A few weeks ago, I wrote a post about Groupon, based on a nice piece of research by Utpal M. Dholakia. I did that because a lot of clients ask us about Groupon (and LivingSocial and Restaurants.com and others) and — let’s face it — there’s just no avoiding it. To my mind, Groupon and the others are nothing more than a new generation of ValPac and Valassis, which were themselves a new generation of targeted promotional media in their day. People will always love a deal. Retailers and restaurateurs will always want warm bodies in their establishments. Entrepreneurs will always be finding new ways to put those facts together for their own profit. It’s up to marketers to figure out what works for them.
Now a new paper has been published by the Harvard Business Review that furthers our knowledge of how Groupon and other deep discount vouchers work in the marketplace. In it, the authors develop a model to explore how consumer demographics and offer details interact to shape the value of voucher discounting. Here are a couple main findings and how they affect restaurants interested in Grouponing.
First, “discount vouchers can facilitate price discrimination, allowing merchants to offer discounts to customers who value the merchant’s product less than ordinary customers do.” In other words, Groupon and others encourage trial by those who simply won’t pay your prices. That’s a good thing if their experience is so good they can establish a strong connection between your price and their pleasure and/or your margins are high enough to scrape adequate profit from the voucher users and/or the Grouponers who show up aren’t already customers. That’s a lot of ifs, ands and ors.
Second, “discount vouchers can benefit merchants through advertising, by informing consumers of a merchant’s existence. For these advertising effects to be important, a merchant must begin with sufficiently low recognition among prospective consumers.” Obviously, Groupon and others offer an opportunity to introduce yourself (or reintroduce yourself) to a potential customer. But it comes at a cost. Groupon’s seductive business model — no money down, proceeds from Groupon sales split 50/50 with the merchant — can mask the true cost in lost margin. Giving that margin away to current customers just doesn’t make sense. So if you’re already well-known, but just want to generate a little more sales volume, find a different answer.
So again, the question must be asked: to Groupon or not to Groupon? The answer is yes, if:
- You need a big awareness bump at any cost. New restaurants or restaurants that can’t seem to get over the hump may need a jump start. Groupon’s ability to reach many people and induce trial can be very powerful. But it ain’t free.
- Your margins are high enough to take a battering. For most restaurants this probably won’t apply. But some have begun raising prices to allow space for deep discount vouchers. In the short term this can look attractive. But it’s no way to build a brand.
Above all, if you do choose to go Groupon, make sure your system for collecting customer data is in place. If you don’t take responsibility for bringing the Grouponers back, you may never see them again.