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
- Risks associated with discounting might be offset by the benefits of brand awareness.
- 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
- Don't forget to calculate ROI (including repeat sales or trailing revenue).
- Don't be alarmed if you are knocked-back (this could be a good thing).
- Offer a product or service within the 'impulse buying' range.
- Offer deals that will help you upsell (to full price) sooner, rather than later.
- Weigh up the advertising benefits -- A loss might be cheaper than advertising.
- Add items of 'high-perceived-value' to increase the value of the deal.
- 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.