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The Questionable Economics of a “Good” Groupon

June 25th, 2011 | Posted by JMarek in Promotions - (Comments Off on The Questionable Economics of a “Good” Groupon)

This article in the New York Times, plus my interview in Fast Company, got me thinking again about Groupon economics.  To be clear, I’m talking here about the Daily Deal type offers, not more sophisticated customer-targeted, location-based, fill-up-empty-seats-right-now types of offers.

Here’s the crux, a restaurateur describing a successful Groupon in which a consumer receives a voucher for $14 worth of food by paying Groupon $7 ($3.50 of which Groupon pays the restaurant) :

“You don’t make money on the deal,” Mr. Massari acknowledged, “but in the end we are even.”

That’s because “people spend more than on the coupon amount,” he said. “They’ve been ordering about double the $14 from us. And people usually bring other customers, who are paying full price.”

Beyond that, among those who are redeeming coupons, “80 percent have come back without a coupon,” he said.

Let’s think through each piece of that, imagining for the moment we sold 1000 Groupons: (more…)

Getting Pricing Right Doesn’t Fit Into Soundbites

June 22nd, 2011 | Posted by retailblogadmin in Pricing - (Comments Off on Getting Pricing Right Doesn’t Fit Into Soundbites)

Operators understand very acutely the effectiveness of price changes – after all, nothing else in the business can impact the bottom-line so directly.

Despite this appreciation for the importance of pricing, the sophistication by which most companies manage prices is woefully inadequate.

Industry pricing “leaders” comment on the problem frequently, revealing “we should remind our guests value isn’t just a function of price,” and “if it’s a $3 price point one day and then it’s all of a sudden $4, that’s not palatable to a consumer. But if it goes up to $3.29, that’s a little bit easier to take.”

If this is the best that the industry has to offer on this subject, then we’re all in a lot of trouble. (more…)

The Economics of Grocery Curbside Pickup

June 16th, 2011 | Posted by Marek Polonski in Retail | Uncategorized - (Comments Off on The Economics of Grocery Curbside Pickup)

Washington D.C. – Is grocery moving online? BusinessWeek reported earlier that Walmart is said to be experimenting with online grocery delivery. At the same time, many supermarket chains are expanding their grocery curbside pickup services. SuperMarket News is reporting that Harris Teeter is slashing its shop-online-pickup-groceries-curbside-at-the-store fee from $4.95 to $1.95. At $1.95, the fee likely only covers the cost of processing the online payment for Harris Teeter. At the same time other grocers are actively testing the curbside pickup options at their stores as well. Why do it?

Benefits and costs

According to the annual report, a typical Harris Teeter store averages about $400K in sales and $119K in gross profit every week, as Harris Teeter earns a pretty typical for grocery industry 30% gross margin rate. Assuming an average shopper basket of $35, in an average week a store draws in about 11.3K customers, each bringing in about $10.50 in gross margin (again, using the 30% margin rate). But online orders that are picked up at the store are likely much larger than $35 per basket. Often seen as a convenient alternative to stocking up at warehouse retailers (CostcoSam’s Club), and cheaper than grocery home delivery, these baskets are likely 3 to 5 larger than average. In other words, the curbside pickup customers average closer to anywhere from $105 in sales & $31.50 in margin (3x larger than average) to $175 in sales & $52.50 in gross margin (5x larger than average).

It probably takes anywhere from 25 (for $105 baskets) to 40 minutes (for $175 baskets) for in-store personnel to assemble the ordered items, bag them and deliver them curbside for customer pickup. Ignoring for a minute other expenses such as installation of the required technology to process online orders for curbside pickup, handling of payments for customers who are pulling into the parking lot to pick up their groceries, to name just a few, 25-40 minutes of clerk time translates into $5-$8 in labor costs (assuming a $12/hour average for a clerk position).

So, to review, the online-ordered baskets average $31.50 to $52.50 in gross margin, and it costs Harris Teeter $5-$8 to pick them. So, net benefit is anywhere from $26.50 to $44.50, right? Not exactly! (more…)

Business Testing: Test Before You Invest

June 6th, 2011 | Posted by Marek Polonski in Retail - (Comments Off on Business Testing: Test Before You Invest)

Washington D.C. – In case you missed it, Business Excellence Magazine has a great article by APT SVP Phil Marlsland on why companies need rigorous market trials to maximize ROI on their investments. Examples are from Wawa, Big Lots, Family Mart, Boots and other companies.

Should Banks Scale Back Marketing Spend?

June 1st, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Should Banks Scale Back Marketing Spend?)

American Banker  recently reported that many banks have been scaling back marketing spend, due in large part to “mounting pressure to cut costs because the economy is not recovering fast enough.”  As the article highlights, reducing marketing spend is one of the easiest ways to cut costs.  However, doing so can also potentially have significant effects on future growth.

As tempting as it is to cut such spending in a tough environment, it is imperative to make an informed decision on the right level of marketing spend.  (more…)