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
- 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