Learning from Startups: Ensogo (part 1: intro & merchant’s perspective)
Startup is the new hype of the 21st century. We have seen the rise of unicorns, and within a few short years, some of those unicorns have diminished into irrelevance. At the beginning of the 2010s, the hottest business model was group buying, with Groupon and LivingSocial the two most well-known name. Like Groupon, LivingSocial expanded globally, only to sell out to Groupon for 0 USD. In Southeast Asia, LivingSocial was known as Ensogo, the company it acquired but never rebranded. This is the learning from Ensogo, why it failed, and how the learning applies to other startups, especially in the marketplace space like Lazada or Zalora or the next generation of service techs like Eatigo, Foodpanda, or UberEATS.
Engoso, like Groupon and LivingSocial, was a discount website for service businesses and retails. It promises group buying discount for consumers and new customer acquisition to partnered merchants. The discounted services include restaurants, beauty services, entertainment, and hotel stays. Usually, the consumers are not restricted on the time they can use the service, but would typically require advanced reservation. The business model is that Ensogo makes money off a certain percentage of revenue after discount. For the restaurants and beauty services, discounts can be as deep as 65% off retail price. And this is where the problem begins.
For a business to be sustainable, there are three key factors:
- It must be sustainable for its partners/suppliers, in this case, the merchants
- It must offer good value for money for the consumers
- It must be financially sound for the company
Can a deep discount be sustainable for the partners?
For a service company, its “perceived” most significant cost is the fixed cost (usually rent and salary) and its fixed assets investment. While true, if a company overlooks the gross profit margin after the variable costs due to too much focus on trying to meet the fixed costs, this oversight will come back to bite with a nasty sting.
The promise of Ensogo, other group buying websites, and marketplace, is to offer a deep discount to acquire new customers and to treat the cost incurred (loss of revenue due to discount) as a marketing expense. This is true if and only if the customers return and pay a higher price or if the lifetime value of the customer exceeds the cost to acquire and maintain them.
What determines whether a customer returns?
For all services, it begins with the quality of service and products offered, the convenience of access, and the perception of value. If a discount is few and far in between, the discount is a viable option to acquire new customers, bring back lost customers, or to boost sales. If a deep discount is frequent, it will be prized into the customer’s mind, and they will not be willing to pay at full price or a reduced discount unless there is no easy substitute. For restaurant and beauty businesses, unfortunately, substitution is easy to find. Thus, although the quality of service and products offered may be excellent at a convenient location, if a customer expects that a deep discount appears frequently and can access the service at their convenience, the willingness to pay a higher price for said product decreases.
What happens when the customers do not return and pay a higher price? In that case, the deeply discounted price must be treated as the real price of the offering, and be used to calculate its gross profit margin. For a service business, the gross profit margin is the following:
gross profit / service = real price to consumer – cost of services – cost of personnel / time served
For a restaurant, the “real” price to the consumer is the price of food after discount, tax, and service charge. Cost of services is the cost of food. Cost of personnel/time served is the hourly wage of the chef/minutes the chef needs to dedicate to the food. It is important to take the service personnel into the equation, especially if the customer can access the service at any time because the customers likely use the service at the peak time when they have a choice. In the case of Ensogo, there usually was no limitation on usage convenience; the customers can come in during peak hours and while the higher paying walk-in customers are denied service because there are no more tables.
For a beauty business, the real price to the consumer is the price of service after discount, tax, and service charge. Cost of services is the cost of products used, e.g., essential oil. Cost of personnel/time served is the hourly wage of the service personnel/minutes the person needs to dedicate to perform the service.
In the case where the discount is 65% and supposedly the full retail price is 100, the merchant will only be getting 45. If the cost of services + cost of personnel/time served is greater than 35, then it is just a matter of time before the merchant goes out of business, unless the deeply discounted customers make up a tiny portion of their business. Even then, we have not yet take Ensogo’s commission into account. For a restaurant business, if the cost of food + chef = 25% of retail price, and the retail price is 100. At 65% discount and 20% discount for food (note that the number is hypothetical), the restaurant is left with
money received by restaurant 100 * (1-65%) * (1-20%) = 28
Which is 28% of retail price. As assumed above that the cost of that dish is 25%, this means the restaurant only has a gross profit of 3% after deducting discount, Ensogo commission, and cost of the dish. What is often forgotten by new merchants is that the merchants still have a huge chunk of costs being overlooked: rent and non-service personnel. For a restaurant business, rent can get very expensive as it is essential to pay for location. Non-service personnel for a restaurant includes waiters, managers, accountants, admins, marketing, finance, etc. Is it realistic that if a dish costing 100 THB would only have 3 THB to pay toward rent and staffs? Assuming the rental price of 200,000 THB and non-service payroll of 150,000 THB, the total fixed cost excluding chefs is 350,000 THB. In this example, it means the restaurant needs to sale 116,666 dishes per month or 3888 dishes/day or 324 dishes/hour to break even (assume 12 operating hours/day). If a customer eats 1.5 dishes, that is 216 customers/hours. Chances are, a location with a rental cost of 200,000 THB would not be able to fit over 200 customers in a restaurant at the same time. Hence, the more customers from Ensogo a restaurant gets, the more likely the restaurant will go out of business.
Can the model even be sustainble for merchants?
Can a merchant involved in Ensogo, other group buying businesses, or marketplace find this model sustainable? It is indeed possible if the discount is not deep, or if it is, there must be a limit concerning the number of customers allowed, or the time of day they are allowed to visit. If the discount is deep, frequent, and at any time of day the customer wishes with no restriction, the customers will get used to the price and will not return when a higher price is offered. Thus, what was and is good for the merchants did not align with Ensogo’s business model during its peak in 2012.