The Kern Gnome Experiment

Managers frequently lament that while there is a surfeit of examples of creative marketing in sectors like cars, clothing or soft drinks, the same is not always true of the somewhat less glamorous world of business-to-business products and services. But that is not to say that there are not outstanding examples of marketing creativity is this sector as well. The Kern & Sohn gnome experiment is a classic case in point.

Kern & Sohn is a German company founded way back in 1844 and is currently a 6^th generation, medium-sized family business. It is a leading player in the precision scales industry, manufacturing products such as laboratory balances and industrial scales for sectors like healthcare, production, education and jewellery. It wanted to build its reputation as a manufacturer of high quality measuring devices and of course, drive global sales. But like many small manufacturers it had a limited marketing budget. Its response however was imaginative and highly successful.

It decided to exploit a little known fact which is that because the Earth’s gravity varies from place to place, things weigh slightly differently in different parts of the world. These differences do not show up on ordinary scales but are captured by Kern’s precision equipment. The company carefully selected some customers and scientists around the world and sent them a kit containing a set of scales and a special test weight – a chip-proof garden gnome. Scientists weighed the gnome, recorded the results on the website, took photographic evidence and passed him on. As the gnome travelled to different landmarks around the world, he generated highly sharable imagery and positive associations for Kern.

The results to date have been exceptional. The story captured the attention of the world’s media reaching an audience of over 350m people in 150 countries and even becoming the subject of a Ted talk. After two weeks, over 16,000 websites had linked to the gnomeexperiment.com/ driving Kern & Sohn from page 12 to page 1 of the Google rankings resulting in a 200 per cent increase in traffic. Within a month, Kern sales had risen by 21 per cent. Impressive results for a very modest outlay!

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Is Groupon a Deal at $5?

Few firms illustrate the highs and lows of internet businesses better than Groupon, the daily deals website founded in the US in 2008. Its novel business model caught on quickly and its sales rose sharply. Leading internet companies such as Yahoo and Google liked what they saw and came with sacksful of money, reputedly offering $3billion and $5.3billion respectively to buy the firm. Groupon rejected the suitors and this looked like a wise decision, when just one year later in 2011, it had a very successful initial public offering of 35million shares at $20 each valuing the firm at $13billion. Such was investor enthusiasm, that the stock jumped 50 per cent on the opening day (November 4, 2011) to reach $29.52. These highs have not been seen since. Disappointing results has seen the share price slide consistentlyand it was trading at around $5 before last week's slump that saw CEO, Andrew Mason finally relieved of his duties. So is Groupon today’s daily deal?

To answer this question, it is important to look at what it actually does. Its name translates as ‘group coupon’ and it works as follows. Let’s say an affiliate such as a restaurant, that normally sells a lunch at €12 offers it for €6 on a given day to Groupon members. The offer only goes live if a sufficient number of customers sign up so members are incentivised to tell their friends about the deal through social media if they want to avail of it themselves. If a set number does not sign up, the deal lapses. For the merchant, this guarantees a high level of demand for the offer which may also bring in new customers that haven’t visited before. Incremental revenue on the offer is split 50:50 between the merchant and Groupon, so unlike many other internet businesses, the latter has an income stream from the off.

So far so good and it was. By the end of 2010, Groupon had over 51million registered users in 565 cities worldwide and it was generating revenues of over $760m on the back of all of the daily deal emails that it was sending to subscribers. But there are two key problems with this model. First daily deals are local so you need a team of salespeople in every city that you operate in who will go out, spread the word and source deals. As marketing costs go, this is expensive – hence the firm’s controversial efforts to exclude marketing costs from its sales figures. The revenues may rise, but the profits don’t and Groupon made a net loss of over $80m in 2012 despite earnings exceeding $2billion. Members of its team of over 5,000 salespeople, seen by some as its key competitive advantage have been jumping ship in droves.

More crucially though, Groupon has no defensible value proposition. To replicate its business model is relatively simple and other large internet companies like Amazon, eBay and Facebook have been quick to move in. In addition, the countless local imitators popping up in towns and cities all over the world may even have some advantages over Groupon in that they have the connections and local knowledge to generate interesting deals for their members. So take your $5 and spend it on the daily deal of your choice rather than on Groupon stock!