Thursday, January 20, 2011

Good strategy or wasted money?

Yesterday, Group buying site LivingSocial.com offered a $20 Amazon gift card for $10 (http://bit.ly/gIfhii).  I have not yet jumped on any “group buy” offers but this one caught my attention.  I buy from Amazon all the time so this was an easy decision for me.  But the deal was so good, I shared it on facebook, linkedin & twitter.  I can’t remember ever sharing a “buy this” offer on all my social sites but this one actually seemed like a deal I thought my friends should enjoy.

When you read the terms & conditions, Amazon apparently did not have anything to do with this promotion.  So it appears that LivingSocial “sold” 1.3 million $20 cards for $10 and thus this promotion cost them approximately 13 million dollars.  13 MILLION DOLLARS to acquire 1.3 million customers.  Even assuming they received some discount/incentive, they spent 5-10 million dollars to acquire customers for their group buying service.

Good strategy or wasted money?

Well, if you have the money I think it could turn out to be a good strategy.  Many people have heard of Groupon but few have heard of LivingSocial.  That changed yesterday because over a million people around the country bought the offer and then shared it with their friends (if 3 people bought, you got yours free).

Whether or not it is a good deal really depends on their typical customer acquisition cost.  If the typical cost is $5 than this was expensive but if it is $20, this was a bargain. My bet is this was about their normal acquisition cost and the publicity they got on top of it was worth millions as well.

For me, I watch all the group buying sites because I’m fascinated by their business.  The model works well for a few businesses but the market has become so crowded with the group buys I think it is going to be tougher to stand out.  Thus as the emails keep coming with offers that are less than enticing, people will tune out and/or unsubscribe.  But in the meantime, it’s interesting to watch to see where these business models go.