What I learnt selling panties on Spreets [How to sell through group buying sites in 7 steps] - Anthill Online

What I learnt selling panties on Spreets [How to sell through group buying sites in 7 steps]

February 22, 2011
By Tim Morris
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What I learnt selling panties on Spreets [How to sell through group buying sites in 7 steps]

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Tim Morris is co-founder of The Pantless Postman, a subscription site for busy gentleman, who wish to avoid the time consuming task of buying underwear through off-line stores.

Recently, Morris trialed a promotion through Australian collective buying site Spreets. In this intimate exclusive for Anthill, he explains what worked, what didn’t and what he’d do differently next time.

1. Why offer a collective buying deal in the first place?

In preparation for a Valentine’s Day sales push, we were exploring new marketing channels that would help us spread the word about The Pantless Postman and encourage new customers to try our product.

We started thinking about offering a discounted subscription through one of the daily deal websites, often know an ‘collective buying’ or ‘group buying’ sites.

Will discounting damage your brand?

Our first reservation was that offering products at a significantly discounted price might damage The Pantless Postman brand.

We soon agreed, however, that as long as the discount only ran for a short, defined period it wouldn’t have any serious long-term negative impact, and that the brand awareness and repeat sales would likely outweigh this downside.

One of the benefits of collective or group buying sites is that they are engineered from the outset to encourage users to share the deal. They incentivise your customers to do your marketing for you.

This is why Spreets has managed to build a database of over 500,000 members in 10-months and why the makers of CatchOfTheDay and Scoopon have 900,000.

It’s also why these sites are popular among new restaurants (or old restaurants with a new menu). They can offer a brand-awareness boost to a business with something new to promote.

Aren’t group buying sites better for service industries?

Our second reservation was that the daily deal model seems better suited to services, rather than products, simply because services, like restaurant meals and fake-tans, are easier to discount (i.e. lower stock costs, higher margins, etc).

Typically, a deal needs to offer a discount of 50% or more off the retail price.

Many merchants of products (as distinct from services) will only use daily deal sites if they have a surplus or simply need to get rid of stock.

For example, a liquidator might have good reason to offer an item at a heavy discount if it is clogging up a warehouse or if the item was purchased at a distressed price.

This was not the case with us. So, we had to ask ourselves the very serious question, ‘Could we offer a big enough discount, and still be content with the return we would receive.”

How to determine your ROI from a group deal

To determine whether we could make the deal viable and attractive to the customer, we searched Google for information that would help us calculate the potential Return-On-Investment.

Pretty quickly, we came across an excel calculator developed by uber-geek Marcel Crudele.

If you are curious about collective buying sites and whether (or not) you should sell your product or service using the model, it is worthwhile checking out Crudele’s observations.

His site covers all the maths and calculates the potential profit or loss from running a daily deal. The calculator can be downloaded via the link above.

Please note, however, that this calculator is based on Groupon in the USA. As we found out later, different daily deal sites take a different percentage cut of the voucher price, plus some of the other variables change as well.

Importantly, our strategy also involved bringing new customers on with the aim to convert as many as possible into repeat customers. We needed to factor repeat sales into our ROI calculations.

2. How to select your collective buying partner

After running the numbers, we thought we might just be able to make the deal work.

So, we started making enquires, contacting the various daily deal sites. A good place to start is dealsguide.com.au. This site is an aggregator of the main players.

We sent emails to several of the sites, including Spreets, Cudo, JumpOnIt, and Living Social.

Spreets was by far the most responsive, calling us to discuss the offer within one hour of our email. Other sites such as JumpOnIt and Living Social responded saying that our product offering wasn’t suitable for their audience.

What if you are rejected?

The sites that knocked us back offered no real explanation or reasons for their decisions.

However, we assume our lack of success is a reflection of the types of deals these other sites offer. Both JumpOnIt and Living Social focus on what are sometimes called ‘experiential’ deals. Once again, these are service-based deals, like restaurant meals.

Rejection is not a bad thing. In fact, it is reassuring.

If our enquries had related to pure advertising, following a traditional advertising model, the response may have been different. And we may have unintentionally burnt cash promoting our product through an inappropriate channel.

One of the benefits of the group buying model is that both parties share the risk. If the deal is a dud (or not suitable to the group buying site’s audience) both parties lose.

