So you may have heard about the “slight” financial difficulties that have been brought to light at Groupon. Thanks an impending  (and now ill-advised) $750 Million IPO, the company’s books have been placed under scrutiny.  Thanks to I-bankers doing their due diligence, we all discovered that Groupon has consistently been losing in excess of $100 Million per quarter for the last year and a half.  How could such a popular company and business model be failing so epically?

As my colleague, Zach, explains rather well:

“But the idea that the internet is going to generate tremendous profits for the same old crap because of a slight tweak of existing retail models is preposterous and the failure of Groupon and the “pivots” of Flash sites like Gilt illustrate this as elegantly as anything.”

Admittedly, I sipped my share of the kool-aid fort a short time, and in my defense, it was amidst the insanity that was SXSW. Rewind 6 months ago, and I was sitting at SXSW, listening to Aaron With talk about the importance of being “weird,” in which  he tried to justify the reason for devoting an entire room of their office to an inane and Dada-esque display.  There’s an underlying assumption that companies can get away with doing weird, tangential stuff if the company is being run well. Instead, you have a company paying massive bonuses out to its founders while paying content editors 30K, all while losing $400+ Million a year. #NotOK.

It’s not just the fact that Groupon seems to be badly run.  There are underlying reasons why the flash sale market is unsustainable. In order to understand the failure, you don’t have to look much farther than the prohibitive mechanics of a flash sale’s model.

Businesses offer their services at 40-to-80% off of the retail markup.  The deal site then takes a 30-40% cut from the already-heavily discounted sale price.  So a brand that wants to flash-sell a product that retails for $100 sells it on the site for $50 and then takes home $32.50 assuming the site takes a 35% cut.

So what’s the justification for this? Does it have a place on a large scale in today’s economy?

The answer is mostly no.

Deal sites try to justify their use in a few ways:

1. They act as a portal for these deals, and become a destination for people looking to take part in them.
2. They are curators of these deals, and their user base captures attractive demographics that brands want to reach.

The problem for sites like Groupon and the myriad other sites is that most businesses don’t operate at margin levels that make flash sales financially feasible.  Couple that with that fact that flash sales don’t spur repeat customers, and its value becomes less apparent.

The flash sale business model as it is today has been kept afloat by it’s fad-like rise in popularity. Groupon’s business model is relying on ever-increasing usage numbers to keep it afloat. It’s got the makings of a mini bubble.

The simple fact is that the deal sites are unfairly symbiotic.  90% of businesses can’t justify a 30% cut on something already marked down 50%.

These deal sites also assume that informational model of the internet remains static.  The only thing stopping these individual businesses from putting on a sale themselves (without the flash sale middleman) is the perception that these sites have a more direct connection to their desired demographics.

What if the deal model becomes open-source? Search engines are  have the potential to efficiently connect users with deals they are looking for.  I see a world where our technological facilities bypass these expensive middle men, much like email and online shopping bypass mail order catalogues and coupons.

That being said, who should think about using A flash sale?

I’m not saying that the flash sale model doesn’t have it’s uses.  I suggested specific flash sale models to some of my clients when it made sense, economically and otherwise.  If your business/product has the following traits, then it could still make sense to do so:

• You’re a new business looking to develop your audience and don’t have a PR/advertising budget.
• Your product has a high (80%) profit margin.
• The deal site you’re using reaches the right kind of people. (IE: luxury goods on GiltCity)

If you answered yes to these, then a flash sale could be a good idea.  Otherwise,  stay away and just offer up a great sale yourself without the middle man.  If it’s a worthwhile deal, online and real word of mouth will do the rest.

My third (and last day) proved yet again to be filled with insight, interaction, and discourse.  I also don’t think I’ve ever tweeted so much in a 24 hour period.

Influencer Throwdown: Proving Influence Once and For All #throwdown

The Influencer throwdown one one of my favorite panels of the weekend.  Over the course of an hour, the 4 person panel, comprised of Saul Colt, David Binkowski, Kevin Dugan, and Krista Neher discussed the concept of influence in the digital space. it was the perfect compliment to the Content strategy smackdown from day 1.

I would venture to say that content and influence are two of the most important components of effective digital strategies.  While good content is essential to driving brand value and justifying subject matter expertise, the level of influence helps facilitate action, engagement, and belief.

It also goes without saying that content and influence are generally linked.  You (typically) become an influencer in a subject matter by generating good content related to that subject. The more experience you have with a topic, the more influential you are perceived to be.

The panel began with some discussion around celebrities and how they are perceived as influencers.  The big (obvious) example used was Charlie Sheen.  Does he have influence?  The panel was split on this, and they each had their opinions on it.  David Binkowski cited that 8% of Americans trust celebrities.  I would tend to agree with him.

While they may not be “influencers,” in a formal respect,  one thing that celebrities do have is voice.  Charlie sheen’s opinions may reach 1MM+ people, but his rate of influence on each of those individuals is low.

Generally speaking, digital influence is less successful than real life peer-to-peer influence.  However, digital channels make up for comparatively lower rates of influence per individual by reaching much larger audiences. That’s why having good content and vetting yourself as an expert is so important.  it allows you to capitalize on the larger audience that the digital world facilitates.

