"The Discount Double Talk"

Entry 1 
      
August 4, 2015

         I was sitting in a pub early one evening and I reluctantly entered in a brief conversation with a couple sitting next to me. A nice young couple, engaged and getting ready for their first time down the aisle.  They were both teachers in the same district, and looked full of hope and happiness. The pub is a business version of the “Tiny houses” you see people running to these days, maximizing the space utility of every square foot and minimizing the overall area. 

       There are a few tables that were behind me and out of view. Four men were sitting at the table of varying ages and cultural background.  I learned soon enough that that three worked  worked at a nearby Salon and the fourth was the owner. That’s the scene. The pub also has more outdoor seating on the well travelled sidewalk of a trendy city neighborhood.  Since it was summer, there were plenty of patrons outside enjoying the summer sun and the moving scenery. 


        The bartender friend of mine wanted a little input on a situation she was not happy about regarding a gift certificate she recently purchased from a small local massage place.  She was upset because their were limitations on the purchase that she didn’t notice (and were a little out of the ordinary). She was not getting very far with the owner as she tried to work out the problem. The gift certificate had a six month expiration date. That information was on a card that was inside the envelope she was given. The envelope was sealed, and she states that that information was not communicated at the time of purchase. That’s the issue at hand. 

She had been asking for a little consideration on the time limits and the owners were telling her there was nothing they could do. They eventually came to a reasonable settlement, but she still was not happy with the effort needed to get to that point. She posed the question for general input on gift certificates and time restraints to all of us. Typical pub talk. 

Everyone listened and offered some ideas, and it was all fairly innocuous. That is until someone brought up Groupon. And I swear it wasn’t me. But I will tell you that I cannot keep my mouth shut when that subject matter comes up.  I am well aware that many, many people use and love this ridiculous business, and that the owners and eventual stockholders may also have made a great deal of money on this idea. But I have a different opinion. Go figure.

The business model of this product is fairly simple.  Connect businesses willing to offer discounted prices on their goods and services with people willing to buy them. Goupon takes a cut of the buyers price, and returns the rest to the business. Most intermediary businesses charge a fee for a service or value added alteration.  Manufacturers combine parts to create a product. Retail provides a viewing and purchasing outlet in a regional and desired location.  More recent businesses, like Amazon, provide large scale and searchable opportunities to view and buy, without leaving your home or office. 

Groupon has created a massive website with regional specific businesses offering coupons for services and products.  The value has become their name recognition and a specific location for the consumer to find discounts.  Really doesn’t sound all that bad or hurtful.
 
The sales pitch from Groupon is simple. A business can reach new customers and bring back return business. When I asked for data on the retention rate of these “new” clients,  Groupon told me it is hard to quantify but other businesses like yours have been happy with the result.  Retention rate refers to how many of the customers that purchased and used your offer returned to your business to consume your products or service for the original value. In theory, that is the only value to the business. Retention of new customers and return of former ones that have gone missing. But really it’s retention. Giving away your product is a risk. The reward for the risk is return of a new customer willing to pay full price. 

In this three party model I see two winners. The customer and Groupon.  Since the risk is minimal for the two winners, the business is absorbing the excess and therefore there should be greater possible rewards.

The hard part is convincing the business to absorb this
risk and that it is a viable marketing strategy benefiting their sales and profits.  The easiest targets are startups and small businesses.  These are the places most susceptible to scams and poor business practices. In addition they are generally under financed and this opportunity to get access to new customers without a cash outlay through traditional marketing techniques is appealling.

There are stories in Groupon’s early days about businesses shutting down because no limits were placed on the total number of deals sold and Groupon benefited from the large numbers. When the business could not supply the volume of product at the lower rate, the results were destructive. This issue didn't last long because even Groupon realized that results that bad would kill their business. They started putting limits on the contracts when they were offered. The business could decide how many coupons would be offered, and for how long. 

  As Groupon fixed the bugs their email list and site visits grew large. There were plenty of people willing to take advantage of the deals.The problem from the risk takers side was that they were generally "value only" shoppers. Although they spend money, it is only when presented with a deal. If they liked the product or service, they would wait for another discount or deal to come around before purchasing. This group is harder to turn into full price customers and a business can end up expending much of their resources on non-profitable actions.  The promised market of new customers and retention was becoming smaller and smaller. 

Now let’s look at this from the perspective of the customer that is not just a bargain shopper. The consumer the business was sold on when they bought into this product. Potential new customers willing to try out your product or service with less risk. It provides an incentive for people to spend at your business and reduces risk in a potentially flooded and busy marketplace. 

