Daily Deals are not a Bargain

The daily deals coupon market made popular by Groupon and copied by many others (with mixed results), reached a saturation point very quickly. Consumers are bombarded with offers from restaurants, spas, service providers, and retailers offering 50% off on a “hot deal.” The novelty of daily deals wore off as numerous competitors joined Groupon in vying for customers. Yesterday, Groupon’s stock price closed at $4.37, an all-time low. Groupon’s stock value today is a far cry from the $26.11 per share close on the day of its IPO last November.

In less than four years, Groupon has gone from start up to category creator to a troubled business. What happened? Reality has hit businesses using Groupon that the bargains consumers receive come at the expense of their profitability. Groupon’s revenue sharing model typically calls for a 50-50 split in revenues deals sold. Given that deals are usually a 50% discount off regular price, a business has effectively given away three-fourths of potential revenue for every Groupon-bearing customer walking through the door. It is hard for the math to work for low-margin businesses that forsake significant revenue to attract buyers.

Deep discounts like those offered by daily deals are detrimental to building brands. They are gifts to buyers, at least that is how I feel when I am able to get a 50% discount at a restaurant. But, it does little to foster long-term loyalty between customer and brand. In theory, coupons are an incentive that attracts buyers to sample a product. Assuming they see sufficient value, potential future purchases might occur without an incentive. Unfortunately, the glut of daily deals gives consumers leeway to shop around for the best deal rather than buy from brands because of a relationship anchored on something other than a discount.

Customers are the lifeblood of a business. But, attracting them with unprofitable daily deals will cause bleeding that harms a business. Instead, explore how to strengthen relationships with your best customers by rewarding their patronage. It likely does not require a 50% discount, and they will reciprocate your gesture with continued support of your business.

Fighting Customer Fatigue

If you ever were a student of marketing, you learned about the product life cycle. The PLC includes stages of introduction, growth, maturity, and decline- yes, that product life cycle. And, you probably learned about the characteristics associated with each stage. For example, the growth stage is characterized by increased competition as new entrants enter the market and a need to achieve brand differentiation. Hey, that sounds just like what is going on in the daily deals category. Groupon established itself as the dominant brand, and its rapid success attracted a slew of websites with a similar deal-of-the-day concept.

Evidence is appearing that should alarm daily deals marketers like Groupon: traffic on their websites is decreasing. Groupon’s site traffic last week was down 25% compared to early June, and it had its first ever month-over-month traffic decline in July. The drop in Groupon website traffic can be attributed to the large number of options consumers have for daily deals. At some point, “in-box fatigue” sets in and the daily email offers become part of the message clutter that is our lives as consumers.

Marketers can learn many lessons from the daily deals category and Groupon in particular. First, early entry into a market can be advantageous but does not guarantee success. Being first is not as important as being unique. Second, if a business idea is easy to imitate as the daily deals concept has been, it is critical to differentiate in a way that rises above the clutter. Whether it is choice, convenience, service, or some other benefit, creating relevance to customers is essential. Ask Facebook, it has ended Facebook Deals less than a year after it launched. It was nothing more than another feature on Facebook. Farmville is unique; another daily deal offer is not!

Fight fatigue by striving to maintain energy in your brand. Let fatigue claim competitors as its victims. Continuously ask the question “how can we better, different, or unique?”

USA Today – “Websites Selling Daily Deals Lose Luster”

Being Better More Important than Being First

In my last post, the challenges of being late to market were discussed, with the demise of Microsoft’s Zune music player being the latest example of how failure to differentiate can doom a product. Now, another situation in which a well heeled brand is coming to market with a new product is examined; this time it is from the perspective of an entrenched competitor. Groupon is a social media success story, going from start-up to an estimated $3 billion in revenues in less than three years. In that time, Groupon has established itself as the dominant social couponing brand. Nothing will be able to derail Groupon given its position as the early-to-market king… right?

Should Groupon executives be losing sleep over Facebook’s push into the social couponing category? The social network giant is launching Facebook Deals, which resembles Groupon’s offering of discounts on local dining, services, and entertainment. Facebook Deals has been available in some foreign markets for several months, and it will debut in five U.S. cities soon (Atlanta, Austin, Dallas, San Diego, and San Francisco). With more than 500,000,000 users worldwide, Facebook is a ubiquitous distribution channel that holds appeal for businesses in markets large and small.

Facebook may be bigger than Groupon, but is it better? Market presence and success give a brand like Facebook an upper hand when introducing extensions but do not guarantee success. Other brands have struggled with breaking into new categories. For example, Google’s enormous market share in search and search engine advertising were not enough to make Google Buzz a viable product, nor has it exactly translated to success for its Chrome browser.

