How much juice can you squeeze?
These are the Glengarry leads. And to you, they're gold. And you don't get them. Because to give them to you is just throwing them away. They're for closers.
A few weeks back, Groupon, everyone's favorite startup, offered a nationwide Gap coupon -- $25 for $50 at Gap. By the end of the day, Groupon/Gap had sold over 400,000 of the deals -- over $10 million in discounts to customers purchasing the offer and likely around a 75% discount to Gap stakeholders after Groupon's cut. Based on their latest 10-Q (June 2010), GAP Stores has a gross margin of 42.1% (this is averaged across Gap, Old Navy and Banana Republic). Therefore, every $50 Groupon they sell has a cost to them in the neighborhood of $29 (technically a bit less, since a few costs like rent are fixed but included in the gross margin calculation). After Groupon's cut (assuming 50%), Gap receives $12.50, leaving a shortfall of $16.50. For Gap to break even, every customer entering the store must therefore spend an additional $40 (.421*$40=$16.84). So with the numbers out of the way, how does Gap, or any business, make this deal worthwhile? They key is how much value a company is able to extract out of a customer once they're in the door. In Gap's case, they effectively pay $16.50 to get customers into the store. Once the customers are inside, the make or break is how much value the enterprise can extract from them. In the case of Gap, they're very effective at this -- they have to be. A pair of jeans costs roughly $50 -- but once you try them on, the sales staff [in what I've generally found to be a helpful, non-pushy way] shows you a few other pairs of pants or shirts that may go with it. Before you know it, you've got the jeans and 2 shirts, and your total tab is around $150. At checkout, you're presented with another option -- sign up for a Gap Visa card and save 30% today. Judging by the amount of people that signed up for the Gap card last time I was in the store, it's a pretty popular move. As you're walking out, Gap may have broken even (if you signed up for the card), but they've potentially gotten a new customer into their clothes, and they've diversified their revenue stream into credit (branded cards typically pay the brand 1% of all purchases) in addition to retail. Today's transaction may be a wash for them, but when you come next month for the a 10% off event, and over the course of the next year, they'll more than make it up.
Customer acquisition is expensive. But once they're in the door, it's really the ability of the franchise to capitalize on that acquisition cost that makes the difference. Gap pairs jeans with shirts and credit lines. Goldman Sachs advises clients, handles the capital raising for them, and then trades the new securities with other clients. Microsoft (perhaps more effectively a few years ago) sells operating systems but also office suites, browsers and advertisements to go with that OS. All of these companies use a suite of complementary products to extract maximum value from their customers once they're in the door -- they "own the customer".
At the end of the day, you can always pay more money to acquire customers -- it's how you keep these customers coming back and spending money that makes the difference. The company that can best extract lasting value from each customer can afford to spend more, which likely leads to greater market share and more efficiencies, and ultimately, the best chance at success.
