them, under a variety of assumptions and scenarios. And for some more interesting perspectives on merchants’ results with Groupon, check out these articles in “Business Week” and “Harvard Business Review.”
Earlier today, I attended an informational meeting about SoundBoard Angel Fund, which is getting closer to its launch date. The fund will build on the expertise of SoundBoard Consulting Group, whose members have extensive experience coaching entrepreneurial led companies.
Attorney Gregory Petroff, who is advising SoundBoard Ventures, told the meeting attendees that he believed that SoundBoard Angel Fund’s chances for success were strong, given its focus on a set of industries (i.e., consumer goods, education, health care services) that sets it apart from Arc Angel Fund, an extremely successful angel fund launched in August 2010.
Mayor Michael Bloomberg and City Council Speaker Christine Quinn both emphasized the importance of New York City’s food manufacturers when speaking at Baruch College this morning, the site of the NYC Food Manufacturers Business Expo.
 Mayor Bloomberg addressing the NYC Food Manufacturers Business Expo Bloomberg mentioned that food represents a $5 billion industry in New York City, responsible for 19,000 jobs, and employment growing at 14%. In her talk, Quinn mentioned that NY City exports 7% of its goods and services, vs. 12% export of goods and services across the U.S., and the city is getting behind its food processors to help close that gap. Seth Pinsky head of the NYEDC spoke next, about how his organization is working to bolster the chances of immigrants to succeed as entrepreneurs, given that they often lack a national network of contacts.
As a further show of support and interest in the food industry, the city today launched a new website: NYC Food.
Exhibitors at the Expo included Brewla Bars, Esposito’s Fine Quality Sausage Products and Davidovich Bagels, but as Mayor Bloomberg discovered when he showed up to make his remarks, no coffee. One of his aides went across 25th street to grab him a cup.
 My wife and I had an impromptu lunch a few weeks ago at Harry’s Burritos on 71st and Columbus Avenue in Manhattan. Our waiter looked flustered when he seated us, and lunch took about forty-five minutes to arrive, way longer than we expected.
When my wife asked the manager why service was so slow, he responded that one of the two cooks had simply not shown up for work, and the single cook was overwhelmed. He comped us for half our meal. The food was very good when it finally arrived, and we left feeling sorry for the mom with two young sons at the table behind us, who still hadn’t received her food.
Probably Harry’s Burritos should have closed off part of the restaurant (rather than seating a full lunch crowd), or at least simplified the lunch menu. Warning customers in advance that it was going to be a longer-than-average wait would have been nice too!
On July 9th, I conducted a seminar – Small Business Profitability Makeover – for 25 exhibitors at the Fancy Food Show, in Washington, DC. Attendees learned how to:
- refine their pricing tactics by checking out the competition
- determine which product lines are profitable and which aren’t
- save on purchasing by adopting tactics used by larger companies
- determine when you need outside experts to cut costs, such as insurance, rent and utilities
- tighten up their accounts payable process to improve cash flow
- create an annual budget and use it effectively
- manage expenses through accountability
When asked which item they thought had the most potential for their business, the majority voted for: “create an annual budget and use it effectively.” Determining product line profitability, and saving on purchasing also were seen as valuable techniques by the Fancy Food Show attendees.
Does any of this sound like it would be valuable in helping you improve your business? Much of this same material is now available on line as an archived webinar at the Ventureneer website.
Earlier this week, NY City announced 22 new initiatives to help small industrial businesses stay and grow in New York. As reported by the NY Times, overall employment by manufacturers in NY City has declined by almost two-thirds since 1990, but the number of jobs in food-making increased by about 6 percent last year, running counter to that trend.
With that in mind, the city has contributed $1 million to a $10 million small business loan pool, intended to help finance the growth of some promising NY City food makers. Goldman Sachs will contribute the balance of the $10 million, which will be managed by a small business lender to be chosen.
Recognizing that lack of affordable manufacturing space is also an acute problem for growing food makers based in NY City, the Economic Development Corporation is “revamping several spaces, including the former Federal Building in Sunset Park,” the NY Times reported.
Adam Friedman, the director of the Pratt Center for Community Development told the NY Times that businesses typically reach a tipping point when they need more than 30,000 square feet, and that is when they first start to think about leaving the city. (As an aside, I do consulting work through the Industrial & Technology Assistance Corporation (ITAC) which among its many services, helps NY City-based manufacturers implement Lean manufacturing techniques, reducing cost, inventory investment, and space requirements)
It’s great that NY City is taking this step to help support manufacturers, including food makers, which often have a difficult time competing for equity investment with companies in faster growing industries. $10 million is small compared to the need, but it may be a big help to a couple of small, promising companies.
