Profitless prosperity

Ah, the era of “profitless prosperity” is back. I still have my Pets.com sock puppet to remind me of those once glorious times.

Barely a day goes by now that we don’t hear about a stratospheric valuation (actual or rumored) for some digital darling. From Facebook to Twitter to Groupon, it seems that unless your EBITDA multiple is either quadruple digits or infinite, you’re barely worth paying attention to.

To be fair, plenty of highly valued, enduring brands have gone through periods of losses ultimately to emerge with a dominant position and boatloads of cash generation. And there are perfectly good reasons a company might decide to pursue low or no profit sales for a period of time, in targeted circumstances or with certain consumer segments, including:

  • Generating trial among prospects with high potential lifetime value
  • Driving traffic to a store or website for consumers with a high propensity to cross shop or be up-sold
  • Creating positive word of mouth among highly influential persons (“You get a sock puppet! And you get a sock puppet!”)
  • Securing valuable customer relationships in a maturing market.

The companies that do this well have a clear understanding of customer economics by segment, a clear vision for how profits will develop over time and a disciplined process for measuring progress.

The brands that do this poorly are typically focused on revenue for revenue’s sake or obsessed with new customer acquisition with no way to tell whether those new customers can be profitable.

More dangerous still is falling in love with the “promiscuous consumer”–that customer that only goes for the best deal. They are often expensive to activate, they have little propensity for loyalty and you rarely break-even with them.

If your customer portfolio is comprised (littered?) with too many of these types, expect it to end badly. It always does.

Twitter’s birthday: Blow out the candles, step on the gas.

You probably heard that Twitter celebrated its 5th birthday yesterday.

The flash-sales model pioneered in the US by GiltGroupe is about 3 1/2 years old.

Groupon was founded in November of 2008, not even 2 1/2 years ago.

While it remains unclear whether Twitter will go the way of a MySpace or a Facebook, it’s hard to question that they have forever changed the way people communicate and engage.

The collective valuation of the flash-sale sites launched in the US is likely already greater than that of Saks Fifth Avenue, a pretty powerful brand that is more than 100 years old.

Groupon turned down an offer from Google to be bought for $6 billion and is rumored to be seeking a $25 billion valuation in an IPO later this year.

These innovative new business models are rapidly gaining share from industry incumbents who are slow to go through the cycle of awareness, acceptance and action.

If it hasn’t happened to your industry yet, rest assured it will.

So let’s all wish Twitter a Happy Birthday.

And then, go figure out whether you are driving the right car or not.

Either way, get ready to step on the gas.

 

A very omni-channel holiday

First there were brick and mortar retailers and direct-to-consumer companies–and never the ‘twain shall meet.

Then came retailers operating in multiple channels–but don’t call them “multi-channel retailers”–most pursued their strategies in operational silos.

Then more companies came to realize that silos belong on farms, and we saw more integration: consistent branding across channels, pricing and promotional synchronicity and cross-channel marketing.

So where do we find ourselves this holiday shopping season?

Now it’s a world of the constantly connected customer, navigating an explosion of communication and transactional channels and touch-points.

Now it’s Twitter and FourSquare and FaceBook and blogs and customer product reviews on a retailer’s own site.

Now it’s Groupon and Gilt Groupe and dozens of other sites driving down pricing through channel innovation.

Now it’s a world where customers use their mobile devices to shorten the purchase funnel cycle to mere seconds.

Information is everywhere.

The customer can be activated anywhere.

Are you ready for the omni-channel world?

 

So excited! Just discovered hyperbole is the best thing ever!

You don’t have to spend much time on Twitter or Facebook to learn that “so excited” is included in a significant percentage of posts–and usually describes something as mundane as what the person is about to eat or that a new episode of Dancing with the Housewives of the Jersey Shore is about to come on.

Marketers tell us that the beer we drink will make us irresistible to the opposite sex or that we are a good and valuable person because of the handbag we carry or the new car we drive.

Charlatans suggest that addictions can be cured by reading a book.

Infomercials claim that our financial problems can be solved in five easy steps with no money down.

Because of the recession consumers are more focused on substance in their purchasing decisions.  Obvious value and tangible bang for the buck are front and center, and fewer customers are obsessed with this season’s disposable fashion or willing to pay a big premium for a rather ordinary item from a fancy label.

Yet, for many brands, the hype and the hyperbole continue.  Consumer relevancy takes a back seat.   The authentic voice remains muted.

What’s exciting about that?

Prospects, Not Suspects

The notion that a smart sales and marketing strategy distinguishes between suspects–consumers who MIGHT turn out to become profitable customers–and prospects–consumers who are highly likely to turn into valuable clients–is an old idea. Great sales people possess this intuition.  Great marketers use customer insight, robust analytics and customer segmentation to do this more scientifically.

If you are anything like me, you may have noticed a lot of attention being given to companies that are posting seemingly impressive customer statistics.

The hot social media sites–from FourSquare to Yelp to Twitter to Facebook–have signed up millions of users (in the case of Facebook reportedly over 500 million!). But how many of these folks are actually buying anything?

Members-only “flash-sales” sites use free-shipping and high value gift cards to coax existing members to refer a friend.  Are these newly acquired members turning out to be customers with a positive lifetime value, or is this mostly a land-grab to keep private equity money flowing and high-end vendors interested?

Groupon recently executed a promotion with Gap during which a reported 441,000 customers spent $11MM in just one day. That particular promotion offered $50 in merchandise for just $25.  Most press reports deemed it “successful.”  Really?

Successful in generating awareness?  Apparently.  Successful in acquiring a significant number of marketable e-mail addresses?  Most likely.  Successful in driving short-term revenue?  Clearly.  Successful in creating buzz about Groupon? You betcha.

But how many of these consumers were promiscuous shoppers, only enticed by the deep discount?  And let’s face it, just about any reasonably desirable brand could generate an impressive incremental sales lift by cutting their prices in half.

Most of these hot brands are still dealing in the world of suspects.   Only through time and more rigorous customer analysis will they know they are gaining prospects.

In the meantime, I remain suspicious.

What does it cost me to see the next card?

When it comes to innovation, many companies approach it as an all or nothing proposition.   Without a clear road to profitability, they do nothing.   If the cost to develop the new line of business seems particularly daunting, they table further discussion.  When clarity around key assumptions seems challenging, well it’s better to delay (or worse yet, form a Task Force that meets once a week but generates no forward progress).

Innovation rarely comes in a clear glidepath to prosperity.  Rather, it’s a journey where reaching the first hill provides more direction as to how to climb the next.

Once I worked in business development for a company whose CEO was passionate about innovation.  When we brought him a new idea he never asked to see a detailed multi-year project plan with Excel spreadsheets showing ROI under various scenarios.

If the idea fundamentally held promise, he asked one powerful question:  “What does it cost me to see the next card?”

Sometimes it was a bit of consumer research.  Sometimes tumbling some high level numbers.  Sometimes working with R&D to assess basic technical feasibility.  But what the CEO knew was that like certain card games, winning in new business was about a series of antes–multiple lower cost steps that helped decide whether to make the big bet.

So instead of endless speculation (and task force meetings!) about whether there is a market for a new concept, spend a little bit of money on basic consumer research to get some guidance.  Instead of months of study about whether there is ROI in being on Facebook or Twitter, get one of your junior marketing folks to spend a few minutes each day trying stuff to see what happens.

Usually the cost to see the next card is less than you think.