Social coupon offers are all over the Internet. It seems like you can’t visit a site these days without seeing ads by Groupon, LivingSocial or yet another site offering discounted offers on local services. Some may remember the early aggregate buying pioneers like Mercata (backed by Paul Allen, formerly of Microsoft), which started in 2000 and collapsed a year later. Fast forward to 2011. Thanks to social media sites like Facebook and Twitter, aggregate buying has had a new avatar.
Using social media to spread the word, It’s a lot easier now to build the critical mass needed for the tipping point. Groupon reported revenues of $645 million for Q1 this year (which could potentially make them a $2 billion plus company this year, although they are losing money heavily). This rapid growth of social couponing leads to an interesting question. For brands that use social couponing, what are the short-term and long-term effects?
Short-term benefits for the business:
- Topline Growth. There will be a spike in sales. If the deal is capped at a certain number and all of the coupons are redeemed with no extra purchases occurring, fairly accurate sales projection is possible.
- Smoothing Demand and Supply. In the case of businesses with inventory to liquidate or perishable inventory (such as restaurants, where a vacant table is lost revenue), couponing has the potential to ensure optimal capacity usage, although the sales generated via coupons often happens at a price below cost or at the marginal cost (where price of a product equal the additional cost of producing an extra unit).
- Inducing Trial. For relatively new businesses, social couponing can be used to lower the risk of a product trial. Groupon is known to prefer established/reputated brands, but there are plenty of others who are only too eager to sign up any business that wants to offer coupons.
- Weathering the Storm. When the economy is sluggish, this may seem like a good way to keep the business going. It may keep employees in services businesses happy (because of tips they get) and create a sense of security (it appears like the company is weathering the storm) even when the company is losing money on every sale.
Such short-term benefits seem enticing, but one has to consider the long-term impact on bottom line and on the brand.
Long-term pains for business:
- Lower Margins. Consumers get very low prices on a whole range of services and some products. While most are local businesses, from time-to-time national brands participate. As consumers get used to the low prices, will they ever be willing to pay full price? Consumers’ reservation price (or the highest price willing to pay) is likely to diminish over time. If fact, Groupon’s ad campaign asks, “Why are you still paying full price?” Increased use of social coupons will likely lead to downward pressure on prices. In a study done at Rice University, 32% of companies using Groupon reported that the deal was unprofitable and 40% companies said they would not use such deals again. Erosion of margins will make it difficult to innovate and create superior customer experiences.
- Your Target Market. You will likely draw clients that were not part of your original target market. Those who were not willing to pay the price for that spa or restaurant or resort experience, now have access. Your control over customer selection is greatly diminished. You would hope that they will turn into profitable, good customers.
- Brand Loyalty. Will proliferation of social couponing diminish brand loyalty? There are no definitive answers yet. If customers who buy at reduced prices don’t buy other items at full prices or come back to buy the item at full price (more than once) and/or encourage others to buy at full price, the net effect might be diminished brand loyalty. A few businesses I have talked to report that their best and most loyal customers, who previously paid full price, are showing up with coupons. Such customers in the past would have paid a full price, but not any more.
- Focus on Price and Not on Brand. Widespread use of coupons will shift the focus to price and not on brand attributes that provide differentiation or a unique experience. Brand marketers want the consumer to focus on brand benefits and appreciate the points of difference. But if price is going to drive consumer decisions, the brand becomes less relevant. If the brand is diminished, the business loses a strategic asset and a competitive weapon.
When and How to Use Social Coupons?
“Stickiness” or Conversion Potential. The hope is that those who buy at heavily discounted prices will later repeat purchase at a full price (hopefully more than once). For instance, a fitness club membership may have good potential being renewed at full price. The local YMCA fitness center offered a discounted 3-month membership. If these new patrons get hooked and see the benefits of going to the gym, there is a good chance of a high renewal rate at full price. On the other hand, a luxury spa or a beach resort or even an upscale restaurant experience do not have the same conversion potential. These are not very essential or regular experiences. An upscale restaurant I know sold nearly 1000 coupons and is now learning hard lesson. The conversion potential of the category is important.
Set Limits and Be Strategic. It may make sense during a slow period or specifically for slow-moving items or entry level services etc. Limit the number of coupons and set expiry date (if law permits). Frequent use of coupons will erode profitability and long-term brand value. Use online coupons strategically. Think about whether offering deep discounts is consistent with the brand positioning.
Measure. Measure and monitor the impact. Look at new customer growth, mix of couponing using customers (new vs. existing customers), conversion of new customers to full price paying customers, margins, and impact on brand equity.
Focus on Customer Experience. Providing a great customer experience is not optional because you offer a low price. It is all the more important now to focus on delivering quality and a good customer experience, because that will increase the chance of the customer coming back and paying a full price.