The value of a dedicated group buying partner

A knock back can, therefore, be a good thing. No-one’s time or energy is wasted (although a courteous explanation would have been appreciated, nonetheless, even if presented in a template featuring ‘common reasons for rejection’).

So, from the outset, Spreets became our preferred partner.

On top of that, their sales representatives were extremely helpful. They were full of ideas and suggestions on how we could make the deal more attractive and they were also willing to negotiate on things like margins, maximum number of vouchers on offer, etc.

We did receive a positive response from Cudo, but not until almost a fortnight later. By then, an agreement had already been struck with Spreets.

3. How we structured the deal: Negotiating with Spreets

The Pantless Postman’s most popular product is a 12-month underwear and sock subscription.

Prices for our subscriptions range from $120 to $190. Our initial idea was to offer a 50% discount on the base pack ($120), bringing the Spreets rate down to about $60.

In our first conversation with Spreets, however, our sales rep suggested that we re-think the offer and attempt to get the price down to what was described to us as “the impulse buying range”, which is around $40.

Internally, we tossed around a couple of ideas and ended up developing a new 6-month subscription with a retail price of $89 and a discounted price of $44.

Another advantage of a 6-month subscription was that it would allow us to try to convert Spreets customers into regular (i.e. fully paid) customers sooner than would be the case with a 12-month subscription.

And this was the underlying strategy of the deal after all — to get people on board with a great price and then convert as many as possible into repeat customers.

Don’t get caught ‘pantless’

What we had to keep in mind though was that with product costs, warehousing and postage (plus the cut given to Spreets, which was significantly less than the 50% suggested in the Groupon model but still considerable), we were looking to lose around $10 per customer.

For reasons explained below, this was a loss we were content to wear. But, naturally, we also wanted to make sure that we didn’t place ourselves in a position where we would be too exposed should things not go as planned — and be caught ‘pantless’, so to speak.

So, we asked Spreets whether we could cap the number of vouchers sold at 100.

Our rep said that this would be okay but only if we would be happy to offer the subscription as a side deal, rather than as Spreets’ main deal of the day.

After ensuring that an email featuring our deal would still be sent out to Spreets’ customer base, we decided that running the offer as a side deal would be worth it — particularly for the piece of mind we would gain by not exposing ourselves to potentially selling thousands of vouchers at a short-term loss.

Finally, Spreets came back to us to ask whether we could raise the cap to 200 vouchers and reduce their sale price down to $39. As an incentive Spreets, offered to reduce its cut of the voucher price.

So, after about two weeks discussions, we finally had a deal ready to go:

  • A 6-month subscription to the Pantless Postman for $39 (normally $89)
  • Run as a side deal on the Spreets Melbourne website on Tuesday 8 February
  • 20 vouchers had to be sold for the deal to become “live” (described as ‘tipping’)
  • Maximum of 200 vouchers to be sold (capped)
  • A reduced cut paid to Spreets in return for a higher cap on vouchers

4. Why we were content to lose money on each customer

As mentioned previously, we actually stood to lose about $10 on each voucher sold.

Why then were we content to go ahead with the deal?

Using stock as advertising

First of all, the loss wouldn’t result in negative cash flow. The thirty-something dollars received by us from each voucher would cover the expense of servicing each subscription (warehousing, postage etc).

It just wouldn’t quite cover the cost of all the products being sent out to the customers.

Given minimum order quantities for manufacturing socks and underwear, we actually have quite a lot of stock in our warehouse.

We agreed that it would be better for this stock to be in the hands of customers rather than sitting on our shelves — kind of like giving out samples but at the same time getting new customers signed up and experiencing the service side of our business.

This effectively converted capital we had invested into stock into advertising.

We also thought that $10 per acquired customer is actually pretty cheap.

Being an online business, we’ve experimented quite a bit with advertising through platforms like Facebook and Google Adwords. These channels can be fantastic for driving traffic to the website but often, when you truly examine their performance, you will see that it takes a hell of a lot of click-throughs to achieve a single sale.

Sure, it might only cost $0.60 a click (if you pick the right keywords) but only one in 30 or 40 visitors might actually buy something.

Harnessing the trail

It’s, therefore, also understandable why these sites might be appealing to organisations that make their profits from ‘the trail’ — trailing commissions or profits from repeat customers.

