Years ago while working for a staffing agency we discussed the value of offering discounts for our services. We decided that by offering discounts we would diminish the value of our service and find trouble down the road when it came time to offer that service at full price.
With sites like Groupon, LivingSocial, and others, consumers are offered a tremendous discount for products and services. As a consumer I love these. Just a couple days ago I purchased a $20 gift card at Barnes Noble for $10. There’s no doubt that was a win for me, but was it a win for their business? The website shows at this time 5,302 of those discounts have been purchased. That’s $53,020 instantly injected in their business within a few days. Is that good or bad?
The reason businesses offer discounts is to get people in the door, a challenge all businesses are constantly working on. But by getting people over that hurdle, another hurdle presents itself. Now that you’ve got them in the door, you have to convince them that the value of your product/service at full price is worth coming back. In other words, one hurdle leads to another.
With the discount for Barnes and Noble how many of those went to new and potential customers and how many went to customers that would have been in their store tomorrow spending full price? Did they gain $53,020 or did they lose that much?
Here’s some thoughts from people:
Consumer (oh, and wife)
“I was taught to go to the sale rack. I am always looking for the sale before I make my decision”
Director of Marketing and Communications of Pleszure Food Group
“All of these third party deal providers (Groupon, Living Social, Restaurant.com, etc.) take a very large cut, if not all of the initial “purchase” of the “coupon/gift certificate/deal”. Most consumers don’t realize this. It raises the price of everything in the long run. The myth of building business is the same as Free Gas giveaways. They pull people from great distances that never come back without another deal. Would rather build consumer loyalty based on a quality product.”
Nail Technician at Beauty Room Salon and Spa
“In my 20 years of working in this business couponers (or Grouponers) don’t usually return which is the whole point of offering these ridiculous deals. Hard core couponers get the awesome deal and move along to the next one.
The point of Groupon is to just get people to walk in the door. The business isn’t going to make money off of the offer, they need to make money off of repeat business. Groupon is just exposure. I get groupon alerts every morning. So far I have not purchased.
Director of Sales & Marketing, Skysoft, Inc
“While I respect corporate/brand strategies that put moratoriums on discounting or coupons at any time. For many businesses, in many industries, the fear barrier that a consumer has (to walk in the door or commit to purchase something for the first time) can often be overcome through this method. It’s also good for existing customer’s who’ve forgotten to go back recently and also, because of the present reality and fun of sharing with social media, it’s a great (and painfully easy) way for those former customers to help their friends as well as to be perceived as being in the know.”
Here’s my thoughts.
A unique product, service or experience shouldn’t have to demand discounts to draw people in if enough people have already experienced what you have to offer. There are also factors beyond products that come into play. They are:
Although not a 100% one way or another with everyone, most people will always go where people know their name and treat them like a good friend or rockstar. When people purchase things it’s because it makes them feel important and valued. If what I’m getting is good and It makes me feel that way, I will go back again and again. (these people will also tell their friends why they should go and bring them there)
Discounts are great for the consumer and to a point for the business (with new customers). Too many discounts though can overwhelm a service based industry by shortening the profit and increasing the time spent delivering it.
There are so many variables when offering discounts and that’s why you’ll never see them go away. We’re right now in the discount era because all businesses are fighting for your dollar, which overall is very little considering the tough economy.
Before offering a discount make sure you think about these things.
1. How many discounts can I handle before I go crazy or before the value of my service is depleted? (remember who is all getting a cut in the discount offer)
2. How do I plan on converting these people into repeat customers? (or, How do I show the customer what they’re getting is worth full price).
3. Do I really need to offer a discount, or am I taking the easy road?
I was inspired to write this blog when Dave Youngman, who I quoted above, posted this on his facebook status. I emailed Dave and asked him a few questions. Dave works for a restaurant group that I have frequented over the years while living in Michigan. They include the Rochester Mills Brewery in downtown Rochester as well as Mind Body & Spirits.
In my email to Dave I asked, “What do you think a business should do rather than offer 50% off?”
(from Dave) “We have always tried to provide our own incentives to get diners to return. Our Mug Club, for example, has grown to over 550 members. They get a deal on something we can control the cost of. They also become part of a community (if they want to). We also have a frequent diner card that rewards them for their patronage and we do offer coupons online, on Facebook and through email. The difference here is there is no middle man taking a cut.”
If the company can entice the customer to walk in the door with a coupon they have a potential to convert the one time customer to a repeat customer. The power is in the repeat business.
The purpose of any coupon is not to save the consumer money, it’s to clear inventory, get you to buy when you’re not necessarily ready or to get you to buy when you normally wouldn’t.
Repeat business is important for the last point, but problems occur when:
1. Your discount is on a service oriented business
2. When too many discounts are sold and you spend more time servicing the discounted clients rather than the full paying.
3. Not enough profit margin to stay alive
4. No strategy to turn them into full paying customers.
[…] Original article can be found online here. […]
Another great article. These sites are great for the consumer, but I have not seen many businesses make a profit from it. It almost reminds of the tradional MLM scam- where a few rare successes are highlighted and companies think they can echo the success. IMO it is only useful for a very select niche vertical.
Agreed and agreed. If people can get repeat business paying full price that’s good, but the way Groupon has taken off, I’m not sure if everyone buys into it’s marketing capability because of how much “they’ve” grown or how much their customers have.
The Groupon business model:
Sucks money out of the local economy and into the hands of a corporate (EG Groupon).
If the discount-deals company is be based in another country so the money is being taken out of your own economy.
many small businesses will end up paying less in tax because of the profits being eroded.
The big corporate businesses such as Groupon with have top-notch accounts and pay less revenue (proportionately) than small businesses of there will be less tax for the government coffers.
Large discounts are unlikely to produce customers that will return.
Potential for annoying your important existing customer base.
People will look for discounts as the cornerstone of their shopping habits – it destroys loyalty.
Businesses will be losing customers as their existing customers join the Groupon feeding-frenzy.
Local businesses will start competing with one-another through fire-sale prices.
People will ask for discounts even when none are on offer – it will become a de-facto standard method of shopping.
Groupon are already recruiting affiliates to shill for them – creating a sales force out of the bargain hunters.
All in all, it looks like a sure-fire way to kill off many types of small businesses.
A funny but serious take on Groupon etc.: