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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
  • Reply
    Author
    Local Online Coupons

    […] out the well written blog post from Social Commerce Today. They outline group buying and a review a new book on why brands should […]

  • Reply
    Author
    Conor

    I was very torn between liking and disliking group deals. There are ‘positives’ that simply cannot be slotted into an equation because they are of an intangible nature.
    But there are many of factors/elements that we can be pin-point and scrutinise to see if the deal makes commercial sense and, if not, what elements would have to be amended and by how much to make it work.
    We wavered so much between the like/dislike we have to add an element of ‘science’ to these promotions so we developed a basic Daily-Deals calculator to look at the offerings.
    You can input the various cost/sales factors here:
    http://www.ilevel.ie/media-blog/digital/101811-daily-deal-and-coupon-calculator
    Once you have the numbers, based only on the inputs it’s up to the SME’s to factor in the intangibles elements of the deal and make the call on it.
    It’s not an exact science (it never could be) but it should at least get a conversation going in a business regarding the value of the deal.

    Regards

    Conor

    • Reply
      Author
      Paul Marsden

      Thanks for this link to your daily deal calculator Conor – useful.