For example, a domain seller might take a bath when a customer purchases a URL for $9.95. But if the customer also signs-up for a hosting package, that loss will be recouped within the first three months of hosting fees.

The same applies to many magazine companies that offer a trial subscription for $1. These organisations can offer such ridiculous discounts safe in the knowledge that a certain percentage of buyers will purchase a full-subscription at the conclusion of the offer.

The 6-month deal would provide us with an opportunity to convert customers acquired through Spreets into long-term, profitable users, hopefully off-setting the immediate loss.

The deal also gave us the perfect excuse to communicate with our own network and maybe get a couple of people over the line who hadn’t been prepared to buy a subscription in the past.

5. How did the deal actually perform?

On the day of the deal, things got off to a pretty slow start.

I don’t think a single voucher was sold for the first couple of hours (and we began to anxiously wring our hands). Then, we realised that Spreets had not sent out its email yet promoting our deal. So, we relaxed a moment and waited for the email to be released.

The Spreets email was sent out at around 1pm and things picked up for a while before plateauing at about nine vouchers sold.

Then, it was our turn to swing into action, promoting the deal to our network as well as on Facebook. Sales picked up again after this and we finally closed up with 30 sales by the time the deal ran out.

This was comfortably over the 20 we needed for the deal to go live but obviously well short of the 200 that Spreets had pushed for.

All up, however, getting 30 new customers in one day was not a bad result.

Were there other benefits?

In addition to actual sales, we also experienced a couple of other benefits.

Traffic to the website increased 10 fold (compared to the previous day) and the average time on site and number of pages viewed also increased. Furthermore, we actually had two people contact us to say they had seen the Spreets deal but instead wanted to sign up for one of our 12-month subscription deals — at four times the cost!

One week on from the deal, about 50% of Spreets customers have redeemed their vouchers. Industry average is about 80%, so we’ll see how many people actually redeem before the 3-month redemption period is up.

6. What we would do differently if we ran it again

Now that we’re on the other side, we regard the Spreets deal as a pretty successful trial run for this type of marketing activity. We’re not sure yet whether we’ll run the same deal again.

However, if we did there’s a few things we would do differently.

Removing the cap. But what about the ‘cup-cake’ horror story?

During the research process, I was treated to a range of ‘horror stories’, largely from concerned friends. They mostly involved organisations that did not include a cap, over-stretched their resources and were pushed out of business.

For example, I have heard a story, told to me several times without a source, about a cup-cake store that offered a dozen cup-cakes at a small loss and received 5,000 orders, killing the business.

Knowing now what the level of uptake is likely to be for our kind of offer, we would remove the cap on vouchers and run it as the main deal of the day. This obviously has risks. The main deal receives more promotion, earlier in the deal window, and has more chance of building momentum.

We would also run it as a national campaign, not just in a single city.

Once again, we would only recommend running a deal without a cap, if you have a  strong understanding of what level of response you are likely to receive. If you will definitely make a profit on each sale, this factor will be less important to you.

But you will still need to factor in the cost of servicing the demand.

Add-ons of ‘high perceived value’

Next time, we will also be more likely to make a concerted effort to ramp up the perceived value of the offer.

There are many things that we could have attached to the subscription (such as free gifts), which have a ‘high perceived value’ to the customer but don’t cost us much.

Using this approach, we could easily have increased the value of a 6-month subscription to $120 dollars and still leave the sales price at around $40. This gives the customer a discount of 77%, which is much more enticing than 56%.

Don’t just rely on the group buying site’s network

Finally, we would prepare a series of coordinated promotions to our own network — making sure every one of our friends, family, fans knows about the deal and has the opportunity to take advantage of it.

Sure this might cannibalise a few sales but it might also convert some customers that haven’t been willing to commit yet, and build greater momentum on the collective buying site among new customers.

Given the inherently ‘sharable’ nature of group buying sites, one sale has the potential to prompt others.

