harvard just released a white paper on the impacts of vouchering which looks at the commercial viability of groupon type deals. while couponing is in no way new, the mechanics and finances of it do raise some very interesting questions regarding viability to merchants. existing research from harvard shows that around 1 in 3 merchants arent happy with their groupon deal and wouldnt do another one – so that is the base element we need to look at, what would make this business model more acceptable?
on the merchant’s side, there seem to be a number of factors that effect the viability of the deal:
1. the type of product and associated margin. in a deep discounted deal where the users get 50% and the voucher company gets 50% of the 50% paid leaving the merchant with 25% – the margin has to be able to support the deal i.e. a zero marginal cost item
2. a long term return – the client will use this as trial and will come back again to purchase more. the trick here however is to have systems that actually measure this, and unfortunately most of the retail stores dont have a way to do that effectively
3. loss leader promotion – the discount is for a loss leader product but feet through the door will result in more value from other goods purchased at full price. this is very common in retail environments and can be seen in current discounting models
4. pure advertising – people will see the businesses name and what it does, whether they buy a coupon or not some will end up being clients
5. price segmentation – you are finding people that wouldnt have brought your product at its current price, but will at the discounted price
some pretty obvious insights though is that there are a lot of competitors in the space, at some point the share of 50% will tumble to a much smaller amount and start starving out smaller companies. at that stage it might become a bit more profitable for merchants. also, as more offerings keep on appearing – when will consumers switch off to the noise? or how deep will the consumer discount need to be to gain attention?
the cons of discounting come to the following
1. are you creating a negative impression of your brand and devaluing your offering? there may be pricing differentials but that might be better suited with a different product
2. to end up with 25% of retail is expensive. without accurate systems to judge long term success how do you know whether it really worked or didnt
3. does a coupon really drive loyalty or will it reduce it for your current customers, who could see a discount/promotio as unfair if they have been loyal for a long time
the harvard blog is here