TOM WINNIFRITH ON MAKING MONEY FROM PROVIDING A CRAP SERVICE – NOT A SUSTAINABLE BUSINESS MODEL
It is normally crackpot lefties who bleat on about the short termist approach of some businesses which undermines capitalism, and so I venture into an area where I might find myself in the same ideological bed as gold grade loons like Polly Toynbee. Whatever… The old trout has – like the proverbial broken clock – got to be right now and again. My mind wanders into this area thanks to two companies on AIM: CPP (which is perhaps days away from going down the plughole) and Cupid which is not near the plughole. Yet.
CPP provided financial services support for big companies. The problem was that some of the services it provided were not just crap they were an outright scam. It was hugely profitable for CPP but in the end you cannot go around ripping off your customers forever because they walk. As it happens it did not get to that stage with CPP because the FSA stepped in, shut down a large part of the operation and slapped a huge fine on CPP.
Cupid is the subject of various allegations which I am not going to bother going into now but one fact which is clear about this online dating company is that the average client stays with it for less than 3.5 months. Now some of its websites are aimed at those seeking love, but many are targeting those who just seek sex with strangers.
I would have thought that if the service was indeed serving up a constant stream of foxy young ladies who were up for random encounters then customers would keep their subscriptions going for a long time. That they are not sends a clear message to me and it is perhaps why Cupid has to spend an incredibly high percentage of its gross profits on marketing.
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Now the arch capitalist would say “so what? There are plenty of other potential customers out there, as long as you make a turn on each who cares?” Hmmm. From an ethical point of view I am not sure that this is the way a business should be run. But from a financial point of view it also does not stack up because in the end the pool of potential customers starts to run dry and you have to spend ever more on attracting in “fresh meat” – it is a law of diminishing returns. A business that operates in such a way is inherently – from an investment perspective – a bad bet.
One can make the same case, incidentally, about listed spread betting companies. Most punters lose their cash on spread betting. And so there is a constant need to replace them. It is like a casino. For every winner there has to be a loser and so once the “house” has taken its slice there has to be a diminishing return.
A good business needs to spend relatively little on marketing because a) it has a high retention rate among customers – they keep coming back and b) they tell their mates what a good product or service they have enjoyed and so deliver free marketing. A bad business gets no references and loses far too many of its customers. It is as simple as that. I wanted to contrast Cupid with a fine business in London’s Clerkenwell area which your esteemed editor knows very well but am told that I must show restraint on this matter.
The critical point here is that ultimately offering a business proposition where customers are essentially getting poor value for money (or worse) will see very low customer retention rates, forcing very high marketing spend and this, from an investment perspective, is just not attractive at all.