7. What were the lessons: 9 final tips

  1. Risks associated with discounting might be offset by the benefits of brand awareness.
  2. While such sites are great for service providers, they also offer a viable option for merchants of product, in three scenarios:

    a) If the merchant has excess stock (liquidation scenario);
    b) If the merchant is likely to benefit from increased exposure; or,
    c) If the merchant is likely to benefit from a ‘trail’ or ‘upsell’ opportunity

  3. Don’t forget to calculate ROI (including repeat sales or trailing revenue).
  4. Don’t be alarmed if you are knocked-back (this could be a good thing).
  5. Offer a product or service within the ‘impulse buying’ range.
  6. Offer deals that will help you upsell (to full price) sooner, rather than later.
  7. Weigh up the advertising benefits — A loss might be cheaper than advertising.
  8. Add items of ‘high-perceived-value’ to increase the value of the deal.
  9. Don’t just rely on the seller. Promote through your own network!

Tim Morris co-founded The Pantless Postman, alongside Dave Andrew, to create a subscription site for busy gentleman, who wish to avoid the time consuming task of buying underwear through off-line stores.

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20 comments
Jackie
Jackie

Great insight into how these deals work from a business perspective and very beneficial for SME that offer products rather than services!

Socratesk
Socratesk

Excellent article Tim! Like Tagmotion, I wish there are more case studies like this available. Far too much fluff and not enough content in most cases. Your article by comparison has heaps of solid content that I know will save me time and money in the long run.

Jacinta
Jacinta

Great Article! Another good Daily Deal site in a more niche market is Fashion Zoo. www.fashionzoo.com.au. Ship anywhere in Australia.

Studyingagain
Studyingagain

great information and it is great others have had success on these great deal sites. i love them but feel that the offer we used yesterday didn't explain the process enough to redeem the vouchers at the cinema - needed the two vouchers and not the one i thought for the two of us.

Tagmotion
Tagmotion

I wish there were more case studies like this on the web. Excellent.

Kate
Kate

An excellent article and precise of the group buying model. I hope you do a follow up in 6 months on the conversion rates to full price customers.

Sheryl & Tin
Sheryl & Tin

Ahh how I wish your article came out earlier.. we had to deal with these group buying sites recently and this info surely would've helped alleviate the frustration we encountered. Although I had been against Scoopon, Cudo, Our Deal from the very start when we started getting flooded with sales calls my partner thought it would be a good marketing strategy. We did our homework though and read of the complete horror stories that other cupcake bakeries faced when doing this deal so we really didn't want to repeat those mistakes. We ended up doing a side deal, pushing down the commission % (yes you can negotiate and do play hardball), pricing the deal at 50% and capped it at 500. We also ensured that our terms and conditions included the term that ALL coupon orders had to be placed in advance with us (so to predict how much we should bake just for these coupon deals and not run out for other walk-in customers) and by placing the order we asked for their email address for confirmation. Don't be afraid to negotiate with these sales guys, as more and more Group Buy sites pop up everywhere, they're going to have to be more competitive to get your business. So the end result? Was it worth it for us? Yes. The way we managed to implement it meant that we were able to sell out of 500 coupons in less than 48hrs and also grow our customer database with email/phone numbers recorded into our system. And remember, even though you will get the occasional person just looking for a once-off cheap deal and aren't your typical target market - you STILL need to treat them as a real customer. Yes we have found some coupon customers extremely difficult to deal with, they're the ones that spend the least and want the world for their dollar but if you keep them happy perhaps they'll tell their friends about you. I know some of them won't even come back because they would never think of paying full price for cupcakes but at the end of the day they're still your customer. In saying that we have had several repeat customers through this deal and they wouldn't have known about us otherwise and have been our best customers. So don't be a fool and treat those customers as cheapskates cos they definitely will not be coming back! (We've bought coupons before for carpet cleaning and the lack of customer service we receive because we're trying to redeem 'coupons' is shocking! Maybe they didn't realise that they would actually SELL all of their 5000 coupons and were freaking out on how to service them all. Something to think about) Hopefully sharing my experience will assist some other small business out there thinking about using Group Buy sites too.

amanda
amanda

Outstanding article! Thanks Tim.

Erietta
Erietta

perhaps its time for the group buying sites to send reminders to buyers who have neglected to redeem their vouchers. on another note, i wonder how many anthill readers are gonna buy some pants?

