Groupon (and its group-buying competitors) are all the rage in retail right now. There’s a pretty healthy debate going on regarding the pros and cons of the Group-on model (see here, here, here, here, here and so forth), so I was intrigued a few weeks back when I saw that a quasi-public entity was the featured Boston Groupon of the day.
Zoo New England runs the Franklin Park and Stone Zoos and receives a subsidy from the state of several million dollars. Its CEO, John Linehan, was kind enough to speak with me about the Zoo’s thinking behind the Groupon offer. (See Disclosure below)
Much of the criticism of Groupon centers on several themes – does it draw new customers or just lower income from existing customers, are the new customers your customers or Groupon’s, and are the costs (an approximately 75% price reduction for the seller) and logistical challenges worth it.
Regarding the new customers issue, Linehan felt the information was incomplete. The Groupon offer was purchased by 2031 people who have several months to redeem the offer. As redemptions come in, the Zoo will be collecting their information to determine if its primarily existing members or new ones.
Linehan noted that the Zoo had very low market penetration rates with only approximately 13,000 members (comparison yardstick—2.5m households in states, 279k in Suffolk County, and 561k in Middlesex county), so that even a low-level of yield on new members would be a significant boost to their membership base. Also, in terms of timing, fewer potential patrons are interested in the Zoo during the approach of cold weather, while the Groupon offered the opportunity to generate sales during a traditionally slow season.
As for the issue of who owns the customers, Linehan explained that this was the Zoo’s second Groupon offer. The first was for single admission tickets. He said that the Zoo’s second approach, offering memberships, made more sense; the Zoo collected name and contact information (which they did not for the ticket offer) and could remarket to the new members in the future outside of Groupon.
Lastly, Linehan laid out the cost rationale for participating in Groupon and accepting an approximately 75% discount from the seller’s end. First, the Zoo marketed a premium level of membership, not a basic one, so it made slightly more on each sale. Second, and most importantly, the Zoos operate on an almost entirely fixed cost basis. New members do not create (almost) any variable costs and the income from their memberships adds to the bottom line (under the somewhat dangerous assumption that all fixed costs are covered). And there’s potential future value in converting these new customers into long-term members at full price. Third, the Zoo operates at way less than full capacity and can absorb significant increases in attendance (unlike a small restaurant or boutique).
Groupon is an intriguing concept and its clearly not appropriate for every business. But I came away from my conversation with Linehan convinced that it made strategic sense for the Zoo. I’ll be back in touch with him after redemptions occur to see how it has affected his thinking.
*Disclosure: I’m a Zoo member and a frequent visitor to the Franklin Park Zoo. I have met John Linehan several times during my time in state service where I handled the Zoo’s capital budget.