Groupon Stores: Implications for Groupon

In my last post I discussed the weak Network Effects of Groupon Business Model. Groupon clearly understands this problem of weak (or, lack of) network effects; Group CEO Andrew Mason said Groupon is the  "N Sync of Websites", and acknowledged that Group Buying is not a winner takes all market. Groupon also has a long line merchants waiting to run their deals in the Groupon site. One way to increase the network effect is to become a deal marketplace for local businesses. Groupon will drive traffic, and merchants run deal on a pay for performance model. Not surprisingly, Groupon recently announced the launch of ‘Groupon Stores’; according to Groupon’s blog, “With Groupon Stores, businesses can now create and launch their own deals whenever they want. Think of it as the online equivalent of a merchant’s physical storefront.”. The blog also says “Today things are different – our biggest problem is that demand is so high, merchants often wait months to be featured. And while we once only had a few thousand customers per city, now we have hundreds of thousands (Chicago just added its millionth subscriber!) – making it increasingly difficult to find one deal that satisfies everyone”

Some of the implications of Groupon Stores for Groupon that come to my mind are:-

Strengthen Network Effects. Surely, introduction of Groupon Stores will significantly help several hundreds of merchants to run their own deals in Groupon. This is likely to attract even more users, and contribute to the existing weak network effects.

Scaling business without costs. Because merchants would be signing up individually, there will be limited requirement of sales force, and since merchants will run their own deals, there will be no added requirement for copywriters. Essentially, the cost of adding a new merchant under Groupon Store is not significant.

 “Freemium” Customer Acquisition model. Groupon Stores allows merchants to try the effectiveness of Groupon, at a low cost, before they sign up for the Home Page Deal with Groupon.  For Groupon, this is also an easier way to acquire new customers.

Deal discoverability and Conflict of Interest:  Users primary discover deals through the daily emails that Groupon pushes to its users. In Groupon Stores, there will be some algorithm that Groupon will run to select and feed the best deals to its users. I see a conflict of interest here: Because Groupon takes 10% of the deal value, all other things being equal, it is incentivized to push the deals that has more revenue potential.  For Groupon, merchant A offering a 50% discount off massage deal worth $250 is more likely to be worth less than merchant B offering a similar service for $100, or worth less than merchant C offering boating trip worth $300. I want to see how Groupon is going to balance the different sets of incentives, and feeds the deals.

Need for good Search and Recommendation Engines. I suspect that it might be possible for users to directly visit Groupon’s site and browse for deals.  I hope Groupon builds a powerful recommendation engine to help the user discover the products/services (s)he  may like.  Also, Groupon must have a powerful search engine to help users search for deals.

Need to Manage Merchant Entropy.  In an open for all model, Groupon is also likely to attract merchants who are less than ideal to do business with. There might be an increased requirement for customer support, and fraud prevention. What if the merchant doesn’t honor the deal? Groupon will refund the money to the user, but what systems are going to be available for the users to give ratings to merchants? Can other users base their purchases of deals, on the ratings of the merchants?  As the number of merchants grows, how can Groupon keep the climate of trust intact?

If not executed well, Groupon is likely to enter the murky waters that eBay is struggling to get out. That said, I am excited to see how the Groupon Stores changes the game for local businesses. 

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Network Effects in Groupon Business Model

With 40 million subscribers from over 300 markets from 35 countries, and with 20 million groupons already sold as of date, Groupon is a raging success.  Groupon provides a real “Pay for Performance” marketing model for local businesses, helping them get new customers using the power of viral web marketing.  Groupon also recently started providing Deal Statistics including aggregate buyer demographics such as gender, age and Zip code, share of purchases bought as gifts, distribution of sales by time etc, to merchants running the deals. Having such data will help the merchants to better understand their customers, and make product offerings and their marketing campaigns more focused to their customers.