Rhondalynn
Rhondalynn

Thanks for this Tim. It is a great article and a fantastic case study for these "groupon-like" sites. I think many businesses will benefit from your frank, forthright and thorough analysis. Just one tiny point of clarification on your point about cash flow. If the money that you (or a business) brings in from the deal (i.e. the $30) doesn't cover the warehousing, postage and the cost of the goods sold, it is very hard NOT to also have negative cash flow. Cash flow is a function of net profit + or - some net changes in key Balance Sheet figures. If you don't cover your costs on the sale (i.e. you have a net loss to begin with), it makes it more difficult to recover and generate positive cash flow. To do this, you would have to string out your suppliers, sell assets, collect debts or liquidate inventory. In this case, I suspect that the 30 deals that did close would clearly not have caused your total business to go into a net loss and/or negative cash flow position. However, caution should be advised for other business owners who may have wildly successful offers. If 5000 people take up an offer where the business is losing money on each sale, it could easily put a business under. The business then has to hope that 50% of the coupon purchasers put it in a drawer and don't bother to redeem it. Some of the businesses that I have spoken to (who have trialled these offers for services) reported that only 50-60% of customers redeemed their coupons.

John
John

Great information in a brand new area of marketing and sales. Thanks for the comprehensive and usable insight into the processes required to successfully run such a campaign.

Tim Morris
Tim Morris

Hi all, thanks for reading and I'm glad you enjoyed the article! #Jonathon. Thanks for your comments. I agree there's going to be a lot happening in the niche deal-of-the-day space in the near future. #jamesh81 - you're spot on that these types of deals build brand awareness AND at the same time produce a quantifiable result (not necessarily shoot-lights-out profitable results, but results none the less). #Dgodbold - you raise an important point as well. I didn't have time to mention it in the article but another challenge we had was configuring the eCommerce part of our site to handle redemption of the voucher codes. So that's something for not just service based businesses to consider, but also those selling online.

Dgodbold
Dgodbold

If you are offering a service based deal you also need to consider how you will manage the booking process once the deal is activated. The answer is to use a online booking service such a http://bookitlive.net as it offers voucher code redeemption.

Deal Pinch
Deal Pinch

Great article Tim, Just want to bring your attention to Deal Pinch (dealpinch.com), a daily deal aggregator, we've been around since Startup Camp Sydney last October. It's a very interesting time to be in this business, within the past month we've had about 10 new deal of the day sites get in touch to be listed in our system. We will start to see more niche deal of the day websites in future, some that perhaps only target womens fashion, others that target holidays tailored for the gay community, I believe that we're only at the tip of the iceberg. The fact of the matter is that many of the sites didn't get back to you because they were oversubscribed already. Some sites take months even for a listing to be placed. There is a gap in the market right now and we're going to see many new players. Jonathan Co-Founder of Deal Pinch

Tim Morris
Tim Morris

Thanks for your comments Sheryl - some great additional thoughts there. I absolutely agree that the group-buy sites are going to have to get more competitive as the market gets more crowded. Anyone thinking of using them, negotiate away!! You also raise a really good point about treating the "coupon customers" just like any others. Yeah, we've had a few (slightly) difficult ones however if we want to convert them into repeat customers we'll have to give them the same level of service as anyone else.

Tim Morris
Tim Morris

Hi Rhondalynn, thanks for your comments and good pick up on the cash flow issue. To clarify a bit, we were already holding enough stock prior to the deal to service the new customers (especially because of the 200 voucher cap). The $30 is enough to cover future expenses incurred in sending that stock out to customers, meaning our "cash at bank" will be higher after the exercise than before it. Where we incur the loss is by selling that stock at a lower price than we paid for it. As I think I mentioned in the article we were happy doing this as a once off activity because it effectively converted capital we had invested in stock into advertising / promotional budget. You'd be perfectly correct though if we needed to purchase more stock in order to service the new customers. Then our cash reserves could well start to look unhealthy - especially if we sold 1000+ vouchers! Also a good point about coupon redemption rates. Some of the daily deal sites (including Spreets) actually hold back a portion of the revenue generated from the deal until you can prove that a threshold number of people have redeemed their coupons.

Studyingagain
Studyingagain

so good that there is a site that has all the brisbane deals in one place. i love the offers that are given and have used some just yesterday. problem i found was i was fortunate i took both vouchers as we needed them both to see a movie and there is no mention that i could see on the voucher that you get your ticket from a machine in the cinema.

alan jones
alan jones

Great story Jonathan, thanks for sharing, particularly the costs and results.

Deal Pinch
Deal Pinch

No problem. Now just make sure you sign up to us ;)