Profit versus risk, and the new channels to market for a brand

The last tech bubble covered a period from 1995-2000. It was a time when investors would discard traditional drivers in investment for a potential future upside based on technology. Some collapsed, others like, went from a share prices of  $107  to $7 only to rebound to $200 years later.

I remember the same people, who were saying you were crazy for not being in it, saying how crazy the whole thing was, just days after the bubble burst.

In many ways brands are at that same cross roads today, take yesterdays heat around Groupon.

At the time of its IPO, Groupon, under fire, had to adjust its filing after critics attacked it for concealing losses through a metric called “adjusted consolidated segment operating income “, which in plain speak means,  hiding the high costs of customer acquisition. Crazy making huh?

The adjustment shifted losses from $60 million for 2010 down to $420 million. After IPO, Groupon shares did not fare well. People who did invest in Groupon would have lost 41% of their investment in 5 months. Yesterday, unsurprisingly, Groupon was compelled to make another downward revision to reported earnings of $14.6 million. Well they are in the businesses of dropping prices!

So what are the learnings?

1. The cost of customer acquistion for online business models is high. Until you test the market, and research opportunity and customer appetite, this can be a show stopper

2. Groupon has walked down that dark and slippery path of discounts. Groupons customers were “buying customers” through discounting. This was never going to be the basis for ongoing loyalty, it is a volatile business model.

3. If Groupon does have a value proposition, beyond discounting, (and folks correct me if I am wrong), it is customer acquistion for business, and  based on their $360 million loss swept under the carpet at the time of IPO, it doesn’t appear to be a core strength.

If you are investing in new channels to market for your brand, take a look at the real value you are bringing to the customer and never, never forget the importance of your brand as a predictor of future profitability.

Louise Kelly

Managing Director

Hearts and Minds

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