High margins, Groupon and the magic basket for price differentiators

Posted: December 16, 2010 by FMstereo in Business Models, e-commerce

Posted 15 December 2010 by Seth Godin in Seth Godin’s Blog

Some things sell for not much more than they cost to make. Things like steel.

Others? They sell for high multiples of cost. Spa services, fancy ties, long haul airplane tickets, coaching, books–these are things that might cost a bunch to set up, but once the factory is rolling, the marginal cost of one more unit is really low. The challenge, then, is to find a way to get new customers without alienating the folks that have paid full price. Even better, to turn those new trial customers into loyal customers.

One of the challenges of selling to new customers cheap is that you might end up with a price shopper, someone who is always cheap, someone who will never convert into the kind of customer your high margin business needs to survive.

Priceline was a pioneer in figuring out how to isolate one customer type from another. The reason the original Priceline was so incredibly difficult to use (with blind reverse auctions, etc.) was that they wanted it that way. Anyone who was willing to through that hassle and anxiety to save $100 bucks for a ticket on Delta was clearly not someone Delta was going to have an easy time selling a regular ticket to. In other words, Jay Walker had figured out how to create a second type of air travel. One for cheapskates. The alternative to Priceline was a bus ticket or no travel at all… And Delta was fine with offloading excess seats to them, because they didn’t have to worry about alienating their core customer.

Groupon is a very different thing. Here, it’s not a hassle, it’s the fun factor. Buying this way is exciting, you never know what’s next, you do it with friends, the copy is funny, it’s an adventure. As a result, many Groupon customers in fact do convert to becoming long time patrons of the place they tried, because they’re not inherently cheap shoppers. When they’re on Groupon they’re hunting for fun. But if you offer an astonishing product and great service after they try you, they may convert into shopping with you for the long haul, not because you’re a Groupon replacement, but because you bring them more than the alternatives.

And the magic basket? Tim Ferriss just finished offering more than $1600 worth of high-margin items in a basket to people who bought 30 copies of his new book. The marketing partners get trial among a group of people who are each paying more than the cost of a single item in the basket, these customers are proving they’re not among the ultra-cheap. And the products are quasi-aligned, appealing to the same sort of consumer. Is there a cheaper way for one of these companies to reach this precise person? I’m not sure there is.

Imagine taking this even further and leaving out the book part. A basket of aligned items, all high margin, none from the market dominator, each holding out the possibility of future business… You could do this with an 8 pack ofcomputer games or phone apps, or drink coupons from a dozen bars in the same town, or even clothing for guys size 38. Alex has experimented with this atSwagapalooza. I’m betting that there’s quite a lot to be done in becoming this market creator/differentiator/middleman.

What’s missing so far is an intelligent way to get permission, to follow up, to further organize those that do a trial and teach them and connect them so that they see a further incentive in sticking with the thing they just tried.

What’s also missing is a willingness on the part of high-margin marketers to use their products and these sort of interactions as a replacement for the unmeasurable and largely ineffective lifestyle advertising they use now.

The net, once again, is making it easier to find and organize tribes of people, even for short durations. When you intersect these aligned groups with high-margin products, you can create fascinating commerce opportunities.

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