Groupon, Living Social, Google Offers: Brilliant Marketing or Price Erosion?

» Posted by on Jun 4, 2012 in Marketing | 0 comments

Groupon, Living Social, Google Offers: Brilliant Marketing or Price Erosion?

OK, I admit it. Frugal, good with money, penny-pinching, whatever you call it, I don’t like to spend extra money on things that I want or need. I don’t think that I am cheap (who does?) I understand that the $20 cashmere sweater that you buy on the holiday sale at Walmart is not the same sweater that is offered at Brooks Brothers for $200. They are both sweaters, and they are both made from cashmere, but that is where the comparison ends.

What I have a problem with is paying more for for the same thing. Buying the Brooks Brothers sweater for $200 and then seeing it on sale for $100 (after I bought it) drives me crazy.

 I don’t think that I am alone.

 Price Erosion on Daily Deal Sites

 That is where the sites such as Groupon, Living Social, and Google Offers comes in. I subscribe to each of them, and they do a good job of catching my attention (and frequently my dollars) with a mix of local events, on-line goods or services, and hard goods.

 I like them when they save me money. I hate them when they make me feel stupid for having “overpaid” for the product or service that they are offering at a deep discount.

 Here’s an example: I am a Boston College Football season ticket holder. I have been for a long time, and while I don’t go to all of the games, every year I re-up for season tickets at full price.

 Three months into last season, BC tickets were listed on Groupon for sale at one half the face value of the ticket. And I (and maybe my wife) felt pretty stupid having paid full price. In fairness, they are not really the same thing: my tickets are in a better location.

 Tell that to my wife.

 In today’s Groupon, “The Economist” is available for 50% of the standard price for a one year subscription. I love the “The Economist,” and if you have never read it you may want to pick up a copy. Really first rate, but what would you think if you already had a subscription and had paid twice as much as I am going to? Maybe not so happy.

 More to the point, does seeing these daily deals make me as a consumer less likely to buy almost anything at full retail? After all, if I wait long enough, there is a pretty good chance that it will show up at a significantly discounted rate on one of these sites.

 Yes, it does. And that’s not good news for the retailers who use them to market.

 Should Your Business Market with Daily Deal Sites?

 At Spalding Barker, in our jobs of helping clients meeting their business goals we are sometimes asked if we recommend using daily deal sites for marketing. What do we say?

 It depends.

 In a perfect world you would use these sites to market only to non-customers, thus capturing new customers that you would not otherwise get. The concept of a “loss leader” is familiar to most businesses; and micro-economics tells us that that makes sense to sell at a discounted rate, as long as you were covering all of your variable costs, even if you are not covering your fixed costs. You are better off selling a discounted good for 50% than having an empty seat, or unsold product.

 But here’s where retailers need to be careful. If the client who buys is not your client, but a Groupon, Living Social, or Google Offers client, you may find that they switch to other substitute goods (maybe the next baseball game on sale rather than a football game.) This is still OK; remember we were assuming that you were not going to get them as a client anyway, and your goods or services may expire (better to get $1. for a ticket than an empty seat.) But if your current base of clients sees that you are offering the same service to new clients for less than you were offering it to them (as good clients) that is a decided negative, and you may find it harder to command retail price in future.

 Some industries are better at this than other. Travel services industries such as airlines are masters at last minute discounts, as are hotel chains. But when retailers or other premium service providers consider using these daily deal outlets, they should determine very carefully if this type of marketing will increase the bottom line or erode prices permanently.

 To learn more about Spalding Barker Strategies, visit our homepage or Contact Us to see how we can help your business.

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