But how defensible is Groupon’s market position? The barriers to entry in group buying business are so low, that as per Groupon CEO Andrew Mason, there are 500 Groupon clones in the market. Unlike a true marketplace such as eBay, there are limited network efforts in the Groupon’s business model.  The network effects of Groupon is induced by

•  40million subscribers, who attract more merchants to want run deals at Groupon, and hence more deals for the users, attracting even more users.
•  More merchants would mean deals available in different products and services, and Groupon can run more personalized deals to cater for subsets of users.
•  Because there are more users, the chances of any deal going through are much higher, resulting in more successful deals, which add value to both user and the merchant, attracting even more users and merchants.
• Also more users, and more deals will give more data to mine, and will significantly improve the personalization algorithms, resulting in better personalized deals, which adds value to users.

A pictorial representation of network effects in Groupon Business model:-

Network Effects in Groupon Business Model

However, for users and merchants, there are no barriers to exit. What stops a user from signing up for a deal elsewhere? What stops a merchant from running the deal in another site offering similar access to users? I think the current business model of Groupon at best induces weak network effects, and is completely vulnerable to competitive forces. There is no stickyness in the system, and there are no switching costs for any of the stakeholders. Groupon can increase the stickyness by rapidly growing and having a large user base which will be attractive to the merchants, and vice versa. But  even a strong network effect is not a guarantee for success, and in fact network effects alone have never been enough to make users stick to a product/service for long.  The best example is Facebook, which dethroned MySpace with a better technology and product.  Users look for value, and merchants look for profits; In a free market, customers (users and merchants) will use that service that maximizes their utility. Groupon is no exception to this established principle in market economics.

Further, the network effect in Groupon business model, albeit weak, is induced by symbiotic growth of number of users and number of  merchants.While Groupon has no added cost in scaling up its user base, (in fact, it added 3million users in just one week), it is a different story when it comes to adding merchants, and running deals. Groupon has a significant number of sales persons who acquire merchants, and copywriters who write attractive ads for the deals, on behalf of the merchants. In order to scale up the number of merchants, Groupon must also increase its sales force, and copy writers; scaling comes at a cost, and it will likely reduce the slope o the hockey stick in the Groupon’s financial graphs.

It is not that Groupon is not aware of these vulnerabilities. In fact Groupon appears to be taking significant steps to defend the fertile group buying market they created from scratch. Recently, Groupon has announced their plan for introducing "Groupon Stores", which will enable any merchant to run their own deals in Groupon. I have discussed about the possible implications of Groupon Stores, for Groupon, in my next post.

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Kindle for Facebook - An analysis of a new product idea

Recently Amazon unveiled its Kindle for the web application that would allow anyone to read a kindle book in a web browser. I thought it would be nice to extend this idea to a new product called the “Kindle for Facebook” app, which will allow a Facebook user to preview a Kindle version of the books listed in the books section of his/her friend’s Facebook profile information page, and should the user like the book, then purchase the book seamlessly right from the app. Amazon is already pushing for greater technological integration with Facebook to improve recommendations, and take a leap towards social shopping. “Facebook for Kindle” app could be another solid step, providing utility to all the stakeholders – users, Facebook, and Amazon.


Currently, when a Facebook user hovers on any thumbnail/link in the Books section of any Facebook profile information page, Facebook presents a layer like this





If you are Facebook user, ask yourself how many times you have updated your books section? I had not updated in over 3 years. A few months ago, Facebook started recommending books pages to me, and when I ‘liked’ them, Facebook automatically updated my Books section information page. Sweet.So, what is next?


Here is my idea for “Kindle for Facebook”; before we dive into the opportunities and challenges, let’s look at the use case first.


Pre Conditions :

• User has his/her Facebook Account linked with Amazon.
• User has set the required settings and has activated 1-Click buy option, in Amazon.
• User has given the necessary permissions to the “Kindle for Facebook” app in Facebook.

Use Case:

• User navigates to any Facebook profile, and browses a profile information page
• User hovers the mouse over the books link/thumbnail.
• If a Kindle version of the book is available, Facebook displays the layer like this

• User reads the chapter in the Kindle for Facebook app that has been seamlessly integrated into the presentation layer.
• User wishes to purchase the kindle book, and clicks the “Buy now with 1-Click” button.
• Kindle for Facebook app completes the necessary transaction in Amazon back end, and delivers the Kindle to user (as per his/her existing Kindle settings)

What problem does this app potentially solve?


