by Jake Stein

Special to the eTail Blog

Customer lifetime value is an important metric for every business, but it is especially critical for daily deal and flash sale sites where a key to success is acquiring new customers. Without a firm grasp on customer lifetime value, companies run the risk of acquiring unprofitable customers or getting outspent and outgrown by competitors.

Groupon and LivingSocial have different views on “loss leader” customer acquisition deals, which may be due to different views about repeat purchase rates and lifetime value. As a publicly traded company, Groupon releases statistics on its customer acquisition costs to the public. LivingSocial, a private company, does not disclose such data. However, we can find proxies for acquisition cost by examining some of their deals (more on that later).

Acquisition costs in the daily deal space have increased dramatically from when these two companies pioneered the market. In fact, Groupon’s customer acquisition costs grew 485% between the first quarter of 2010 and the first quarter of 2011 to more than $30 per email address, according to AmericanBanker.com. However, once customers are acquired, they are believed to create a profitable annuity of repeat purchases, although how profitable and the duration of that annuity is still unknown.

Groupon CEO Andrew Mason explained the company’s acquisition cost philosophy in an email memo to employees: “Once we have a customer’s email, we can continually market to them at no additional cost. Compare this to Johnson and Johnson, McDonald’s, or most other companies. If I’m trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you’ve bought your first box. With Groupon, we just spend money one time to get you on our email list, and then every day we email you a reminder of the sweetness of our metaphorical Band Aid. There is no cost of reacquisition — that’s unusual. If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day”

Do deals with high profile national merchants have a lower lifetime value?

If customers are as valuable as Mason says, and the incremental cost per sale once Groupon acquires a customer is trivial, why not acquire customers in large volumes at a loss like competitor LivingSocial has done with their Amazon and Whole Foods deals?

LivingSocial presumably offers deals such as promotions where customers spend $10 to get $20 in merchandise from Amazon or WholeFoods in order to acquire new subscribers. Users acquired through these deals may represent up to a 66% discount off Groupon’s current acquisition cost, according to blog.agrawals.org.

Mason also addressed this topic in his email memo, stating, “Driving them toward short-sighted tactics to buy revenue, like buying gift certificates from national retailers at full price and then paying out of their own pocket to give the appearance of a 50% off deal. Our marketing team has tested this tactic enough to know that it’s generally a bad idea, and not a profitable form of customer acquisition.”

Depending on the proportion of the coupons that were bought by new users and the percentage of coupons that were redeemed, LivingSocial might be acquiring users for less than Groupon’s cost per acquisition. The other critical element is the value of the customers acquired through this channel. Groupon’s cohort analysis on these users may have shown that customers from those deals are unlikely to be repeat customers.

Whether or not that is the case, identifying repeat high value customer segments by acquisition source versus those likely to churn is invaluable information in the daily deal market. LivingSocial and Groupon surely have different rates of repeat purchase; the question is how much and is there a distinct difference in rates by deal type?

Learn which deals and sources generate your most profitable customers

Despite the fact that customer lifetime value is critical to success, young ecommerce, flash sale, and daily deal companies face challenges that make it difficult to pull these numbers. With a limited operating history, it can be difficult to draw high-confidence conclusions about the length of your customer lifecycle or how the average customer will ultimately behave. For example, Groupon attributed a lower than expected profit to refunds associated with a specific cohort that had higher than average customer dissatisfaction rates associated with them.

Another challenge is that ecommerce sites are often started by excellent merchandisers who don’t have a core competency around technology and quantitative marketing. This can make it difficult to find the internal resources to run complex calculations and ensure that the data is clean and consistent for long term analysis.

One tactic to combat this challenge is to split the customer lifetime value calculation into several separate metrics that address different stages of the customer lifecycle. This makes individual parts of the product or acquisition strategy easier to optimize, and it ensures the calculations can be understood and communicated with the entire team.

A few examples of these metrics are:
• Percentage of members converted into buyers
• Time from account creation until first purchase, first purchase to second, second to third, etc.
• Revenue and gross margin generated in first 30, 60, 90, 365 days
• Invitations and social referrals in first 30, 60, 90, 365 days

Groupon is not required to disclose this level of detail on their unit economics, but you can be sure that they and LivingSocial are monitoring these statistics carefully on their different customers and deal types to decide which are most profitable.

Jake Stein is the Founder and COO of RJMetrics, a software developer that helps online businesses measure, manage and monetize.