Today I was forwarded an article about the Posies Cafe Groupon Problem. Their blog post examined the effect their Groupon decision made to their bottom line. The story is quite sad, I must say but certainly a learning moment for the cafe folks.
I can’t get a good feel for what Jessie, the owner of the cafe, was thinking when he chose to use Groupon as a method of customer acquisition. His article talks about the value of the network, reaching new people and a bit about how much money they would make or lose from each coupon used. However, he left out the important parts like the lifetime value of a customer. He didn’t discuss his viable customer acquisition cost. And most importantly he didn’t reveal what their plans were for the traffic once it arrived at their doorstop.
As we discuss regularly here in posts like “How to use Groupon for your business”, these are really the most important parts of any advertising campaign. They can be broken down into 3 important categories:
1. Lifetime Value of a Customer
- This is the amount of money you can hope to make from a customer over the lifetime of their purchases. Knowledge of this number and how it changes over time enables the business owner to make some great decisions. Imagine if you switch from Yellow Page advertising for a year to social media and find your lifetime value going down? Would that tell you that it’s better to be in front of people looking for you, or better to entice them with witty banter?
- The ability to track the financial results of activities is fantastic. The hard part is knowing exactly what changes your customer’s lifetime value. Thus few, significant changes over time will improve that connection. To make tracking even more profitable, the ability to track customers by source will give you an even better hand at what kind of advertising results in the most profitable customer cluster.
2. Acquisition Cost
- This is the amount of money you can afford to spend per customer. Sometimes, as in the case for subscription and continuity services, you can afford to spend more than the customer’s first payment because of the money that is spent by the customer later. It is imperative to track customer sales and determine a lifetime value of each customer before attempting to calculate an acquisition cost.
- If you know that your typical customer spends $400 with you over time, that will enable you to calculate how much you can spend sponsoring a local baseball team versus a local industry conference. If you can project the number of customers an advertising source will serve to acquire, you can quickly calculate how much you can afford to spend. While the local baseball team will increase exposure, it may only bring one customer in whichs means $399 would be the most you could afford to spend and still make $1. On the other hand if you could project to interest 10 new customers at a local industry conference, you may be able to spend $3,999 advertising at it.
3. The Backend
- Nothing is more crucial than understanding the backend. The backend is everything the customer buys or engages with after their first visit. With internet businesses that often means downloads, upsells and email offers. With a brick-and-mortar business like Posies Cafe that may mean catering orders, Foursquare special offers and and special musical in-store events. Understanding what you can offer your audience after their first visit allows you to try new customer acquisition avenues.
- For instance if you know see a regular audience coming to your Tuesday morning “kids club” reading, and spending money during it, what other avenues can you explore to drive traffic to that “weekly” event thus increasing the lifetime value of the customer? And if you find that this regular program generates the most revenue for you, what other programs can you try? And if you understand how much these customers typically spend with you throughout their weekly “kids club” visits, you’ll know how much you can afford to lose on an opening Groupon customer acquisition opportunity.
The Posies Cafe Groupon problem is remarkably similar to many other businesses that have the same complaints about Groupon. If those business owners spend some good time studying their customers buying habits and what kinds of things to do and offer that increase sales, they’ll find they totally understand how to use Groupon and its significant reach.