Fast Company recently ran an article titled The Dark Side of Web-Based Savings Schemes. The article includes a description of the experiences of two companies:
- The Gap. According to the article, “Groupon’s first big national promotional partner was Gap, with a seemingly amazing sounding offer of a $50 gift certificate for a knock-down price of $25.”
- East Coast Aero Club. In an attempt to lure people to take helicopter flying lessons, the firm offered 70% off of a first lesson for just $69 through Groupon. In the first five hours of the offer, 2,600 lessons were sold, which, apparently was “the very limit of what the company could stand.” (I, alas, responded too slowly and was shut out).
The article concludes that:
“Many promotional incentives through Groupon, its competitor peers, or other systems like Foursquare’s location-based game are run as loss-leaders in the hope of enticing new customers who may then deliver repeat business. But in in era of widespread Net use, when a simple promotional message can run round the country in a matter of hours, the risks for companies using Web coupons is potentially much much larger. Get your popularity-to-loss-leading ratio wrong, and you’ll attract thousands of unwanted new customers.”
This, according to Fast Company, is the “dark side” of web-based savings schemes.
From The Gap’s perspective, there was no downside here. How Fast Company concludes that a $50 gift certificate for $25 is a “seemingly amazing sounding offer” is beyond me. The Groupon deal: 1) generated immediate revenue (the price of the coupon), and 2) produced a set of highly motivated customers with a vested interest in reaping the benefit of that certificate.
And I’m betting that The Gap didn’t pick up any “unwanted new customers” from this promotion, nor was it trying to. My bet is that the firm saw Groupon has a far more effective way of distributing coupons to its target market than other distribution channels.
The Gap might have an email list, but an email from The Gap competes with emails that consumers get from lots of firms they do business with. Too much noise in that channel. FSIs in the Sunday paper? Direct mail? Sure, those were options, but at a lot higher cost (most likely) than through Groupon.
According to Mashable.com, 441,000 coupons — oops, I mean groupons — were sold. The offer might have crashed Groupon’s servers, but that’s Groupon’s problem, not The Gap’s. And it’s certainly not a systemic problem with web-based savings “schemes”.
While The Gap’s use of Groupon was to effectively distribute a deal to customers, East Coast Aero’s business objective was very different. ECA needed to create awareness for their brand (I live in their area and had no idea they existed). Utilizing Groupon to effectively reach prospects in their market was likely a very effective tactic from a cost and reach perspective.
It’s certainly possible that ECA got the “popularity-to-loss-leading ratio” wrong. But that’s not a dark side of web-based savings tactics (sorry, but I find the word “scheme” to be derogatory). What ECA did wrong was mis-structuring the offer.
More than 2,500 people will now be showing up at ECA’s door in the next few months looking to cash in on their lesson. My bet is that very few of them have any plans on continuing lessons. (I was looking to get in on the deal because I thought it would make a cool Mother’s Day present for my wife).
Did ECA think about the logistics of scheduling 2,600 lessons over the next 6 to 12 months? Does it have a plan for converting first-time flyers into long-term customers? I don’t know. If it doesn’t, then that’s ECA’s problem. But it’s not a “dark side” of web-based savings scheme.
Sorry, Fast Company, but the “risks” of web-based coupons that you’ve identified are simply not there.
If I were to take sides here, I have to side with FC analysis. From a customer experience and long term profit POV, there is a real danger from such campaigns. Many of the companies including the helecopter company and Red Velvet Cupcakes are ill-prepared to handle the onslaught of responses. The down stream impact? Let’s take Red Velvet’s case. Short term revenue motive leads to overwhelming response from, what is most likely a larger percent of one-time customers leads to not enough production capacity to handle demand leads to inability to deliver leads to disappointed new customers, leads to strain on support and service functions leads to alienated long-time profitable customers leads to “redvelvetsux.com”
I think the idea is directionally correct. I think many of groupon’s customers, especially SMBs, are not doing the required preparation and planning to handle the response rate – getting lured in by the sweet scent of short term revenue, while not accounting for the long-term offensive odor that gets into the sofa fabric of the customer experience
I want thousands of new customers. (It’s the worst recession in 80 years for cryin out loud.)
Barry: I see where you’re coming from here, but here’s the crux of my disagreement w/ FC:
The article is basically saying that the risk of using Web coupons is the potential to attract thousands of unwanted new customers.
The “problem” doesn’t lie w/ the marketing method (web-based coupon). The problem lies with the marketer’s ineffective use of the method.
A car doesn’t drive itself off a cliff. A person does. Don’t blame the car. (Unless it’s a Toyota, of course).
Had FC positioned its article as “factors to consider” when deploying web-based coupons, I probably wouldn’t have reacted so negatively. But nooooo… FC had to take the sensationalized approach and claim there was a “dark side” to web-based savings “schemes”.
I agree, it really is up to the advertiser to figure out their strategy going in. You have to expect that your offer will explode if it’s a great offer.
I get the Groupon e-mails everyday localized for Vancouver and a few have caught my attention – haven’t bought yet.
However, I almost bought one a few weeks ago. I received a Groupon for a professional family portrait sitting from what looked like a great photographer in Vancouver. Regular $400 on for $59. I monitored the offer for the full time that it was open and watched as a one-person photo studio sold over 1,500 on-location photo shoots that included a pretty robust print package. From the outside, it looked this poor sap sold more than a year’s worth of his labor at a deeply discounted rate. But maybe he makes all of his money on up selling on prints, who knows?
