Do group discounting deals short change real world businesses?

By: Jack Winston

“Group discounting” and “social commerce” based services have received mixed reviews over the past year.  While it is clear that these marketing tactics can drive huge surges in foot traffic to real world businesses,  the Groupon phenomemon has started to illustrate its limitations.

US Group Buying/Daily Deal Market
Average Reported Discount per Offer
Source: Local Offer Network

For anyone not familiar, Groupon and other group discounting companies like LivingSocial, RueLaLa and BuyWithMe, work with businesses to promote deep discounts that only activate once a critical mass of people have signed up.  Customers pay Groupon up front, who takes a piece and passes the rest on to the business. Groupon outlines their pitch to businesses on their website.  The businesses are encouraged to offer extremely deep discounts, retaining only razor-thin margins after Groupon takes their cut.  A recent report from the Local Offer Network profiled the typical discounts used for different industries, noting an average discount of 53% in 2010.

The primary reason to invest in a group discounting campaign is to quickly drive an influx of new customers.  The effectiveness of these programs for driving new business is proven – the ability to profit from them is still at question.   An interesting research paper from Rice University, (A Startup’s Experience with Running a Groupon Promotion, May 2001) compares the incremental revenue and profit driven by a Groupon deal for one business.  Interestingly, despite a huge surge in revenue, the business did not realize an increase in profits over their baseline until the deal ended and they recognized the profit from the non-redeemed deals – nearly 30% of all deals purchased.  Justifying marketing spend on a campaign that relies on non-redemption seems a bit counterproductive for a real-world business looking to acquire and retain new customers. 

A recent Hubspot blog entry notes the considerations a business should make in deciding to launch a group discounting campaign.  They emphasize the need for businesses to prepare for the change in customer traffic, ensuring they can both retain existing customers and encourage their newly acquired customers to return and pay full price. 

It is useful to consider how group discounting programs help businesses satisfy three basic objectives of marketing promotions:

1) Attracting new customers:  Without a doubt, Groupon drives a “surge” in new customer traffic.

2) Retaining customers and building loyalty: Since companies cannot afford to always be running Groupon-type specials, these programs are not a tool for customer retention.  Companies using Groupon for new customer acquisition need to have retention programs, including promotions geared toward rewarding loyalty.  Encouraging participation in location based services are a good way to establish a means to measure retention and a platform for loyalty rewards. 

3) Upsell customers on a wider range of higher value products:  It is particularly challenging to upsell a customer that has been acquired using an abnormally steep discount like those offered by group discounters.  Getting a customer to increase the amount of money they spend happens when a business builds a long term bond with their customers, adapts their product offerings to better match customer needs, and educates their customers on the benefits of their products over their competitors.  Getting customers to interact via social media tools like Facebook are an ideal way to create the relationships that enable businesses to upsell their customers on a wider range of higher value products. 

Groupon and other group discounting programs certainly have their place, but are just one of the many social media enabled tools available to the modern marketer.  With an increasing portion of consumers using smart phones to connect with their friends and community while on the go, there are new opportunities for businesses looking to retain and upsell their customer base through the use of mobile social networking and location based services.  Increasing participation in on-location social media is a focus of Bozuko and we are really looking forward to telling you more about what we can do for your business.

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