I was so glad to read Malcolm Gladwell’s piece in the New Yorker, because as a Facebook bear, I often feel alone in the wilderness. Finally, I thought, a widely respected contrarian on the topic of social networks! He says the “revolution won’t happen on Twitter.” And I say “no one's revenue will come from Facebook.”
While there is no shortage of bragging about how many people in the world are on Facebook, sadly none of them have generated any significant revenue for other companies. That may very well be The Social Network's bane. I spend much of my day talking with, surveying and interviewing retailers and the general consensus I hear about social networks is that they just don’t drive revenue. Nearly 60% of retailers agree that the returns on social marketing efforts are unclear. Retailers tell us Facebook fans don’t buy after becoming fans, they don’t click on the posts that retailers make, and no one visits or buys from the Facebook stores (unless that’s the only place where your merchandise is available). I contrast social networks with search, which even 10 years ago was regarded as one of the most effective marketing tactics out there even when few retailers were using it. The State of Retailing Online Report from way back in 2001 had 88% of retailers saying paid search was effective. To this day, search continues to retain that honor. Social networks? Not so much. Only 7% of retailers say it’s an effective customer acquisition source.
A Rice University faculty member just published a study on how effective merchants find Groupon. To Groupon critics, it was honey because a whooping 40% of participants wouldn’t repeat the experience.
But here’s the catch and why I’m still a huge proponent of the “group buying” model that encompasses Living Social, Buy With Me, Tippr and now the Yellow Pages and local radio stations and newspapers too: most of that 40% thought the Groupon customers were cheap and tipped badly.
If that’s the worst of the problems, this model may actually be worth much more than the billion-dollar valuations already placed on the space. Here’s why. First, businesses like restaurants can prepopulate the “tip” field. I went to a restaurant in Charlotte called Zebra which has done multiple group buying offers and they include a 15% gratuity in the bill. Any business not already doing that could and should be. Second, and more powerful, is that the group sites could capture information on who is a good and bad customer from the merchant. Every redemption has a unique code associated with it (see image). None of the group buying sites are doing that now and merchants, at least according to the few that I’ve interviews, are keeping track of redemptions in rudimentary excel spreadsheets. The first company to provide a merchant tool that allows the flagging of particularly good and egregiously bad customers will be the winner in this space. By eliminating the “bad” customers from the offer, a merchant is much more likely to experience profitability or service issues that strain these small businesses.