Getting a Grip on Groupon
To judge how hot the “social coupon” space is now, try this unscientific experiment. Look up an online article on one of the category leaders—Say, Groupon or LivingSocial.com —and see how many new start-up social coupon sites are link-spammed in the comments section. (My personal best was mentions of seven other sites, some of which won’t launch until January 2011.)
The social couponing phenomenon has hit, and hard. But what are best practices in the space, and what potential does it hold for marketers?
In some ways, the issues here are the same as for any program distributing coupons through FSIs, the Web or mobile. Like most standard coupons, social couponing sites are usually geo-specific; users sign up to get email and visit sites tailored to their local market. They’re a vehicle for driving traffic into specific local merchants, often small- to mid-sized businesses.
But the deals in these social coupon offers are usually much larger than any rebate offered in a paper or Web coupon: rarely less than 30% off a list price, and often reduced as much as 50% to 60% to draw attention. Those deals get spotlighted on the local site as a “Deal of the Day”, and are also contained in email alerts for those members who opt in to receive them.
And here’s the biggest difference: Users who want to take advantage of these deals pay for them first and then use them. In that way, they’re as much like gift cards as coupons, representing upfront revenue that the marketer usually splits with the social couponing platform.
As for the social component, that can vary by platform. Some, such as Groupon, emphasize the crowd-power element by setting buy-in levels. Once a specified number of members sign up to buy the deal—a number that can be set by the merchant–the deal “tips”, that is, goes live, and the subscribers are charged.
That’s the classic model made popular by Groupon, the elder statesman of this crowd. (After all, it evolved in November 2008 out of ThePoint.com, a platform built to let activists drum up online support for their causes.)
Other platforms integrate social in terms of viral spread rather than raw crowd power. For example, users who buy a deal at LivingSocial get their deal for free if three of their Facebook friends then buy the same deal. And most of the platforms let users login through Facebook, giving them the option to put their deals up on their walls and share them through news feeds.
[sh]How to Deal
Several factors converge to create a lot of marketer uncertainty about social coupons. Apart from the rapid proliferation of platforms, these deals by definition appeal most to small-to-mid-sized local businesses, many of whom may not have deep experience with online price promotions. Combine that inexperience with the occasionally astounding reach of the Web, and it’s not difficult to find stories of merchants who made deep cuts in their margins only to find the deal had ten or twenty times the takeup they expected.
Other issues can also make a deal go bad. A Rice University study of 150 businesses that ran Groupon promotions from June 2009 to June 2010 found that about 32% of the merchants surveyed said their efforts did not turn a profit. “Promotions are supposed to drive new customers into the store and make them loyal,” said Utpal Dholakia, study author and associate professor at the school’s Jesse Jones Graduate Business School. “Both of these aims were significantly higher for businesses reporting profitable Groupon promotions.” In other words, merchants whose coupon users spent less than the face value of the coupon, or who failed to return and buy again at full price, felt the promotions were net losses.
Dholakia also found that only 12% of the merchants surveyed had placed an upper cap on the number of coupons available—so that bad offers had the chance to go very bad.
Finally, Dholakia’s survey identified a surprising factor at work in determining success or failure of a social-coupon promotion: employee satisfaction. “Indications are that a large number of Groupon users don’t tip on the full amount of the purchase, but on the discounted amount,” Dholakia says. “If employee’s tips are a third or a quarter of what they should be getting, they won’t be happy.” And the customer experience will be less than ideal.
Merchants can also set themselves up for failure by overestimating how much new business they can take on. Groupon, LivingSocial and EverSave all claim to perform due diligence to make sure their advertisers have the capacity to follow through on their promises. Groupon reportedly only accepts one in eight would-be ads and has a waiting list of 35,000 marketers.
Lately, those names have included some big national chains, indicating that big brands want in on the social-coupon action. In August Groupon’s first nationwide promotion offered $50 in Gap merchandise for $25, and 445,000 shoppers took them up on it, creating $11 million in sales.
Of course, that $11 million would normally have been $22 million, and Groupon took an unspecified share of the sales. But The Gap probably benefited from increasing store traffic at a crucial shopping time. “They purposely timed the offer to back-to-school shoppers”, says Julie Mossler, consumer marketing manager for Groupon. “And the expiration date was November, so that motivated people to come in and use it right away.”
Besides, who only spends $25 at The Gap?
The prospects for big-name, systemwide discounts are still up in the air at Groupon and others, however. In November Oprah Winfrey’s final “Favorite Things” holiday show mentioned a $10 coupon for a non-profit contribution by Groupon, and that boost—timed with a nationwide offer for $50 in apparel from the Nordstrom Rack outlet for $25, caused intermittent slowdowns in the Groupon site—a problem it had encountered with the Gap offer.