Point is, Groupon is becoming hugely popular and if you decide to offer a Groupon, you better be prepared to fulfill the orders!
In that regard, I agree. Its not a failure or defect in the program. Its not only marketers, its the failure of all functions of the client to prepare for the success of the campaign.
Another fine post, Master Shevlin. I concur with you on The GAP’s offer, which is good but not amazing.
It’s essentially a 50% off sale — which they’ve done from time to time. (Indeed, their clearance discounts are often steeper.) The difference is that the discount applies only to the first $50 someone spends. The GAP hopes customers will come spend much more than $50.
Also, in this case, customers must commit to buying in advance. That’s some sweet cash flow, and there’s a chance that not all the gift certificates will be fully redeemed because of breakage.
Finally, the discount can be chalked up as a marketing expense. Rather than spend the money on a TV ad, they spent it on a Groupon, which is trackable and generates lots of free publicity, like this blog post.
Smart advertising? Yes. Amazing? Not so much.
Freddy: What I don’t get about FC’s analysis, is why they try to paint Gap’s offer in a negative light. I mean, why say “by signing up for the scheme”? Scheme has a negative connotation. And when the article says “seemingly amazing”, it seems to me that FC is implying that Gap was trying to pull a fast one over on people with something that sounded better than it really is.
I’ve read FC for a long time, and have enjoyed doing so. But they are the People magazine of business. Analysis is not their game; making business news fun to read is what they excel at.
Isn’t there quotas placed on Groupons?
Nyla: Yes. The sponsor determines the quota, not Groupon. And that’s just one more reason why I think the article unfairly characterized web-based coupons. You’re not going to get too many “unwanted” customers if you set your quota appropriately.
Interestingly, I went to the GAP’s website the same day of the Groupon and there was a huge discount offered (35-50%? I can’t remember exactly) Pretty much the same offer as the Groupon. I concur with Freddy that, most often, people spend a lot more than what their groupon allows. I have every single time I’ve gotten a groupon…..usually for restaurants.
It seems to me that new channels always get the most criticism. All marketing carries risk. You could spend thousands of dollars (or millions) on a TV spot, radio spot, or magazine ad, and have it flop. The risk any company takes is also directly related to the risk of inaction. Many industries still haven’t escaped the recession, and if the Gap is struggling, they may have to take risks. That’s the nature of business.
Obviously, if The Gap’s stores were full of shoppers begging to pay full price, they wouldn’t make this move. Now, with Groupon, they have an option that wasn’t there before. Is it ideal (i.e. do they WANT to give away half their revenue)? Of course not, but that’s not the choice at hand. The choice is live with empty stores or find ways to incent new customers.
The other issue I see being ignored is what companies have always known about gift cards – some percentage of people are going to buy that Groupon and never end up using it. That’s pure profit for Groupon and The Gap, and it offsets the loss on the cashed-in coupon. Of course, retailers aren’t going to rush to give out those numbers, but they have to be factored in.
@Mary: Thanks for commenting. What you saw on Gap’s website is evidence that there was some coordinating thinking going on over there, and that someone wasn’t acting off-script.
@DrPete: Great point about the criticism of new channels. To your point, why doesn’t Fast Company write about the dark side of TV advertising: Specifically, that you might a gazillion dollars to produce and run a TV ad, that no one will see it, and instead of having a lot of “unwanted” customers, you’ll have NO customers.
I will say this, though: While breakage is pure profit, I’d bet that the Gap (and most other retailers) would rather have a customer redeem the gift card or coupon. They’re not going to build a long-term relationship with someone who isn’t coming in to the store, or not buying.
I’ve been an avid reader of FC for years, so this violent agreement with you, Ron, is not a slam on them. You are absolutely right when you say that Groupon is neither “dark” nor nefarious.
At my last job, it was my responsibility to look for digital marketing solutions for local small-to-medium businesses. What’s missing in both the FC article and most of the “future of digital marketing” pieces right now is the perspective of the business owner. While they might not be prepared for the response of ad tactics like this, they love the reach and guaranteed revenue aspects of them.
I’ve taken advantage of several great local Groupons, an every time I redeem I ask the business owner, “How is it working for you? Do you like Groupon?” The answer is always overwhelmingly positive. “I love it!” one salon owner told me, “It’s like they’re paying ME to advertise. I’m KNOW I’m going to get response and business from it. Before Groupon, I’d pay a local ad agency like $5,000 and not know what I’d get from it.”
While Groupon and some of the “deal of the day” websites still have user experience issues to work out, both with the interface and later customer redemption experiences; the model WORKS. It’s working because it’s a vehicle that resonates with the core audience, is transparent, low-risk from an ROI standpoint, and hyper-local.
As you indicated, the risks lie with educating the business owner about exposure and setting limits within the boundaries of inventory. Great article.
@April: Thanks. You’re really pointing out a key thing here (further disproving the “dark side” conspiracy): The immediacy and attribution accuracy of the Groupon approach. It’s possible that the salon owner might not get a great response from Groupon, but s/he will know pretty damn quickly whether or not it worked, and will know which customers it helped bring in.
ECAC was mentioned in articles in Fast Company and Forbes all for having a deal sell too well. What’s there to complain about? Even the $400,000+ people are “saving” couldn’t have bought that many eyeballs.
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