Users: Users read about their friends interests in books but they actually never get an immediate opportunity to check out what those books are all about. This app will provide a tool for users to immediately check out what their friends read and recommended, and if that book is compelling, then have an option to immediately buy a kindle version.
Amazon: One of Amazon’s goals for Kindle for the web app is to allow any user to embed a link for Kindle book and become an affiliate. This app will virtually create an army of Amazon affiliates, and has the potential to generate a lot of traffic. Also, currently, an Amazon user has to follow a long winding navigational path inside Amazon your account page, to do anything related with shopping using recommendations using Amazon and Facebook integration. This app can serve as a turning point for greater integration of Facebook and Amazon, at the doorstep of the user. Virtually, any Facebook user can become a Kindle affiliate.
Facebook: Facebook can get revenues out of this lead generation business; Amazon and Facebook could come to some revenue sharing agreement. For Amazon, the risk free revenue share is a simple CPA model in which Facebook will get a revenue share for every successful purchase by a user. For Facebook, the risk free revenue is a CPM model in which Amazon pays for impressions(views of the Kindle book) by users. And then, there are several solutions in between this wide spectrum. But whatever the revenue share might look like, I feel that having a Kindle for Facebook could be a win-win model.


Opportunities for the Kindle for Facebook app.

• This app could be the Trojan horse for getting more users to connect their Facebook account to Amazon.
• Amazon physically sells goods only in 6 countries, but Kindle books can be purchased by any one virtually from anywhere in the world. So connecting Facebook will help Amazon gain customers instantly from new countries where they don’t have any physical presence.
• Facebook, with all their social graph and Facebook connect, is still looking for ways to expand revenues streams. “Kindle for Facebook” app will generate revenues. Also, if this model works, then Facebook can streamline the processes for new products such as “Amazon for Facebook” App, using which any user can buy any of product their friends like using this app, right from inside Facebook.
• If explicit user permissions are needed for sharing information between Amazon and Facebook, users can be incentivized to provide them, and one of the incentives could be a revenue share of a small percentage, and can be given with Amazon credits or Facebook credits that they can use it to purchase other goods in Amazon or Facebook or sites that accept Facebook credits such as gaming sites. Such a revenue share with users will also incentivize users to constantly keep their profile updated, and like/recommend the products they like.

Challenges

• I am sure there will be a number of technical challenges, which is out of scope of this article; but I am very confident that these will be the easiest ones to solve.
• Working out a revenue share business model will be a challenge. Can Amazon short Facebook by developing the app that can be installed by users themselves, an app that has no technical integration with Facebook beyond what the current Facebook APIs provide? These options need to be explored, but I guess, Facebook is unlikely to allow an app that gives Amazon a free lunch.
• Understanding the impact of such a user generated ecommerce in Facebook profiles, on the overall User Experience would be important. What will be the impact on Facebook user experience, if eventually, when a user visits any Facebook profile, he/she encounters several links to third party ecommerce sites such as Amazon. Will Facebook users like it? Will they visit their friends profile who keep posting such links, especially if they know that their friends are likely to earn some cash if they purchase the kindle book? So the challenge is not only to keep these ecommerce apps seamlessly integrated into user experience, but also understand the impact on the social capital of users who turn into Kindle affiliates in Facebook. Extensive A/B testing must be done to understand these implications. At the end of the day, Facebook must not lose its USP as a “cool place to hang out with their friends online”.
• For Amazon, the challenge will be providing a seamless purchase experience and account integration for existing customers, and an easy path for new customers to register as Amazon customers and buy the kindle book with minimal disruption to their Facebook experience.

Final word: The product manager in me many a times wakes up with new ideas, and this is one such idea that I got while reading about “Kindle for the web”. Kindle for Facebook app is neither real nor anywhere close to reality. I have only let my imagination run wildly. The mockups have been created using images from facebook.com and amazon.com. That said, I think this idea has some great potential, so much so that I actually spent some time blogging about this.

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Social Referral Traffic - What to measure? Whom to target? What are the qualitative aspects?