As stated above, the big problem with this group of Groupon-ers was retention. The goal is that the consumer will be pleased with their purchase and come back without the benefit of the Groupon coupon and the business will retain the cusomter. Retention. I repeat this because all current marketing concepts tell you that repetition is the key to conditioning. The problem here is twofold. First, the retention rate is not available from Groupon. I’m not sure they could calculate the figure for each industry, and if they could, they certainly would not want the business to know that data. So, they are selling you on something that is not quantified. And if some financial person can’t quantify it, how can one know the value. 

My sense if that it’s low, really low. I will venture to guess less than 5%. And if you wonder why my sense should matter, it’s because there is no data to disprove it. If you doubt my prediction, ask yourself how often you (if you are a Groupon user) have purchased a discounted product or service from a new-to-you company, and then continued to use that business without additional incentives. By that I mean other Groupon discounts or any other deal. 

The second part of this problem is perceived value.  We are asking new customers to evaluate their experience with a distorted sense of value. When a business provides a product at a price point it is up to each customer to decide if the there is value.  This is not always completely objective. Different people in different situations with different needs all determine this at different times. 

Finding the sweet spot with a customer base willing and able to buy can be one of the hardest aspects of any business. The idea that the we have smart consumers and they will be able to adjust there sense of value based on the discount is not as strong as businesses are led to believe.  Think about the amount of money spent on repetitive advertising to “brainwash” customers of all ages. If this wasn’t working, the market would make a change in it’s approach. I think most have made purchases they are not particularly proud of, and those have probably been influenced by outside sources, with questionable benefits.  

My point here is that as consumers, we cannot always be trusted to make sense of the true value of each of our purchases, especially when outside forces are applied to alter that perception. Same goes for the Groupon idea. Distorting the inherent value for the individual through a discounted initial experience can have the exact opposite effect intended and pitched by the promoter. 

      Need a personal example? The one and only time I ever offered a coupon was in one of those books of deals. It was for some charitable organization, so I thought it was a good idea. We had very few people use the coupon, but I remember most that did. One woman in particular used to come in every other week with one of those coupons. How she got a hold of so many was a mystery. I could have just refused her after a while, but I wanted to see how far this would go, and there was an expiration date at the end of the year. After that, we never saw her again. 

  The customers Groupon provides are what we retailers call "discount sponges." Not that they are doing anything wrong by using the offers, but the intent of the program gets lost when the proclaimed benefits that bait participation by the buying business are false or limited. The winners here end up to be the Groupon company alone. If you want to suggest that the consumer is a winner as well, I would argue that the long term benefit is nonexistent. Not only will the consumer lose out on the true sense of value but continued participation by a business will result in changes that accommodate their usage. The business will raise prices to maintain margins and everyone will end up paying more for the same product, with the extra money going into the pockets of Groupon. All we have done is add another layer to the purchase.

The business theory that I would like to package this Groupon idea into is a simple one that I learned from a favorite professor in graduate school. It applies to small businesses in particular, but can apply to mid size places when confronted by a larger challenger. Never, ever, discount your product, EVER. Find the price point that properly allows for profit and volume at a  level of service you aspire to. If your price is too high there will be too few buyers. Too Low and you may be inundated with demand that can put pressure on quality and service. Discounting can alter the times and areas of demand and although it can help get rid of products that need to be moved, it can have the negative effect of moving demand to take advantage of these opportunities. 

 Larger competitors can afford to do battle on price, especially if it is only to put the smaller guy out of business. When you are confronted with a large competitor, compete on service and agility. It is easier to train a small staff to be better service providers. It is also easier to move quickly in directions the market dictates with a smaller facility. Those are the areas in which the small guy should do battle with the big corporate behemoth.

I am aware that asking people not to take advantage of discounts and deals is a tough sell, not to mention pissing off the company’s salespeople. My opinion of the negative impact of Groupon may only to be accepted among businesses.  And this is exactly why I feel compelled to advocate against Groupon. There are too many behaviors in our current economy that are slowly spiraling our macroeconomic strength into a version of Dante’s Inferno. But if I can sway those business decision makers teetering on the edge of participation, that will be a good start. For the consumer, if you have always wanted to try a place, do it at the regularly offered price first. If you find value in the offerings, consider it a reward if you can take advantage of a discount they offer.

Remember the guys from the Salon at the start of this? When the name Groupon came up, they all moaned with great disgust, followed by a “Yawp” of anger (thanks Walt).The input I have received from service providers and other buiness owners mimics that response. There are a variety of reasons for this distaste, but that is for another day.

This topic is very representative of what I hope to provide in this section of my blog/website. I hope it will be of interest to anyone who takes the time to read through my musings. I will attempt to tie my rants into a hypothesis or theory currently in practice. There will certainly be those who disagree and others who might proclaim my thoughts derisive. So be it.  Running my mouth and expressing crazy ideas has become an integral part of my personality. A willingness to listen to counter points is a strength I am continually working to improve. But on some issues all the data has been gathered, and my thoughts have settled. This is one of those issues. 


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