Groupon playbook

Well Groupon has to be the storybook IPO of 2011 and it will probably be the biggest company on planet earth, sometimes what works for gigantic momentum plays (eg mega drag race) won’t work for anyone else.

They have billions of capital so can buy large high pressure sales forces. That gives them an incredible advantage like the army of timeshare condo salesman or if you have ever watched Tinmen, aluminum siding people.

In this case I’ve heard time and time again how well their sales tactics work. We just took a massage from a new business owner here in Hawaii. They have two sales reps here and she was promised a huge repeat installed base. Instead they doubled the number of groupons from 450 to 900 and doubled the term to 18 months on her. They now hold over $100k of her money and will pay her on 60 day terms and sounds like they will keep it all if redemptions don’t happen.

It’s brilliant because they get all the money upfront. As a small startup she feels she has no choice but to honor it. She is working basically 24-7 for no profit for groupon for the next year. And the rep is no where to be seen.

And let’s face it the customers haven’t turned out to be long term but very demanding price sensitive folks who won’t repeat. not something to build your business on.

What can we learn from this. Well for Groupon it’s an extraordinary opportunity with so many new businesses forming all the time and extremely profitable. But it sure won’t work for everybody…

Startups and Drag Races

I get to go hear the presentations of both large and very small companies just about every Monday in my day job.

I’m always struck by the number of folks with less than six months of cash left who are running a drag race against competitors who have a billion dollar in cash.

While it is true that most of these companies have a better mousetrap. As the Russians used to say, “Quantity has a quality all it’s own.”. Or if you are a true aficionado of the Cold War there is this famous cartoon of two Russian generals sitting in a Paris cafe saying, “so who did win the air war over Europe?”

The point of course is that the fancy aerobatics don’t matter hen you ate staring down 20,000 tanks headed your way.

We may have our own opinions about Groupon and so forth, but let’s face it, they a billion dollars in cash so they have won this round. Trying to beat them now is just much harder. In the same way that a decade ago Amazon went public raised lots of money and this let it survive that great valley of Ecommerce death (anyone remember pets.com?) to be the leader.

So what is a startup to do? Well three pieces of advice

1. Think stealth play. Is there a segment that is protected? Taking that hyper local example. Are there places we’re you are not competing coupon for coupon.

2. Profitability. If you can spend as much money as the other guys, where in your customer base are there profits. Even if you have 10 customers, it’s often interesting to do a by customer cost analysis. I’m amazed how many companies could shrink 10% in revenues and double profits. Thats because customers are different. The substrategies here are typically selling another product to an existing customer (very cheap, like burglar alarm companies selling fire extinguishers too), cutting unprofitable customers (you know who you are) or lower costs on introduction (why go coast to coast before you make a city profitable ten use those profits to fund the next one)

3 Double your share by delighting. If you have small share, the easiest way isn’t to convince people they ate wrong selecting the market leader (the default choice of probably 80% of decision makers) but to find anther customer who look like someone who already loves you. The big guys ironically usually don’t need to worry about customer satisfaction because they are the default choice but as a small player you have no choice but to delight usually.

Finally just one more word. This is a good case where you can’t compare yourself with the leader or their strategy. I once saw a slide showing that if a $10m startup was valued the same way as the market leader, it would already be worth $500m. That’s not the point. Kind of like the corner coffee shop wishing it was Starbucks. It just isn’t. Not will leader strategies usually work for small players. That’s like me thinking I just adopt a Olympic weight lifters training strategy to get in shape. Sadly it’s not the same body I’m trying to get in shape.

Anyway enough said, the drag race isn’t for everyone. It’s the easiest to do but the least likely in most cases to work. Think stealth!