Haagen-D’Azs was launched by Reuben and Rose Mattus in the Bronx in 1961, acquired by Pillsbury in 1983, and is no longer made in NY City. I’m going to be attending the Fancy Food Show next month where I hope to visit the booths of NY City based businesses such as Wine Cellar Sorbets and Chozen all natural ice cream. If either of these brands becomes a huge success, it would be nice to think they could continue to be economically manufactured in NY City.
Stylitics won the Wharton 2011 Business Plan Competition, beating out seven other finalists for the grand prize of $30,000 in cash and $15,000 in legal and accounting services. The competition, which is open to any student of the University of Pennsylvania, began in the fall of 2010, with 210 contestants.
Stylitics motivates customers (with gifts like reward cards) to log what they wear on a daily basis, thereby capturing up-to-the-minute insights that it hopes will make it the “Nielsen for clothing.” The company has developed a “new generation” of tools that can track and analyze actual offline clothing and purchase behavior.
Stylitics was judged to have the “most viable business plan.” Obviously a business plan is needed to win a business plan competition, and is also typically required to raise capital from outside investors, but how about a company that is able to self-fund, is a business plan still important?
Using Stylitics as an example, they believe there are 50,000+ clients for their services in the United States, and that at an average revenue of $5,000 per client, they have the potential to be a $95 million revenue company by 2015. In the process of creating a business plan for Stylitics, one of the key questions that would need to be answered is: “what marketing strategy and tactics, and at what cost, is needed to build awareness and trial of our site among these 50,000 potential clients, in order to put us on a growth curve that gets us to the $95 million revenue level by 2015?” Estimating this early years’ marketing budget is key to estimating the needed initial capitalization.
Although a self-funded company would not need a formal 25 page business plan write-up, it would still need to know how much it has to self-fund. Therefore, the problem solving, decision making and disciplined planning that goes into answering questions like this all can be essential elements of successful start-up businesses, even if the end result is not a 25 page comprehensive business plan.
I read Michael Gerber’s eMyth Revisited in 2003, the same year I started my consulting practice. I felt that it gave me a roadmap to success as a consultant. The book opens by describing a woman who loves to bake, and her friends all suggest “you should be running a bakery.” So off she goes. However, she soon becomes overwhelmed by the managerial responsibilities that come with owning a bakery, taking her away from her true love and passion: baking pies.
“Simple,” I thought, “I’ll help resolve this disconnect by assisting my clients on the managerial side of the business so they can continue to ‘bake the pies.’ And there will be an educational piece to my practice too: I will teach these bakers enough about finance so they are better equipped to manage their businesses.”
But as the years have gone by, and I have gained experience as a consultant, I have come to realize there is something deficient about this model; some of my clients have a real aversion to learning how to manage the financial side of the business. Some even avoid hiring anyone to do it for them! There was the entrepreneur who did not file tax returns for numerous consecutive years, with the thin justification that these were loss years so they didn’t owe any money; but he put himself at risk of losing valuable tax-loss carry forwards. Then there was the maker of high quality organic desserts who couldn’t persuade her partner to create a “bill of materials,” and consequently did not know if some products were being sold below cost. And there have been numerous instances of people thinking about starting, or actually starting, businesses without having a clear idea of how much capital it would take them to get to positive cash flow. This systemic avoidance went well beyond what was described in eMyth.
Fortunately, Margaret Heffernan has written Willful Blindness and I believe it provides a deeper psychological/sociological explanation for why business owners are blinding themselves from the positive results of proper financial management. Figuring out whether the business is going to make a profit, what to do if it isn’t going to make a profit, where to find money to pay quarterly estimated taxes, etc. is not likely on the top of any business owners “to-do” list. Avoiding these and other similar activities for a day or a week may seem acceptable behavior, but as Heffernan writes, “All of us want to bury our heads in the sand when taxes are due, but in trying to pretend the threat doesn’t exist, and we don’t have to change, we are… trying hard to avoid conflict.”
I’ve also recently had the chance to do join up with Richard Magid and his team at Soundboard for some important client work and to witness firsthand how effective they are in the areas of coaching, training and cultural assessments. Their wide range of successful client work has made them highly sensitive to the discussions that are not taking place – but should be. If you are looking for consultants who can help get your employees more engaged, you should give them a call.
Client education will continue to be an important aspect of what I do, and I will continue to ask myself whether individual clients are truly coachable in financial literacy or not. I’m at a point when I can no longer keep my head in the sand when it comes to business owners who are not willing to get into the financials, because your business is too important not to look at the financials, and mine is too.
On March 9th of this year, Senator Mark Udall of Colorado introduced Senate Bill 509, the Small Business Enhancement Lending Act, a bill that would raise the permissible amount of Member Business Loans from the current cap of 12.25% to 27.5% of a Credit Union’s assets.
