In my opinion, one of the most fascinating business case studies of the past couple years has been Groupon and the Daily Deals industry. From the highs, to lows, to the who knows, I have seen countless examples of praise and criticism.
Throughout all of the press, one thing that has always puzzled me is how businesses that use daily deals and companies like Groupon portray a c(gr)oupon’s business model. Overwhelmingly, it seems that the face value benefit of a coupon (lower prices for huge audience = more traffic = higher revenue) is made clear, but that the strategy behind a coupon is glossed over (even by basic information pieces).
To put this idea into context, think about the economic ramifications of coupons from this face value perspective:
Using a Coupon: Good Idea or Bad Idea?
1) Coupon discount: 50% off
- Retail price: $10
- COGS: $6
- Coupon Impact: +50% more inventory moved (directly related to coupon discount)
- Quantity Originally Sold: 50
- W/out Coupon: 50*(10-6) = $200 profit
- W/ Coupon: 75*(5-6) = -$75 loss
- Decision: Bad Idea!
2) Coupon discount: 20% off
- Price: $10
- COGS: $6
- Coupon Impact: +20%
- Original Quantity: 50
- W/out Coupon: 50*(10-6) = $200 profit
- W/ coupon: 60*(10-8) = $120 profit
- Decision: Bad Idea!
Assuming we keep price, COGS, discount percentages and quantity as given, the only way we’re going to make any money is using a 20% coupon that results in a coupon impact of +100%:
3) Coupon discount: 20% off
- Price: $10
- COGS: $6
- Coupon Impact: +100%
- Original Quantity: 50
- W/out Coupon: 50*(10-6) = $200 profit
- W/ coupon: 100*(10-8) = $200 profit
- Decision: Good Idea!
Of course it’s impossible to decide on the information given whether this 100% bump is likely, which is why the better question is why on earth a business would run a coupon campaign, especially in the case of the coupon that results in a loss (a practice not completely absent from business terminology).
The answer is customer lifetime value. Customers purchasing with a coupon offer three additional value creation opportunities beyond the face value benefit of walking in the door:
- Purchase something else
- Love the experience so much that they return
- Love the experience so much that they refer friends
Which brings us to the the heart of my puzzlement about Groupon (and clones) and businesses running daily deals promotions. To me, “you should do a groupon to drive tons of customers in one day” makes zero sense as a marketing plan. What does make sense is “do a groupon in order to gain 100K new subscribers for your continued marketing outreach.” Succinctly, there should not be a mismatch between the value proposition and business model of a daily deals offering/c(gr)oupon.
And for me, this is where mobile and database marketing come into play. Mobile and database marketing are the perfect tools for marketing and re-marketing to tech savvy consumers who come to new businesses for the first time. By opting these people in to a communication database for future outreach, rather than relying on chance to drive return visits, the potential for coupon success seems like it would increase considerably.
And call me crazy, but a Groupon clone that wants to distinguish itself from the rest of the pack could offer solutions for these other coupon revenue streams. For example, a daily deals business could, given its size compared to small businesses, use its own business model to purchase and resell digital marketing software at a discount. How’s that for good press?
More than anything, I encourage any businesses running coupon campaigns to not just bank on one shot of interacting with the mass amounts of customers they get with a groupon-type promotion. Take proactive steps to ensure those folks purchase something else, come back or bring friends (hopefully all of the above!).