Twitter Monetization: Combining Offers with Advertising Would Be a Good Approach

January 16, 2012

Make User interests Explicit

Twitter’s monetization has focused on Promoted Tweets and Promoted Accounts. Promoted Tweets show up in users’ timelines as well as when users perform a Search on Twitter. But unlike regular Search, user intent is typically not readily identifiable on Twitter. For example, on Google/ Yahoo/ Bing, user intent is very explicit when the user searches on “laptop deals” or “car insurance”. But on Twitter, users often do not make commercial searches. And when users are not explicitly searching, it is hard to make guesses about their intent or interests.

On the other hand, Twitter is a natural medium for Offers and Deals. Several companies such as Walmart already use Twitter to tweet specials to their followers. But instead of waiting for users to follow specific accounts, a better approach would be to ask users themselves to state their interests and then tweet to them based on their stated interests. This combines the Advertising model with the Offers model.

 

This is how it can work:

Bottomline:

  • This approach makes users’ interests and intent explicit, providing greater value to advertisers as well as a good user experience. Since users have specified what sort of offer categories they are interested in, advertisers get ‘pre-qualified’ users.

Is Groupon’s Daily Deals Business Model Viable?

November 17, 2011

Groupon’s innovative daily deals model has evoked extreme responses. Either it is regarded as the model that will unlock the potential of local businesses online, or else it has been reviled as a ponzi scheme.

Here is an attempt to take a more measured view of Groupon’s business model based on their SEC filings.

1. Groupon’s daily deals business model involves both a high Marketing expense and a high SG&A expense. This is a big barrier to profitability. Marketing expense was 55% of revenue and SG&A was 51% of revenue in the first 9 months of 2011.

Revenue numbers are lower than the Cost Structure (SG&A, Cost of Sales, Marketing cost)

2. Q3 was a comparatively low growth quarter. Major metrics such as revenues, gross billings, featured merchants and # of groupons showed lower growth rates. However given the very high growth rates in previous quarters, Q3 had to grow on a higher base.

Note that these are growth rates and not actual values. All the metrics grew in Q3, but at lower rates than before.

3. SG&A expense is a necessity for the daily deals business. Self serve has been the holy grail of the local space but a having a salesforce is important in order to locate and negotiate quality deals with the right level of discounting. Groupon mentions in its filing that it tries not to repeat merchants, and this adds to the sales cost. In Q3, Groupon has done larger deals which probably reduces the SG&A per deal, still, this expense is unlikely to reduce greatly. Additionally, Technology expense, which has not been very high (only 4% of Groupon’s employees are in technology) will have to increase in the future, because Groupon has to invest in targeting and other technology to support both subscribers and sales teams/ merchants.

4. Marketing expense has significant correlation to growth. In Q3 2011, marketing expenses were reduced to 181 M from 432 M in previous quarters (Q1+Q2 combined), presumably to get closer to break-even ahead of the IPO. Revenue growth slowed from 33% in Q2 2011 to 10% for Q3 2011. That is still a decent growth rate but a lot of growth was also driven by International segment where marketing expense was higher than in the US.

5. Groupon’s 2011 operating loss is 3% for the more ‘mature’ North America segment, compared to 22.5% for the fast growing International segment.

Takeaways:

  • Post IPO, in the immediate future, I would expect Groupon to see high growth rates, as they once again turn up marketing expense and expand internationally. This will impact profitability.
  • In the longer term, Groupon’s daily deals business has the potential to be profitable but with moderate to low growth. This makes for a decent but not terribly sexy business model.