Economics of the Onion Deal – How Rs.9/kg materialized?

When onion prices have skyrocket, Groupon’s onion deal (check here) comes as a god send. A deal seeking Indian customer is always on the lookout for value-for-money options. The deal websites usually attract customers by using price differentiation strategies through lucrative offers and discounts that go up to almost 70 per cent.  With the best deal on onions, Groupon has caught the pulse of the Indian consumer who is sensitive about vegetable prices. It has tied up with one of largest onion distributors to procure 3,000 kilograms of fresh onions every day for the next seven days and selling it at Rs. 9 per kg.

Groupon India's Rs.9 per kg Onion Deal

Groupon India’s Rs.9 per kg Onion Deal

 Economics of Onion

Lets try to uncover the inside working of this deal.

Well the cost for onion in the wholesale market is ranges from INR 1000 – 4000 per quintal in Maharashtra (ref: http://www.indicat.com/Market-Rates/Commodity-Rates/Onion). Since Groupon have secured a bulk buy of 21 ton of onions in 7 days, with 3000 Kilograms of onions every day I am sure they must have negotiated  a killing price. Lets for the time assume that they bought onions at a rate of INR 2000 per quintal, which is equal to 20 Rs per kg. Thus a total expenditure of Rs. 420000.

At this moment they have already sold 19.8 ton and with this rate will easily sell the whole of 21 ton by tomorrow. At a sale price of Rs. 9 this would have generated an overall loss of Rs. 231000 for the company.

 But why would any company indulge in a loss making practice? And that too simply buying expensive & selling cheap?

The answer lies in the economics of a digital marketing campaign which are regularly run by these deal based sites to capture new customers & amplify their customer base.

Economics of a Paid Marketing Campaign:

There are roughly 10 Lac deal based searches in a month on Google.  The deal based sites often run ads on Google to capture new audience. These 10 Lac searches would have roughly generated 50,000 clicks for such a website assuming a healthy Click through Rate of 5% and at a generous 10% click-to-lead conversion rate there must be around 5000 new user registrations per month. Since the average click cost in a deal based vertical is in the range of Rs. 7-8 per click (CPC), thus we can easily conclude that every registration must have cost GroupOn around 80 Rs as advertising expenses & this should have generated about 5000 registration per month. Thus a total digital marketing expenditure of Rs. 4 Lac in 30 days to capture 5000 new registrations.

 

Turing the loss into profit:

 

Google Web Search Trends

Google Web Search Trends

  • Day this deal went live,  the total Google searches for Groupon jumped by 400% in a single day. This was even more than they could have expected & lead to momentarily crashing of their site as well (as reported by Aljazeera here)
  • At the end of the whole sale they will have gain 21000 transactions on their website in flat 6 days & since each transaction mandates a registration, they would have generated a maximum of 21000 new customer registrations, or on an average close to 15750 new customer registrations (assuming 75% as new customers).

The only expenditure incurred for achieving the above statistics is the net loss amount of Rs. 2.3 lac. Thus from a marketing prospective, the total promotional expenditure of Rs. 2.3 Lac in 6 days has been able to capture 15750 new registrations.

Brilliant Strategy! They gained 3x their monthly customer registrations at 50% of the regular digital marketing cost, just by selling onions  :-)

Moreover not to miss the wide spread national/international media coverage and mentions on twitter, facebook & other social media channels – All included in the 2.3 Lac total marketing expenditure.

On the hindsight, its needless to say that Onions have great veiled powers which if used correctly at the right time & space , have the potential to crash anything from websites to political parties   :-D

[Edit:  Someone pointed out that the delivery charges are not accounted in the above calculations. Ideally fulfillment costs are not accounted while measuring the marketing & acquisition channel costs. Even if we add up the normalized delivery charges of Rs. 5 per delivery (normalized due to economies of scale with limited cities covered), then for 21000 deliveries they would have spend Rs. 105000, taking the whole project expenditure to Rs. 3.3 Lac for 16K registrations at Rs. 20 per registration (75% of regular acquisition costs).  All this without not yet accounting for the loads of direct traffic registrations over and top of these 21000 sure shot ones.] Google

4 thoughts on “Economics of the Onion Deal – How Rs.9/kg materialized?

  1. Very well explained latest marketing strategy …
    I was wondering if people have actually received the onions that they ordered on Groupon or not ?

  2. Hi Puneet,
    Amazing postmortem of behind the curtain marketing stratergies of groupon. Lot of things learnt. Keep posting such amazing stuffs

    -Anil

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