In aggregate, Credit Unions ‘ Member Business Loans equaled 4.2% of assets in 2010. While only a tiny fraction of Credit Unions are being held back by the current 12.25% limit, which was put into effect in 1998, and some have called arbitrary, National Credit Union Association survey data shows that nearly 70% of Credit Unions do not make Member Business Loans in the first place, perhaps held back by the perception that these loans were too risky.
The proposed legislation is supported by the Obama administration, and by the Credit Union National Association, which projects that the bill’s passage could result in $13 billion of new lending to small businesses, which would in turn stimulate 140,000 new jobs, all at no cost to taxpayers. The American Banking Association is vigorously lobbying against Udall’s bill, contending that the proposed legislation is intended to support “large, aggressive, growth-oriented credit unions who have abandoned their mission of serving people of modest means.”
Personally, I hope the Senate can move bill 509 quickly through committee, debate, and to an affirmative vote. While it is true that only a small minority of Credit Unions are currently constrained by the 12.25%-of-assets lending limit for Member Business Loans, in addition to freeing these Credit Unions to lend more, the bill’s passage might also stimulate other more conservative Credit Unions to think about originating Member Business Loans for the first time. To have this bill stifled by Big Banking as it attempts to protect its turf against encroachment from not-for-profit Credit Unions would be ironic, especially as this country attempts to pull out of a recession that was made worse by the reckless and unregulated actions of some of this nation’s largest banks.
Last Sunday evening’s broadcast of the CBS news show “60 Minutes” raised some important questions about “Three Cups of Tea” author Greg Mortenson and the governance of the charity he founded, the Central Asia Institute (CAI). I watched the episode, reviewed the Central Asia Institute’s latest 990 form, and also read the CAI’s response to 60 Minute questions, which is now posted on their website.
 Both CBS and the Central Asia Institute agree that only 41% of the Central Asia Institute’s spending actually went to build schools in Afghanistan and Pakistan. Furthermore, while the CAI spent $1.7 million for book related expenses (i.e., advertising, events, film, publications, and travel) what is much murkier is how much of Mr. Mortenson’s royalties from sales of “Three Cups of Tea” have been donated back to the charity, raising the very reasonable question of whether Mr. Mortenson is deriving excess benefits from the charity he founded.
I personally felt the 60 Minutes segment was the product of some outstanding investigative journalism while I did not find the responses posted on the CAI website very reassuring. Read them both, decide for yourself, and add a comment here, or on the 60 Minutes website, which has 379 viewer comments, and counting.
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Final Exam Question to Merchants: Calculate your Groupon’s ROI
Groupon spent $208 million in marketing for the first three months of 2011, this represented 77% of its $270 million of gross profit for the same three month period. Groupon’s marketing spending for these three months was driven by customer acquisition in international markets it had recently entered. International sales represented 54% of Groupon revenue for this period.
By comparison, Google spent $246 million in sales and marketing in 2004, the year of its IPO; this represented 14% of its $1,732 million in gross profit for the same twelve month period. International sales represented 34% of Google revenue for 2004, up from 29% in 2003.
Even allowing for Groupon’s relatively faster penetration of international markets, one might ask: what is it about Groupon’s offering that is requiring it to spend such a high percentage of its gross profit? After all, coupons have been around for decades prior to the launch of Groupon, while Google’s AdWords product was truly new to the marketplace. Is there something about the range of possible financial results for merchants on a Groupon promotion that requires more convincing, leading to the need for a relatively high marketing spend by Groupon?
To further explore this question, I asked the students of my Managerial Accounting and Finance class at Polytechnic build a simple Return on Investment model for a hypothetical restaurant owner using Groupon for the first time.
In this hypothetical exercise, a restaurant owner had 1,200 couples per month visiting his restaurant prior to running a Groupon promotion which attracted 240 customers, entitling them to a $100 meal, one that cost the restaurant $40 to serve. Assuming that half these 240 couples were existing customers, and half were new customers, I asked the students to calculate what percentage of the newly found customers had to become “regulars” for the restaurant to get a reasonable 15% Internal Rate of Return (IRR) on the cost of the Groupon promotion.
The answer…… nearly 25% of the newly found customers had to become regulars.
For a free copy of the merchant Return on Investment model described above, please send a request at David@RudofskyAssociates.com. It provides an easy way for business owners to model what the Internal Rate of Return of a Groupon promotion might be for them, under a variety of assumptions and scenarios. And for some more interesting perspectives on merchants’ results with Groupon, check out these articles in “Business Week” and “Harvard Business Review.”
Tags: Do Groupons pay off?, Groupon, Groupon ROI, How to calculate ROI on a Groupon promotion?