Cost per Thousand Butts? The Quest for Real-time Deal Optimization

Groupon and LivingSocial receive the type of press coverage that most businesses could only dream about. Literally not a day goes by where one if not both aren’t in the news. Sometimes you get the feeling that the companies wouldn’t mind if some of the press were to die down. It’s one thing to get coverage for events that drive positive awareness and another to have endless speculation and reporting on topics that can easily get blown out of proportion. Reading about them is not unlike reading about celebrities. That’s what these businesses are, and it isn’t every day that we see companies transform hundred-plus billion dollar industries as quickly as these two have done.

The first part of their growth continues still, the land grab phase, and what an amazing experience it has been from the sidelines. Performance marketers had an innate understanding of the spends involved, but it wasn’t until the second half of last year that the broader advertising markets started to get a glimpse of these businesses scale with respect to spend. When we hear that they are among the top 5 in search or display, it doesn’t come as a surprise, but it did seem to shock the rest of the media world. Those spends aren’t just enormous. They are also close to profitable. They may not make their money back immediately the way that an incentive promotion advertiser might, but these businesses aren’t spending dot com one money for the sake of having a lot of traffic in hopes of that alone driving up their valuation. These are direct response, customer acquisition plays. They spend money to make money. That is also what makes their ability to become a top advertiser so fascinating and exciting from a performance marketer’s standpoint.

Despite Living Social and Groupon doing almost $2 billion in combined revenues, if not more, the land grab is far from over. We will continue to see them spend aggressively, and they will continue to make $2 per email seem under-priced. That in and of itself is amazing. More amazing perhaps are the continued innovations taken place, some of them as a result of the land grab. These businesses main problem is their success. They can drive too much traffic. It’s both hard to believe and pretty satisfying to think that an email blast can lead to actually butts in seats; yet, that is what is happening. For certain types of businesses, an overflow of customers is a good thing. For others, this opening of the flood gates creates a sub-optimal experience for the users and more so for the lead buyers. Not a problem in the beginning as the model proves itself and grows, but it is proving to be an issue at scale.

Their ability to over deliver was probably not unexpected, but it probably came earlier than they might have predicted, or wanted, given the need to still compete in the land grab. Speaking of over delivering, when taken in abstraction, the innovations and major focus of the top deal space resembles that of display advertising, except instead of ad impressions, we’re talking about people – getting the right person at the right place at the right time instead of showing the right ad to the right person at the right time. For the deal companies, it means no longer relying on the single offer or “blunt instrument” as Perry Evans of Closely calls it. Like their advertising, that is a run of network play, the biggest bang for the buck. Like display itself, targeting helps the relevance and the yield on a per impression basis, but scale is tough. To pull it off, the companies need either better information or better targeting for their merchants.

Groupon Now and LivingSocial Instant are all about trying to sharpen the blunt instrument they created in the daily deal. It’s a critical tool, because like targeting, it opens up the universe of potential buyers, in this case venues. A place that cares about its brand will avoid discounting en masse for worry over diminishing the way it is viewed by less price conscious consumers. Every business, though, tends to have availabilities. That real-life could flow with the fluidity of online is something akin to science-fiction. The uses of instant deals based on availability and location are almost endless. It makes the business and model not just an infrequent catalyst but something that can be used with frequency. Says Groupon Founder Andrew Mason, Groupon is like teeth whitening whereas Groupon Now is like brushing your teeth. Says Rob Solomon in this article, Groupon’s past president and now advisor, Groupon Now is to help eliminate perishable inventory—food ingredients, labor hours, and anything else that’s wasted if not used immediately. "If we can eliminate 10 percent of perishability, we can change the dynamics for small business owners," he says. Small businesses would become more like airlines, matching supply against demand to maximize revenues. "If we get this right," Solomon says, "we are going to influence what tens of millions of people are buying at a frequency that we have never seen before." That’s thinking big on a very local level. It’s a lot more work to figure out, but if the companies can nail this, it takes an already billion dollar business and catapults it into the realm of a Google…