One cannot read the news these days without hearing about the difficulties Groupon, Living Social and the other daily deals companies are facing. It seems as if the market is turning on these online coupon businesses and demand is declining. Merchants are now refusing to renew their offers and are shunning the Groupon business model.
According to a recent Manta survey, 82 percent of small business owners will not offer any deals though a “daily deal” site this year and only 3 percent said these types of promotion sites have brought them repeat business. This is one of several data sources describing a form of a backlash towards daily deals as a marketing vehicle.
What happened? Nothing extraordinary. That is simply it. New customers did not return in droves after their first purchase despite being able to sample a product or service at a deep discount.
For years I have written about the danger of attracting customers with deep discounts. Discounting and price-slashing is a tactic used by companies that have no other way to differentiate. Customers are not attracted naturally to you and therefore you need to lure them with financial incentives. Couponing and financial incentives have existed for years in the non-virtual world. They do not create loyalty to a brand; they create loyalty to a price. When the deeply-discounted price disappears, the customer disappears as well. “Buying” business through discounting and price-slashing is simply not a long term strategy for sustainable growth.
For some unexplainable reason, daily deal vendors managed to convince merchants that the rules are different when selling via the web. They claimed that they can turn price-cutting into a growth strategy. Now that the honeymoon period has ended, many are realizing that although the medium has changed, customers have not. Customers continue to grant their loyalty to attractive, differentiated products and services and refuse to be “bought” even with a really deep discount.
My wife has given many of the companies selling on Groupon and its daily deals competitor sites a chance to win our family’s business. On one occasion, the manicurist she scheduled never showed up. (I figured that the merchant had a customer paying full-price and therefore preferred to satisfy that customer first.) In another case, I was dragged to a couples massage at a serious discount. I went along if anything else for the purpose of trying it. It was an okay treatment, but it was a year ago. I never went back to this spa because at the full price, that spa did not deliver an experience that I felt was worth the price. I did, however, go back to my regular spa where I pay full price and receive full value.
The impact Groupon has had is actually much worse than not creating loyal customers for a particular business. Merchants who offer a “deal” to new customers cause the actual value delivered to be perceived as less. As a result, the merchant has altered forever the value these customers will pay in the future. In the name of short term gains (most of them at losses to the merchants), merchants have destroyed their long term value and viability.
No new media, social, mobile or whatever the next one is going to be, will change the hard realities of business. If customers refuse to pay your asking price, your value is simply not worth it. You either try to sell high value to the wrong customers or your value is not up to your customer’s expectations. The solution is not price reduction.
The solution is one of several options:
1. Identify the customers who will pay your price for the current value you deliver and focus on them solely.
2. Develop greater value that will allow you to command your price among current customers.
3. Develop new value that will fit the price customers are willing to pay.
The Groupon experiment proved yet again that reducing price is not the answer to business troubles. An attempt to claim that a new medium will change the constant rules of business was proven once more to be false.
Customers will grant their long-term loyalty to exciting, differentiated, exceptional, attractive, alluring, surprising products or services. They will be loyal to those whom with they fall in love. Ultimately, money cannot substitute for love. Just as it is in one’s personal life, the eternal rule remains true: love trumps money every time.