By now, we are all familiar with "social buying" sites like Groupon, LivingSocial and Heartsy. These offer daily discount coupon programs. They are taking the internet by storm and promise to build local business overnight. In fact, Groupon can lay a claim to being the fastest growing company in history! The above mentioned companies get into an agreement with local businesses to offer their products and services at a discounted coupon rate which is 50-80% cheaper than the original selling price.
Consider that the Gap recently offered a Groupon for $50 worth of merchandise at $25. The Chicago Tribune reported that a whopping 445,000 Gap Groupons were sold. Sound like a savvy way to bring in new customers and boost sales? According to author Bob Phibbs of Groupon-Why Deep Discounts are Bad for Business- retail sales reports showed that this decision may have directly contributed to an 8% loss that Gap showed soon after, leading to the exit of Gap's CEO and marketing director, and having a negative impact on the company's stock! This type of scenario is not limited to Big business- small businesses have been affected too. Consider Posie's cafe in Portland, Oregon. Three months after offering a Groupon coupon, the owner could not meet payroll after losing $8,000 in profits from the discount offer!
[Related -Emerging-Markets Stocks Took The Lead Last Week]
The appeal of on-line coupon deals like Groupon is based on the beliefs that
- any publicity is good
- the discounted cost is a marketing cost
- online coupons are a great way to expose your store to new customers who will return without the lure of a discount.
[Related -Does Your Latest Investment Pass This Test?]
You don't run one of these deals to make money. You do it to increase awareness and trial. You do it to drive traffic to your store or website with the hope that once they try your product or service, they will eventually spend more money with you and maybe even become a loyal customer. But, at the onset at least, you are basically buying business, which can be a slippery slope. It might be an appealing concept if the product or service offered is commoditized and price plays a major role in influencing purchase. However, this mechanism falls far short if the product or service is in the premium category.
Besides Bob Phibbs, several other experts have been critical of this online coupon discounting phenomena. They enumerate the following reasons that highlight the pitfalls of such a strategy:
1) It destroys profitability. If you run a 50% off campaign in your local area or in your industry it will be very hard for anyone in your sector to come back to the pricing levels that you used to get. In effect you destroy profitability not just for you, but for all involved. In a recent study, 32% of companies surveyed, said that the Groupon campaign was unprofitable with only 25% of redeemers buying additional products beyond the ones offered through the coupon and only 15% of coupon users coming back.
2) Discounts affect service levels and customer satisfaction. Profitability has an established link with service levels that can be provided. With decreasing service levels, customer satisfaction will go down and you will lose not only the unprofitable coupon users, but all your clients.
3) Customer loyalty is affected. Usage of coupons can easily be copied by others. So if you shift your business to one where the differentiation is price (or coupons), you destroy customer loyalty – not just for you but for all parties in your market. Discounting can also anger and alienate your existing customer base. They are likely to feel cheated by the fact that they didn't get your discount deal all along!
The questions that businesses must answer before they use the concept of discount coupons are
- Will we have to raise prices across the board to make up for the losses incurred due to discounting?
- Does the true cost of the coupon campaign fit into our advertising budget?
- Do we have the extra products and staff to handle a sudden influx of new customers all at once?
- Do we have a way to turn one-time coupon buyers into regular customers?
Instead of focusing on discounts and coupons, companies should focus their efforts on longer lasting competitive differentiators like service levels, or uniqueness of their offering. Upgrades and add-ons are great solutions as these don't add time to the service/product, or much cost.