If you’re looking for a growth industry to get into, then surely the online deals and coupons market is it right now. But is it a model for long-term expansion as an industry, or another tech-wreck in the making? And should you as a business be involved?
Many of my clients have been approached now by companies seeking to sign them up for discount deals. Not all businesses are suited to this form of marketing, particularly those that offer services rather than products as the base of their commerce. Even those that are should definitely take part only as part of a pre-determined marketing strategy that will see them profit from the heavy discounting later.
The idea of using coupons to create new customers has been around for decades. Their roots can be traced to late 19th century America, where Coca Cola used redeemable coupons to encourage people to try their new product.
Particularly popular in difficult times discount coupons flourished through the Depression and WW2, before becoming a craze in the 60’s where coupon clipping from magazines was practically a family hobby. They peaked in a physical sense in 1992 when almost 8 billion were exchanged.
Given their long history, and close connection with the American psyche, it was only a matter of time before they emerged on the internet, flourishing again in the tough economic conditions surrounding the GFC – in 2009 3.5 billion were redeemed, ending 17 years of steady decline.
Taking the old model to new heights is Groupon and its myriad mimics. Groupon (its name is an amalgam of ‘group’ and ‘coupon’) has been described as the fastest growing company in the history of business. (You can get an idea of its growth from this video from Forbes.) When it was only 18 months old it was valued at $1.35 billion, and recently it turned down a $6 billion offer from Google.
As an aside, it is interesting to note that the only company to be valued at $1 billion faster was YouTube, ironically now part of Google. It was founded in 2005 and still hasn’t turned a profit. Groupon was into the black after just seven months.
Naturally success like that spawns wannabees at a rate that would embarrass a cane toad, with an estimated 400+ clones out there and the battle well and truly on in the US between Groupon and LivingSocial for top billing, in every sense of the word.
Like sharks drawn to blood in the water Facebook and Google are now circling. Facebook Deals is the latest spin-off from the facilitator of the world’s largest online population, while Google Offers will this week make its beta debut in Portland, Oregon with Floyds Coffee first off the rank.
Emily White, Facebook’s director for local, recently revealed that Facebook will initially focus on offers for things that are best done with friends, like concerts or events. In Australia that will pitch it directly against local hero my247.com.au which began life as an online Brisbane entertainment guide in 1999.
The Google Offers model is a little different to that of Groupon in that it doesn’t require a tipping point of people taking up the offer before it becomes valid. Google Offers is also likely to be the entry point for Google Wallet, a notion that has many of the world’s banks wondering just where this behemoth might be headed.
Okay, so that’s the skinny on coupons and online group buying deals. Now, how and why does it work…
The premise is based on a simple proven formula: establish a value for a product > offer a substantial discount to that value > engender a sense of urgency to claim that discount (limited time/only so many) = reel’em in. It’s geared for impulse buying, and aimed at people who are keen to get things for less.
Under the Groupon model, the business agrees to offer customers a product or service at a hugely discounted rate (at least 50% off) if a specified minimum number of sales are reached. Once that number of sales is reached, the deal becomes activated and all the customers that signed up for the deal are eligible to take part. The eligible customers are charged for the purchase, and receive an email for a printable voucher that can be used to redeem the deal with that particular business.
For delivering these customers, Groupon takes 50% of the money collected. Some group buyers vary the amount they take, some hold on to a percentage for a little while to allow for refunds. But they all do well out of it. The only people at risk are the businesses, especially if they haven’t done the math or prepared adequately.
Due to the viral nature of these limited time campaigns, a business can potentially see a month’s worth of sales in a 24 hour period. A restaurant can be booked out for weeks. But at a minimum 50% discount, and with 50% going to the promoter, the shop stands to make at best 25%. Is this enough to cover your costs?
There are three main reasons that I can see where you might use this tactic:
1. Cash Flow – generally the money flows to the business about 24 hours after the sale has closed. If you have offered a $200 deal for $100, and 100 people took up the offer then you have $5000 inbound. Of course, you may have been willing to open the deal up to many more. Just remember that you’ll have to pay the piper before long.
2. Advertising Value – appearing on these sites will certainly get your brand or business noticed, and you can definitely track the ROI from this. If your deal goes viral your company will be exposed to a whole new audience that you may not have been able to reach otherwise.
3. New Customers – giving away your product to attract new customers is an old practice. But what you do next may determine whether they become regular repeat customers, or remain flash in the pan visitors you never see again. Unless you heavily discount again. Preparation and performance will be vital to your long term success here.
It should be noted here that a high proportion of the people who use these coupons are price-sensitive shoppers. They are bargain buyers by nature, and as such are not likely to be naturally loyal customers that you can rely on for repeat business. Service and quality of product will never be put ahead of price for the majority of these people.
Sadly too, many will look very dimly on a poor experience if you try and cut corners to keep costs to a minimum. They won’t hesitate to voice their displeasure through social media if they wait for hours, or feel they have ‘ripped off’, turning what may have been a risky venture on the businesses’ part into a downward spiral as word of mouth turns potential customers away.
If you are thinking of going ahead with a group buying deal, then consider these points:
Calculate how much this is worth to your business – Be aware that you may only take 25% of what you might normally make on a sale. Calculate how many sales you need in order to make it worth your time. Don’t factor in your ability to up sell, or that many won’t redeem their coupons.
Set a limit to the number of coupons you’re willing to accept – It’s not unusual for popular collective buying sites like Groupon to generate thousands of coupon sales – if you don’t set a limit you could be in trouble.
Prepare for the coupon promotion – Set up a scheduling calendar if your business requires appointments to be made so you can immediately begin booking your new customers. Try not to have a day full of coupons – leave room for real customers to balance out the discount ones. You might also need to hire extra workers to handle the large influx of business and calls for appointments.
Get your people on the same page – make sure your staff are well-prepared. It’s important they know what the offer entails, and what it might exclude. Discount customers usually want to redeem as soon as possible – how they are dealt with by your staff will go a long way towards turning them into repeaters. If the experience is a negative, others will know about it.
Choose the promotional date carefully – If your business is seasonal in sales you’ll want to take that into consideration when choosing the date for your offering. Schedule it during those slow times when sales are expected to be down.
Gather data for use in future promotions – in my opinion this is possibly the best thing you can do to maximise your chances of turning these customers from faint prospects to loyal repeat customers. See if you can make it a condition of the deal that you get the person’s contact. Failing that, try and collect as much as possible at the point of sale or when the booking is being made – it could be so they can contacted if anything changes. Ask for them to leave a comment on your website – even a testimonial on the back of a napkin is better than nothing.
Most importantly though, treat it as part of your marketing campaign. Measure, test and measure again to see if group buying works for you. And if you have used one of these deals, I’d love to hear about it.
Online deals are here and they’re hot right now. Just don’t get dealt out of the game by offering what you can’t deliver.