Math problems in Groundswell

Category: Statistics

Published: 07/30/2009 04:02 p.m.

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).