The pieces of big puzzle of profitability of any consumer internet company have always been

1. Traffic Generation
2. Conversion
3. Monetization. (in some cases, 2&3 are same)
4. Retention.

But with the advent of social media, social networks, and social sharing tools, a whole new piece of puzzle is emerging : 5. Social Referral.


I had earlier written a post about the benefits of social media optimization here. Your customers and visitors share information about your products and services using the social sharing tools in your website. The ever expanding social networks such as Facebook and Twitter are fundamentally changing the way people discover information. Except for a brief period of last about 30-40 years, people, for times immemorial, were discovering information through word of mouth, and through the trusted sources in their offline social networks. Today, social media sharing is enabling people to hear what their trusted sources from across the world say about the news, products, and services people care about, before making their decisions. Simply put, social networks are slowly restoring the primacy of information discovery through word of mouth (mouse).


A simple diagram below depicts the big picture of traffic generation, referral, retention, and monetization.

Social Referral Traffic.
When your visitor or customer shares information about your website, products or services to his social networks, and generates traffic through such referral links, the traffic is called social referral traffic.


What to measure?

1. How many times information from your site has been shared.
2. Who is sharing the information?
3. Who is generating new social referral traffic?
4. No. of new visitors referred per social sharing link.
5. No. of conversions per No. of new visitors referred through a social sharing link.
6. Retention rate per unit number of converted referral traffic customers per social sharing link.

(there are certainly more parameters to measure than these six)

Whom to target? 
From the above analysis, it would be possible to identify the group of users generating the most valuable social referral traffic to your website. It will be useful to understand what percentage of your visitors are generating what percentage of your referral traffic from their social networks. Often, less than 3% of your visitors/customers would generate more than 50% of your referral traffic, and even a less percentage would generate new customers.  Most likely, these 3% visitors/customers are social media influencers of some significance, among their networks. Simply put, their followers trust their referrals, and that is why their followers follow their referrals to your website.

Redefine your Net Life Time Value parameters. It is very important to  identify who these top 3% customers are, and how valuable is their referral traffic. Assuming that all your current customers have same/similar Average Revenue per User (ARPU), these top 3% customers unquestionably have a higher net life time value than other 97% percent of your customers because they generate referral traffic, who then generate further profit. Therefore, it is important to identify this top 3%, proactively woo them with offers, and promotions to retain them, and give them incentives to share information more often to their social networks.

Qualitative Aspects of Social Referrals.
Web analytics is quantitative and often does not identify the qualitative aspects completely. For example, let us assume that two of your referring customers A and B, generate same amount of referral traffic AX and BY, and both AX and BY same amount of revenues and net profits. Your web analytics results would treat A and B as equally valuable referring customers, and your marketing department might approach both A and B with equal promotion offers. However, AX, the referral customers generated by A, is qualitatively poor: AX consume your customer care services much more than BY, the referral  customers generated by B, or may be, AX has  signification number of returns and repurchases than BY. In that case, you might want to think about which referring customer to keep, and which one to stop targeting. In the long run, quality of customers referred matter beyond profit numbers.

Today, as social networks expand exponentially, and as we rapidly perfect the social media monitoring tools, measuring, and understanding social referral traffic, and targeting social media influencers will be key to running a successful consumer internet business. 

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Opportunity Assessment for New Product Development

Opportunity assessment is one of the primary steps for New Product Development. A  suggested set of basic questions that a product manager must find answer to, in order to accurately assess the opportunity for a product is as under:-

1. What’s the value proposition of your product? What problem is your product solving? Or, Will your product create new market?
2. What is the Market size? In terms of volume, revenue, and share? Is the intended product valuable to your business?
3. Who are your competitors? What are their product offerings?
4. What is the pain point that customers have in the current product offerings available to them in the market?
5. In what ways your product will be differentiated? Will the customers find utility for your product? Will our customers find your product usable? Most importantly, will the customers actually buy your product? In other words, is their problem grave enough that they are willing to pay you to solve the problem through your product offering?
6. Why us? Do you have the technical expertise to build the product? If not, is it feasible to acquire the capability and technical expertise to build the product in the given time frame?
7. Why not your competitors? If they have not done it, then are your competitors simply too dumb, or is there a strong reason for them not having explored or for having failed in their endeavors to build one?
8. Why now?
9. What is the NPV/ROI metrics? What is the ROI for your customer?
10. What is the go-to-market strategy?
11. What are the critical factors for success? What are the risks involved?

