Groupon, the pioneer of daily deal sites, offered its first nationwide deal yesterday and according to the Chicago Tribune, they sold 445,000 deals for its client, Gap. The $25 voucher worth up to $50 in Gap apparel became available at about 6:30 AM PST and ended at around midnight. The Gap deal offering was so popular it even crashed Groupon’s servers for a short while. Groupon normally takes 50% of all deal sales which means that they earned an estimated $5,562,500. Clearly it was a very successful day for Groupon. Unfortunately the jury is still out as to whether or not Gap came away from this deal as a winner. By our calculations they stand to lose at least $8 million unless they can convince their new customers to keep coming back.
Groupon’s Service Fee For The Gap Deal
Groupon has not publicly disclosed the exact fees it charged Gap or whether it charged any fees at all. It’s possible Groupon executives believed that the nationwide publicity would be payment enough considering all the new email subscribers they would obtain. However, given the amount of free publicity Groupon gets on a daily basis, I highly doubt CEO Andrew Mason would have allowed it. Furthermore, waiving fees for Gap would result in a backlash from other clients desiring the same waiver. With this in mind it’s logical to assume they charged Gap the same fees it charges its other clients.
Gap’s Income And Losses From Groupon Deal
Using our Groupon ROI calculator, we can quickly discover how much cash flow this generated for Gap and how much this promotion cost them. With Groupon earning 50% of all sales, and vouchers priced at $25 each, the income that Gap gained was the same amount Groupon earned, $5,562,500. However, what this simple calculation doesn’t include is the value of the coupon. Each coupon is redeemable for $50 worth of Gap products so Gap lost twice what they made ($25 x $445,000 = $11,125,000). Of course this figure doesn’t include 1) any revenue gained from additional products customers may purchase when they redeem their coupon, and 2) income generated from customers that don’t redeem their vouchers.
- Redemption rate – The expiration date on the Gap voucher is November 19, 2010 so it’s very possible that some customers will fail to redeem their coupons for the entire $50 value given this short 3-month window. While constructing the Groupon ROI calculator we discovered that a shop owner reported reaching a redemption rate of 56% within four months of offering the deal. So based on this information, I think it’s reasonable to assume that a 50% redemption rate is attainable within three months. Keep in mind, however, that for customers that don’t redeem their voucher before the expiration date, Gap will honor the coupon at its sale price ($25) for a period of time required by each state’s gift certificate laws. At that point, Gap will provide the customer with a $25 Gap gift card that apparently doesn’t have expiration date and it isn’t susceptible to non-usage fees.
- Additional sales percentage – Our rubric for determining the additional sales generated beyond the value of a Groupon voucher is a restaurant that offered two sandwiches for the price of one ($9). The owner of that restaurant reported that about 40% of redeemers bought an extra item (i.e. snack or beverage). While an apparel store and a restaurant differ quite a bit, customers behavior doesn’t. Therefore adopting the 40% additional sales percentage for the Gap deal seems appropriate.
- Average price per additional sale – This is probably the toughest estimate to make because we don’t have an appropriate comparison to draw from. If we knew Gap’s average sale amount we could simply deduct that from the value of the voucher. Without that, we can assume that the buyer will spend an additional amount that rivals the price of the voucher ($25) or its value ($50).
- Repeat customer percentage – Will all of the people that redeem this deal offering come back again a month later? No. Data we’ve looked at tells us that about 20% of those that redeem a voucher will return again.
- Average repeat customer sale amount – This is another difficult value to come up with since we don’t have any appropriate previous findings to base this estimate. Picking a random value doesn’t make any sense either so that’s why I’ve decided to chose the value of the coupon ($50).
- Customer visitation rate – How many times per month does the average customer visit Gap? We don’t know this information either but since most Groupon users are female, we can assume it’s going to be higher than males. We’re choosing the value of one visit per month for this estimate but we’re not going to apply it for the entire year.
Gap ROI Calculation Results
Plugging our assumptions and estimates into the Groupon ROI calculator yielded one very shocking finding above all others:
- Gap stands to lose about $8 million – Despite generating over $5.5 million in voucher sales, Gap may lose up to $8 million beyond that. Our estimate is quite conservative as it also includes another round of purchases from the newly acquired customers. Based on our calculations, in order for Gap to break even on this deal, they must convince those newly acquired customers to return at least four more times this year ($8,010,000/$2,892,500) and spend the same amount ($50). That is unless Gap can somehow 1) increase the frequency of visits per month for new repeat customers, 2) increase the total number of visits per year for repeat customers, 3) decrease the voucher redemption rate, 4) elevate the average additional sale amount (beyond the voucher’s value) per visit, 5) attain a higher repeat customer percentage for voucher redeemers, or 6) achieve a higher additional sales percentage.
Of course many people will disagree with my assumptions and estimates but in my defense I would say that these are very conservative calculations. If you don’t agree with them, you’re free to plug your own estimates into the Gap ROI calculator embedded below and chug away. If you find any errors in the spreadsheet, please bring them to my attention so I can adjust it accordingly.
More Daily Deal Info
For additional information about social buying models, the group buying business, or more on how Groupon works, you may want to take a look at these articles regarding group buying. If you’re a entrepreneur that wants to utilize this promotional tool for your company, see our business owner tips for daily deal websites like Groupon. Oh, and if you were one of the lucky 445,000 that bought the Gap deal voucher but you decide that you can’t use it, you can always resell it on a coupon marketplace.
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