Math problems in Groundswell
I discovered a bit of a math problem while listening to the book Groundswell. (I have it in audio, so I don’t have page numbers. UPDATE: I found a copy of the book. It’s on page 122.) If you read this and think I’m way off, please let me know.
It is in chapter 4, about half way through. It involves Beinggirl.com and the sites profitability.
As stated in the book, a girl who picks Tampax will spend about $5 a month for 40 years. This is $60 a year, or $2,400 for the lifetime of the customer. If the margin is only 20%, as stated in the book, each girl is worth $480 to the company. That’s $480 over the life of the customer, not per year. Per year, $480 over 40 years, the customer is only worth $12 a year.
The site costs $3 million a year. If each girl is only worth $12 a year, it would take 250,000 girls to cover the cost for that year, not the stated 6,250. If you take into account future revenue, you also need to take into account future costs, which I think is left out of the book
Now, if you are assuming each girl who picks a brand will stick with it for 40 years (which my GF Meg says doesn’t happen), and look only at the website as a recruitment cost, then the math technically works. But, I don’t think that type of logic is very logical. For one, that would mean that the website would have to recruit 6,250 new girls every year. The ones that are already registered for the site would not count towards new revenue.
For every year that the site is run, more and more girls will need to be recruited. Over time, as the membership grew (as necessary to make a return on the investment), the cost of the site would grow as well. This turns the cost of the site into to a variable cost. So now, not only does the site have to recruit and maintain more people, it has to do it at a higher rate to make up for increasing costs.
The final nitpicky problem I have is assuming no increase in the value of money. Lets say they ran the site for 1 year, spent $3 million, and acquired 6,250 girls who would go on to use Tampax for 40 years. The math in the book suggests this is a break-even scenario. But it completely ignores the Time Value of money (thanks Finance 409), which is very relevant over 40 years. Even at a modest interest rate of 4%, our $3 million today is $14 million in 40 years. And, for $12 a year in profit from 6,250 girls is only $7 million if invested at the same 4%. So at a minimum, they need double the girls to break even.
The book so far has told some very interesting stories, but it is issues like this that I think create problems in the Groundswell itself. People read this which makes it sound so easy to make money with a social network, and then the market is flooded with them. The sad part is that someone thought this would make them rich, and I’m guessing they learned the real math the hard way.
The rest of the book has been fine, and I may pick it up again, but this math problem really bothers the statistics nerd inside of me.
(This was totally inspired by a twitter response from the co-author, Josh Bernoff. Thanks for paying attention to the groundswell Josh. I’m truly glad that my voice can be heard).
You make some interesting points. Some I accept, some I don’t.
The unique thing about tampons is that girls just starting puberty need to make a decision, and don’t have very much information.
I’ve made certain simplifying assumptions, some of which you’ve challenged.
Each girl sticks with the brand she picks for her whole reproductive life. Not completely true. But there is an awful lot of brand loyalty, and not that much switching, in this category.
I’ve ignored time value of money. You’re right, that complicates things and makes each decision less valuable.
But your logic assumes that the girls need to stay in the community for Tampax to get the benefit. That’s not how P&G looks at it. The money spent this year influences this year’s crop of 13-year-olds. Next year’s money influence’s next year’s crop. And so on.
So the question is, how many teenagers can you influence each year, teenagers who are just entering puberty?
P&G says over a million girls are in beinggirl.com. Even if time-value of money cut the value of each girl to $200 lifetime vs. the $480 I used in the book, and even if only 5% of the girls are being influenced to pick Tampax for that first-time decision, that’s 50,000 girls times $200 which is $10 million in value. And that community doesn’t cost nearly $10 million to run.
The community won’t just grow uncontrollably, either. Every year a new crop of girls will join because they’re the right age, and bunch will leave since they’ve outgrown it.
If they recruit another 200,000 girls every year, using the same math above for conversion rate of 5%, they’ll generate 10,000 times $200 or $2 million a year in profits.
Now this isn’t the same, admittedly oversimplified, math I did in the book. But you don’t need to spread the value of the years as you suggest — each brand decision has a value, and because of the loyalty you can compute that value. That’s almost certainly what Procter & Gamble is doing, and why the community remains so valuable to them.
Thanks for being thoughtful about this. And thanks for listening to voice on the audiobook for a couple of hours.
Thanks for the comment and for clarifying. I wasn’t looking at beinggirl.com as purely a recruitment site, and I didn’t take into account the older girls leaving. In the same sense that the amount of 12 year-olds in the U.S. stays pretty constant year to year, this could also hold true for the site membership.
I agree that the math was a bit oversimplified in the book, and that bothers me mostly because many people will not realize this and may get the wrong idea about the ease of creating a profitable social network. At 1 million girls and a conversion rate of just 5%, they are still gaining 50,000 new customers, which is certainly making the site profitable. Obviously P & G is making some money, but they aren’t doing it on just 6,250 girls a year.
Thanks again for clarifying, and it is probably silly of me not to finish the book just based on some oversimplified math.
That site costs $3 million a year? Hope they didn’t spend any of that on design costs.