Facebook Deals may be a smash hit, but it will not be because Facebook has a large number of users. In order to be adopted, it will have to offer points of difference relative to Groupon. Are the deals more attractive? Are coupons easier to redeem? Is the interaction with retailers or service providers different in some way? Groupon can win the battle by being better; being first will be helpful but not as much as a providing a better experience for customers.

In the long run, being better will be more profitable than being first. To borrow an ad tag line from Nike, Groupon will have to show “My better is better than your better” when it comes to competing with Facebook or anyone else. If the customer experience is positive and enjoyable, almost any brand can compete.

Winning with Social Coupons

Consumers flocked to coupon offers in the past two years as the recession put a dent in our buying power. But, coupons really are not for us; they are ultimately for the gain of marketers that offer them. This small but significant point has been lost on many businesses that have experimented with social couponing services like Groupon. Many businesses have gotten burned because the revenue hit taken and expenses incurred to offer deep discounts to attract customers is not always recouped.

A recent study from Rice University found that nearly one-third of businesses running an offer through Groupon say that lost money on their promotion. More than 40% of businesses surveyed said they would not run an offer on Groupon again. These figures are alarming for the future of social couponing. The medium holds great promise because information about coupon offers can be transmitted through permission marketing and word-of-mouth, channels that are much more cost efficient than traditional channels used to deliver coupons.

Rather than shy away from social coupons because of a bad experience or because of hearing about bad experiences other businesses have had, marketers should take the following steps to manage a social coupon campaign:
1. Do the Math – The expenses associated with a coupon offer can be calculated on a per unit basis when evaluating an opportunity. Revenue sharing with a service like Groupon, cost of goods sold or given away, and any additional labor costs to handle increased demand must be considered when making a decision to participate in social couponing. Realistically, Return on Investment should be based on incremental profit, not revenues. What is the additional profit a promotion brings in once all expenses are deducted? Social coupon offers can be capped; set a maximum number of offers to sell to manage profitability of the promotion.

2. Prepare Employees – One of the problems businesses have had with demand generated by a Groupon offer is that employees can become overmatched in meeting the influx of customers. And, in the case of service businesses, many employees have found that Groupon customers are not always the best tippers, basing tips on the deeply discounted price rather than regular price. Companies should take steps to increase service coverage, train employees on handling service encounters with new customers attracted by a coupon , and monitoring employee satisfaction during peak business periods.

3.Think Long-Term – A coupon can get customers in the door, but other factors will determine if they return. A great customer experience, which is highly related to #2, can demonstrate the value offered and persuade customers to return without the incentive of a coupon. If employees can be persuaded to view these customers more like a new friend than a nuisance, the initial service encounter can set the stage for repeat customer visits. Also, businesses should seize the opportunity of a visit by first-time customers to invite them to expand the relationship by opting in for permission-based marketing in the form of email or by friending a brand in social media.

Social coupons may fall under the category of “spend money to make money,” but when properly executed and managed they should not lose money and hopefully set the stage for developing repeat customers.

Promo – “Groupon Social Coupons Unprofitable for One-Third of Marketers: Study”

Should Customer Acquisition be Painful?

Retailers and service providers use coupons to attract new customers to their businesses. The all important trial that an incentive like a coupon can provide is crucial for creating relationships. A new genre of couponing that has emerged is known as “social couponing,” driven by social media’s capability to spread information quickly from person to person. The leader in social couponing today is Groupon, the Chicago-based company that has become a $350 million dollar company in annual revenue in less than two years. The basic premise of Groupon is that a retailer or service provider offers a coupon at a deep discount (e.g., $10 worth of food at a restaurant for $5) as a carrot to create traffic. Groupon’s cut is up to 50% of the coupon sales. Most Groupon offers are local in scope, but it executed its first nationwide offer this week for Gap.

Deep discounting like that required by Groupon can succeed in adding new customers and revenues. My family found a great restaurant in Nashville, The Local Taco, which we would have never visited had it not been for a Groupon offer. We have been back once at regular price since using our Groupon, and we will go back again in the future. But, for all of the stories like mine, there are many other stories of failure to establish customer connection that will bring them back for future visits without the deep discount.

Businesses considering a Groupon program should be prepared to hold their noses while giving away about 75% in the transaction. Groupon may bring customers in to visit, but the experience they have once they arrive and marketers’ efforts to engage them (e.g., encourage sign up to receive emails to continue the relationship) will ultimately determine if the short term pain actually leads to long term gain.