Deadly Discounts and How to Avoid Them

Discounting is the new marketing trend.

Groupon is reported to be the fastest growing company ever (ever) with 5 million users in the UK and even more worldwide. Other copy cat business models (Itison.com, KGB Deals, LivingSocial) have quickly followed suit in what is ultimately the next land grabbing gold rush of the ecommerce landscape.

But business owners beware. Discounting is both a marketing science and an art. One which, if not thoroughly thought through, could backfire with catastrophic circumstances.

Over the past few weeks I’ve had many philosophical discussions with clients about Groupon and its ilk. Many of these discussions are tinged with fear and suspicion. But discounting is a viable, and arguably clever, marketing strategy. Tesco’s are the king of the discounts and it hasn’t done their business any harm over the last few years.

So here’s the deal on the deal. Here’s how to make sure it works for you.

Assess Capacity and Demand:
If you are in a service business, your marketing has to be ALL about creating demand and maximising capacity. Failure to maximise capacity and you lose money.

For instance if you’ve only sold enough hairdressing appointments for half a day, and the other half a day passes, you’ve just lost half a day of revenue – never to be gained again.

If you can fill that half a day with paying customers, albeit at a smaller value, you are now making more money than you would have been than if you’d not sold anything at full price.

Do NOT discount if you do NOT have capacity in your business. This is where others have come a cropper. Itison.com’s Dundee launch sold 5000 Dominos pizzas in one day….. needless to say, thanks to such a great offer, Itison.com had plenty of dough but the pizza shops didn’t have quite enough to satsify all those hungry pizza loving bargain hunters.

Assess Profitability and Pricing:
This is the key to success. Discounting is NOT about giving it away at a loss. Roughly speaking, most discounters are looking for the business to give the service away at around an 80% discount on advertised price. So, unless your “mark up” is in the region of 400% your discounting adventure will be costing you money.

But there is a way to do it, at a profit:

  • Don’t make single service offers – combine services to maximise the use of operational time and increase the value of the deal
  • Only put on offers where you have a high likelihood of making a cross or upsell – for instance a service that’s likely to result in a product sale, or will need multiple visits (at full price)

Assess Reach and Impact:
There’s choice in the marketplace so you don’t just have the option of one when it comes to selecting a discounting partner.

If you are looking at discounting as a media channel, first consider its reach. Response rates in the industry are typically in the region of between 0.3% – 2% at most.

In simple terms, if the database of the discounting firm sits at 100,000 total “reach” you can expect between 300 – 2000 people to take them up on the offer. In most cases it’s at the lower end of the scale. In exceptional circumstances it may be much higher. But in those cases the deal is a steal.

So if you’re not sure you can support the capacity uptake of 500 new customers, consider using one of the smaller discounters. You might only get 50 voucher sales, and only reach 10,000 people, but it might be a better solution for a very small business.

Carefully Consider Frequency:
Tesco discounts all the time. Their business model supports this activity. They either negotiate with their suppliers to get the products at a discount, or they push prices down across the board to ensure they make their profits even though they are offering up bargains galore to customers in store.

Your business is, most likely, not following this kind of discount model. So tread carefully when it comes to frequency of offer. We would avoid committing to more than three deals in any calendar year and the timing needs to be sporadic, rather than predictable. The last thing you want to do is train your customer base that, if they wait a couple of weeks, they’ll get it at a 60% discount. There madness lies.

The offer should always be seen as a “treat” or an “exclusive” in order for it to be successful for both you and the discounting site.

Assess Audience Response:
It is very likely that your existing customers will be on the database of the discounting company. So having a strategy that rewards existing customers is a must. Whether it’s a loyalty promotion or something simple that says thank you, never forget: these are the guys that, ultimately, keep you in business.

To Groupon or not to Groupon. That is the Question.

Groupon continues to grow and grow. The world’s fastest growing company this week announced it will float on the stock market. Investors can now get a slice of the big Groupon coupon pie. Yum!

This toddling three year old is growing up fast. Yes, there are clearly teething troubles, but I can’t see anything preventing it from growing into a spotty, arrogant adolescent in due course.

Groupon’s “partners” (the companies who offer the great money saving deals)may be just a little bit more sceptical, however.

Here’s the tension. Companies don’t like discounts. Consumers do.

Discounts lower profit margins, quite possibly forever.  The P for Price is the last of the 4Ps that any self respecting marketer would ever want to touch. For companies who are struggling to get bums on seats, Groupon offers a clear method of filling those seats, but at little or no value to the business. In some cases, at a massive cost.

So why are companies bothering with Groupon?

Well, from a marketing perspective it does have some redeeming features:

  1. A mighty big local database. The key here is local. No-one else, guaranteed, will have a database of local consumers quite this big, or quite this up to date. That’s the quid pro quo for conusmers – keep your info up to date, and you’ll get all the deals first hand. Local media can’t even begin to hope to reach, directly, the same numbers that a Groupon database can do in a matter of seconds. Getting the latest local news direct to your inbox is no competitor for a deeply discounted facial or trip to the zoo.
  2. It’s free to use. There’s no direct cost of marketing. So companies need no longer spend their money on something that doesn’t guarantee a return. It’s sort of a “no win, no fee” marketing tool.
  3. Their customers are engaged. And this is the real key to its success. The vast majority of Groupon users, thanks in part to social media and mobile phone technology, check their offers daily. And then they buy. They buy things they weren’t intending to buy because it’s a great deal. And who can beat a great deal?

So do the nay-sayers have a point? They sure do.

Traditionally, spend on marketing sits in the region of 10-15% of total sales turnover. Groupon is essentially asking companies to part with 80% (60% discount + a 50/50 share for Groupon and the retailer) – it’s a damn big ask.

But on balance, if your marketing only costs you something if you’re successful and it is, by and large, the most effective form of direct marketing you can get, why wouldn’t you give it a try and add it into the marketing mix? If you’re in a business that relies on repeat custom, and customer service and you believe you can develop even 25% of your response into longer term customers you are onto a winner.

Don’t get me wrong, a marketing strategy that relies on 100% Groupon is commercial suicide. Unless your gross profit margins are in excess of 500%.

If you don’t believe you’re systems are up to strong customer retention, then don’t bother.

But then, that might be one of the reasons you are looking for bums on seats in the first place.