April 29 2013
by Todd Hixon

Sell-To, Sell-Through, Repeat!

This post first appeared at on October 31, 2012.

One of my partners reminds us that, to be a success, a company must not only sell successfully to its immediate customers (“sell-to”), but also enable the customer to sell successfully to his/her end customers (“sell-through”), not just once, but repeatedly. Too often we (as venture investors) see businesses that have revenue traction selling to immediate customers. But, that success proves illusory when the end-customer does not buy, or if s/he buys, there is no stream of repeat business. As a result, the business spends more and more on sales and marketing, but ultimately fails to scale.

This might seem like an esoteric problem, but in our experience it happens often. Right now there is a major example coming out of the daily deal companies.

PrivCo (a private equity newsletter) reported last week a 94% write-down of the valuation of Living Social, from $5.7 billion to $325 million. The devaluation resulted from both operating losses and write-down of the value of acquired companies. It came to light because it contributed materially to the quarterly loss reported by Amazon, which owns 29% of Living Social. PrivCo’s conclusion: “LivingSocial’s Business Model Is Unsustainable, Co. Must Raise Massively Dilutive Add’l Outside Funding, Or Undergo Immediate Layoffs and Cost Restructuring, Or Both ASAP To Survive Another Year”.


GroupOn share price post-IPO ($/share)


GroupOn has also hit headwinds, as evidenced by sharp decline in its share price post-IPO.

I don’t claim to be an expert on daily deals companies, but I know a couple of things:

1)  A large part of their expenditure goes on acquiring customers, either directly via sales/marketing, or indirectly by acquiring similar companies whose principal asset is their customer base.

2)  Several of our portfolio companies have used daily deals. They report that “doing a GroupOn” produces a good flow of new customers (sell-through), but few of those customers come back again (little repeat).

GroupOn’s model is: the merchant offers a product/service at a deep discount to the normal price (like 50%) through GroupOn, and GroupOn keeps half the revenue, so the net revenue is about 25% of normal price. This contributes no profit on the first visit unless the marginal cost is very small or the discounted product pulls through other profitable sales.

Daily deals appeal to small business owners, who are often not data-driven and analytical. They see the welcome increase in people coming through the door, and are less aware of the profit they make from these customers. This probably was a major basis of the initial success of the daily deal companies: they create traffic and bring in new customers.

But small business owners are smart, and soon they become aware of the profit in daily deals, from the first sale and over time. Some entrepreneurs say daily deals deliver profitable customers for them, but many that I know believe they do not. These small business owners move on, and the daily deal companies must acquire new customers who want to try daily deals. Judging by Living Social’s numbers, maintaining revenue growth is becoming increasingly expensive.

The lesson for entrepreneurs and investors alike is simple: pay attention to your customer’s economics, and make sure your product is paying off for them. If it does, they will buy again. If not, you need to fix the problem. Sell-to, sell-through, and repeat!

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