Another concept the panel discussed was reaching the right audience.  Influence is largely contextual.  If you want to improve your rate of influence, then aim your content and influence at the most relevant audience possible.  Having a broad audience doesn’t necessarily inspire action; having a relevant audience does.

A major topic of discussion by the panel  (and audience via twitter) was the concept of proving influence.  How does one do that? With influence being a largely qualitative concept, we are met with challenges in quantifying it and interlocking it to brand success. Conceptually speaking, influencers are able to drive a higher rate of action.  This should have a positive impact on site traffic, click-throughs, and (ultimately,) sales.  Measuring a brand or person’s level of influence then rests on quantifying the level of engagement that their content and opinions garnered.

At the end of the day, content and influence are the key to building an engaged audience.  The more content and experience you can show, the more your audience will trust you.

For a full trascript of the livetweeting, click Here.

Strange Business: Corporate Creativity That Doesn’t Suck (featuring @Groupon)

The second panel of the day perplexed me for the first half hour.  Titled “Strange Business, corporate creativity that doesn’t suck,” the talk was a one-man show featuring Groupon’s Editor-in-Chief, Aaron With.  The description of the event was as follows:

“Explosive Internet cancer Groupon, the fastest-growing website ever, intentionally wastes endless amounts of staff time and marketing-budget dollars on baffling initiatives. From the bizarre write-ups of its daily deals to uncomfortable social experiments such as awarding $100,000 scholarship funds to babies whose parents met on a Groupon date, Groupon can’t resist executing its silliest, darkest, dumbest, and most pointless impulses on a grand scale. By launching one incredibly expensive joke after another with no clear tie to revenue, Groupon may very well be blowing its own death horn. Why?”

I’ll be honest with you, the reason I chose this panel was because it was next door to the previous panel.  The other session I wanted to go to in that time slot was a 15 minute walk from where I was, and laziness got the best of me. I was rewarded with Aaron telling us the story of “Michael’s room.” The story took us on a journey that can only be described as a macabre, funny, irreverent, dada-esque version of the popular 90′s pc game, Myst (boom! awesome reference)

Aaron’s story made no sense at all.  People were sitting there for 30 minutes waiting to see what the hook or tie in to the brand was.  The answer:  there was none.  Aaron used the story to prove the point that there is value to creating art for art’s sake.

It reminds me of an essay that Tom Robbins wrote about the uselessness of art: “The most useful thing about art is its uselessness.” Robbins makes the point that it’s OK to be creative for the sake of being creative.  Aaron With takes a parallel tack, taking up time and energy to create a culture that’s weird, irreverent, a bit dark, funny, and not directly tied to advertising a product.

Admittedly, I may be a bit misleading when I say that they’re doing it for no reason.  there are benefits to investing strongly in weird creative.  Being creative without tying the creativity directly to sales or advertising is a powerful brand-building tool.  It allows the audience to trust that there is more to the brand than just shilling products. There are also a few other benefits that can be found below:

They also do sometimes find targets in other competitors, and in this case results in a hysterical parody of the exclusive sale purveyor known as Gilt Group:

Aaron then started speaking a bit more earnestly, sharing his views on how to write effective copy.  His main points were that most marketers insult the audience’s intelligence, love using superlatives, and incorectly assume that people will always be excited and willing to promote their brand for free in some silly way.  Quite a few of his points remind me of the site: Things real people don’tsay about advertising:

Keynote: Chris Poole of 4Chan

The last session I checked out was a keynote speech by the founder of the infamous message board known as 4chan.  While largely known for their Anonymous community’s bouts of Internet vigilanteism, Pool used the speech to touch on another important aspect of 4chan.  4chan happens to be a major hub for the creation and popularization of internet memes. What’s a meme, you ask?  ”Internet memes are catchphrases or images that spread quickly, peer to peer, across the Internet.”  You have 4chan to thank for lolcats, rickrolling, and “Chocolate Rain.”

While these are from being considered a form of art,  4chan’s inherent structure as an anonymous forum makes for some interesting discoveries.  The biggest of which being the following:

Anonymity enables creativity among individuals.  It mitigates the fear of a failed creative endeavor.  Users are much more likely to be creative when they are anonymous.  Anonymity can truly be seen as an empowering force in creativity in the digital space, and has largely shaped our online culture up to this point.

On the flip side of that, however, is the concept that anonymity on the internet also enables negative aspects of human nature.  Anonymity largely releases one of the consequences of saying hurtful or negative things.

Either way, the concept of anonymity and its place in modern digital society is a thought-provoking one.

 

Well, folks,  that wraps up my recap of my time spent at SXSW 2011.  I regret that I could only fit 3 days in this year.  My experiences with these brilliant, engaging individuals over the course of the long weekend has left me energized and eager to do my part in developing the digital world.  This yearly conference is truly a celebration of what happens when the best of people and technology intersect.  These ideas and people push the world forward and enable us more and more each day.  I’m thankful to have been a part of it and look forward to attending the full interactive event in 2012!

-Christophe