Groupon and other daily deal sites have created a frenzy in the business world as consumers scoop up big bargains and business owners try to determine if the steeply discounted coupon offers makes sense for their own business.
A recent study shows that while the short term profitability of the offers may be worthwhile for business owners, the long term growth of customers is just not there. About 55.5% of the businesses who offered a coupon made money. But, business owners and entrepreneurs hope that these offers will have consumers buying beyond the deal offered and/or will become repeat customers for the business. However, only about a third of coupon users end up spending beyond the deal value. And less than 20% end up returning for a full price purchase later.
Don’t compete on price
This all comes back to one of the most basic business rules: don’t compete on price. Your value and differentiation from your competitors should never be about positioning yourself as the low cost provider. Ideally, you should create such a reputation and brand appeal that you can actually charge more for your services.
According to this survey, close to 80 percent of deal users were new customers of the business. Which means an opportunity for the business owner to show a distinct brand identity and build an effective brand experience with the offer. But with so few people returning, it is clear that the buyers were just there for the low price—not an ideal prospect.
The cost of business?
Some businesses who offer steep discounts through Groupon or other sites such as Living Social figure that it’s more of a marketing expense and are OK if their deal is unprofitable. But it makes more sense to invest that money into an effective marketing and branding effort that would attract ideal clients rather than just the cheap ones.
My inbox is filled with offers everyday from both local and national businesses who are using these deals. In general, there are very few well-established, high-end brands represented. And while I’m usually one to support any sort of marketing effort that helps independent businesses, I see how getting involved with these deals can do more damage than benefit.
Coupons and discount sites are a means of advertising your product or service. But in a way you are suggesting that your normal customers have been overpaying by the 40-75% margin that you are now willing to discount. It’s like a one-two punch of poor pricing & marketing messages: 1) you are overpriced and 2) you are offering a cheap service.
According to Utpal Dholakia, associate professor of management at Rice University’s Jones Graduate School of Business, who completed the study:
This is a problem for businesses, because they’re not building their brand when they offer discounted prices for their products and services.
In summary: Groupon and daily deal sites can tarnish your brand image and attract cheap prospects rather than ideal clients.