Amazon does it, L’Oreal does it, American Apparel and Barnes & Noble do it.  So do Nordstrom, Gap, Old Navy, W Hotels, Fairmont Hotels and countless big and small brands and businesses around the globe.  Should you?

Should you offer group-buy deals to your customers?

This is the question that Rags Srinivasan (@pricingright) addresses in an insightful eBook ‘To Group Coupon or Not‘ (Kindle version).  And the answer, to cut a long story short, is probably not. Like any other form of deep discounting, the chances are that group-buy price promotions will hurt your brand rather than help it.

Going beyond the hype and spin surrounding group-buy, the short 65 page guide provides a clear, concise and candid account of the realities – particularly the risks – branding and business – involved with offering group-buy deals.  It takes you through, step-by-step, the cost-benefit analysis for deciding whether group-buy is right for you, offers real-world examples, and provides a useful Group-Buy ROI calculator in the form of a downloadable MS Excel spreadsheet.

Although intended primarily as a guide for small businesses, big brands will find it useful too – refreshingly free of marketing jargon, and full of good business sense.  For those in the group-buy industry – especially group-buy platforms (Google Offers, Facebook Deals, Groupon, LivingSocial et al), To Group Coupon or Not should be required reading; it includes one of the most articulate attacks on the branding and business case for group-buy we’ve read.  Deal with the issues raised in this book, and you will have a cast-iron value proposition.

The book is definitively worth a read; but for the time-pressed, here’s our speed summary and thoughts from a brand perspective.

Our main takeout is that although To Group Coupon or Not argues that group-buy can often be toxic for brands and businesses, there are occasions when it makes sense – specifically when the total campaign costs do not exceed marginal costs (group-buy events are ideally suited to digital/high margin products, or for liquidating excess inventory).  And whilst it is true that the current group-buy model is tipped in the favour of customers and consumers rather than businesses and brands (Facebook Deals, Google Offers, Groupon and LivingSocial as the loan-sharks of the marketing promotions industry), there is an opportunity to innovate – and use group-buy not as a short-term price promotion attracting promotional junkies, but long-term customer loyalty – offering your best and most loyal customer group-buy exclusives as part of a loyalty program.

Speed Summary: To Group Coupon Or Not (2011) by Rags Srinivasan ($9.99)

How group-buying works: Brands and businesses offer group-discounts for customers who club together and buy in bulk.  Typically, the process is managed by third-party ‘market-maker’, a group-buy intermediary such as Facebook, Google, Groupon or LivingSocial that promotes and sells a guaranteed minimum of discount coupons (typically offering 50%+ off) online that can be redeemed in-store or online.  These group-buy intermediaries take a commission on coupon sales (typically up to 50%).

What’s in it for the customer?

  • Favourite brands at great prices
  • Trial new brands with reduced risk

What’s in it for the brand?

  • Drives brand awareness – (especially when major intermediaries with big subscriber databases are used)
  • Drives trial (customer acquisition) (reduced price barrier)
  • Attractive ‘risk-free’ online/mobile advertising (no upfront costs and commission-only costs (CPS (cost per sale), PPS (price per sale))
  • Measurable – unlike other forms of online advertising, performance can be tracked through sales and redemptions
  • Builds the brand – a form of event marketing offering an exciting brand experience that may create choice-shaping associations in the mind of the customer

What’s the downside for customers?

  • Poor experience – existing loyal customers can suffer in two ways from group-buy.  First, the time and effort spent servicing group-buy customers may mean they receive less time, care or value.  Second, if they are full-paying loyal customers, they may feel cheated by a brand that rewards promotional junkies rather than brand loyalty

What’s the downside for brands?

  • ROI – with intermediaries taking 50% commission on coupon sales, and coupons offering at least 50% off, group-buy is an ‘extreme promotion’ – you are effectively selling at a 75% discount.  If your marginal costs (incremental costs for selling one more unit) are more that 25% of the ticket price, you will lose money running group-buy

Profit/Unit = Discounted Price – (Intermediary Commission + Marginal Cost)

  • Cannibalisation – Group-buy is not cost-free, your cost is 75% of the list price for a customer you already have

    Bird Café Japan Group-Buy $256 Meal Disaster: What Happens When Demand Exceeds Capacity

  • Bad customers – Do you really want to attract cheapskate promotional junkies likely to move onto your competitors next deal
  • Opportunity cost – Losing profit from every current customer who walks away because you are busy serving a coupon-customer
  • Brand Damage (financial) – Your brand value is your ability to extract margin, by cutting margins you erode your brand
  • Brand Damage (image) – A brand is made up product and user imagery; are promotional junkies part of your brand DNA?
  • Promotionitis – Group-buy is a form of price promotion, and price promotions, especially of the deep-discounting variety are of questionable value – price promotions are the loan-sharks of the marketing industry, offering temporary respite at a high cost – at best hiding a structural problem, and at worst, making it worse

Four Key Questions – When considering group-buy, use the 4Cs

  • Costs:  Know the cost of producing, marketing, hidden costs and opportunity costs of running a group-buy deal
  • Capacity: Know your capacity – how much do you have spare, how many new customers can you serve with a group-buy deals (without harming experience of existing customers)
  • Customers:  Know your customer – what are their profiles, wants and needs and how is best to reach them – is it really group-buy?
  • Choices:  Know your options – what alternatives to group-buy do you have; you’re effectively spending 75% of your ticket price for new customer acquisition from a email list of promotional junkies that will promote your competitor tomorrow