Enterprise software products: What is the ROI for your customers? Does your product help your customers improve their competitive advantage over their customers?

Good product managers will know that customers buy a product to satisfy a particular need, and that customers are more interested in the solutions products bring, rather than the product itself. Enterprise customers often buy enterprise software or cloud solutions to improve in at least one of the three areas – product differentiation, operational efficiency, or customer intimacy – of their business operations. As they do for any investment, enterprise customers calculate their ROI for the investment they make in your products to the best extent possible. So a product manager of enterprise software or solutions product must place the customer at the core of any opportunity assessment study, or product design process. Wherever possible, a product manager in coordination with the product marketing team must closely understand his customer’s real need and design a product that will give a competitive advantage for his customers over their competitors. If the product offering is for a broad based set of customers, then the product manager must research to understand individual market segments, and how the product will actually give value for money to your customers, and help sharpen their competitive advantage to your customers over their competitors.

Adopting a customer and market driven approach to develop a new product is more likely to succeed than trying force a new product you have built using your great new technology, to a customer that has no utility or use for that product. That said, It would also serve well to be cautious of the Like-But-Wont-Buy trap that Gopal Shenoy brings out here in his “Like/Buy” matrix.

In almost all cases, the success of a product is determined by how well the product satisfies the customer and the market needs. And understanding the customer, and designing the right product by placing the customer at the core of the opportunity assessment study and product design process, is key for the success of the product, the business unit, and the company.

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PayPal Bump, RIF Sim, and P2P NFC - Whats the Future?

Recently PayPal released an iPhone app using Bump technology for P2P money transfer.Already more than 1million people have downloaded the application. I think that enabling such a P2P payment service on smartphone platforms will open up a host of new avenues for services and business models to be built around it.

To begin with, PayPal bump service is conceptually a p2p NFC model, where phones communicate with other phones to initiate a transaction. In advanced economies with good credit card penetration installing NFC infrastructure such as readers/writers at POS will be an added burden, and may never take off. But in emerging economies, such as China and India, NFC has strong potential to be take roots. For example, China  Mobile has begun commercial roll out of contactless mobile payments system using RF SIM enabled phones, and China Telecom has promptly followed suit. Any P2P mobile transaction system - be it NFC, RF SIM or PayPal Mobile can lead to creating of new services and products around these platforms. Also customers could find so many new ways to use the p2p NFC, as in the case of MPESA, which was originally invented to deliver micro credits in Kenya, but one customers found innovate ways to use it, turning MPESA into one of most successful mobile payment systems in the world. Some of the services that I could think of where P2P mobile payments will find use are :-

1. Digital Lending. With value (not just money) transfer enabled, services like P2P digital lending can mushroom. For example, music companies can sell songs with DRM allowing certain number of times a song can be rented, and person renting the song can pay the lender directly using p2p NFC. iPad and Kindle have ebooks, and now ebooks can come with limited lending rights. Here again, a simple p2p NFC utility can work.

2. Value Transfer. Promotional coupons provided by advertisers can now be traded amongst peers. Not everyone who receives a $10 coupon has a utility for it, and now one can transfer the coupon to others who have a utility, and get the value in cash through P2P transfer.

3. Payments  for Services in Emerging Economies. Vast majority of daily service providers in emerging economies like India can benefit greatly by p2p NFC, Bump and other contact-less payment systems such as RF SIM. Everyone has a mobile phone but not a credit card. As such credit card penetration is almost non existent even with their customers. So customers can pay small businesses such as hair saloons, photocopying service, laundry services, daily door to door vegetable vendors - using P2P mobile money services.

Given that PayPal already has mobile payment services leads me to believe that the new iPhone, Andriod and Blackberry Bump App is one way to promote and increase use of PayPal mobile. The consumers are king. They will find innovative ways to use such a service. I am sure that the PayPal will see this service being used a number of different ways.

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