The dark side of the Daily Deals phenomenon manifests in three main problems vendors have with Groupon:
- Groupon can overwhelm small merchants when it sells too many coupons. How can a Chicago nail salon accommodate 5,100 new coupon holders?
- Groupon depresses profit margins. Obviously deep discount coupons are marketing loss leaders for local retailers. On a corporate scale, it’s quite possible that the big Groupon deals like the nationwide $25 for $50 worth of Gap gear might significantly hit Gap’s earnings. Never mind that the loss might be a wash with lower marketing costs, in the end the consumer perception of retail prices dropped 50%.
- Retailers bemoan the rise of Groupon and the deal sites because they inculcate a culture of “don’t buy retail”. Everything can be negotiated. Brands become diluted as they become perceived as deep discounters and new customers tend to be non-loyal price shoppers.
Retailers have no solution to the new “don’t buy retail” culture because the cat is out of the bag. Although certain types of business can maintain a service proposition – medical, legal, professional – that can’t be commoditized, retailers are now in face to face conflict with their most cherished mantra- ” never compete on price”.
The combination of the recession’s low consumer demand and depressed retail margins will force retailers to change the coupon game in the following ways:
- The budget for couponing will grow at the expense of other marketing and advertising channels. Coupons are performance based and their instant campaign feedback is easier to assess and more accountable than figuring out the ROI and CPM for a banner ad campaign.
- Many local retailers will stop going with massive Groupon campaigns in favor of more controlled couponing campaigns by local coupon systems. This will allow the retailer to test various campaign ideas without the risk of oversell. The key factor for the retailer is in assessing how a service performs in delivering coupons to their target local audience, and a local service may be more efficient and less costly.
- Coupon campaigns will look to scale. The big national campaigns, and even regional campaigns are far more profitable and easier to manage for Groupon. Brand retailers like the Gap will be able to negotiate these attractive deals and play Groupon, LivingSocial and other systems off each other.
- Retailers will demand lower pricing than the standard 40-50% of coupon face value that Groupon charges. From a retailer point of view, a coupon delivered to the same local customer with a couponing service that charges a 30% fee is better than one that charges 50%. Although the service may have smaller coupon distribution, they can run deals more often.
- Discounted offers must be validated with good crowdsourced reputation, or they will be perceived suspiciously as a cry for new business. Retailers will understand that maintaining coupon campaigns will require consistently good Yelp reviews because buying coupons is a site unseen decision.
UPDATE: 9/16/10: This article is intended to address some of the criticism that accompanies the Daily Deals movement that Groupon sparked. Readers of this blog would know that I support this movement. It is revolutionizing local marketing by creating a performance based metric for advertisers. I believe Groupon is the front runner in developing a real time localized transactional system that will eventually cover hotel rooms, concert tickets and airplane seats by addressing the need for selling off perishable goods and services at the last minute.
That said, based on comment on my Facebook page, I do think the Groupon / Gap deal was a huge success because it put Groupon on the map, and tipped consumer sentiment to the obvious value proposition of online coupon advertising. Yes, the Daily Deals movement does depress retail margins, but it’s inevitable. Intermediation is what the Internet does best.