Deal of the Century

I read recently that Facebook is getting into the “deal” business made so successful by Groupon and now copied by I think just about everyone. I have to ask at what point do the merchants who are giving away their services/products realize that this type of promotion isn’t financially sustainable as a long-term proposition?

The merchants I’ve talked to see a nice initial boost in business, but the customers buying these deals appear to be loyal to the deal, not the merchant. If the objective is to bring new customers in with a discount and impress them enough to return and pay full price, it doesn’t seem to be working. Search around the internet and you’ll find several recent studies that have come to this conclusion.

I was sitting in a group discussion of marketers a couple of weeks ago and the topic of deep discount deals came up. One of the attendees told the group that he and his family didn’t go anywhere without a Groupon, Living Social, or other daily type of deal. He then proceeded to relate the story of having his carpets cleaned for next to nothing with one of these deal coupons. Apparently the cleaners didn’t do a very good job, but he didn’t care because it was so cheap. He said he wouldn’t use the cleaners again.

So who won in this situation? The customer received substandard service. The merchant probably rushed the job knowing that it was a financial loser. The merchant can now look forward to bad word of mouth from this customer. The company selling the coupon was the only winner.

With most of these companies setting up only one deal a day I think there are enough businesses willing to at least try it that Groupon and some of the other deal sites will survive and prosper. But a lot of the “Johnny-come-latelys” probably won’t.

There is a great quote from Starbucks’ CEO Howard Schultz in the April 2011 edition of Inc. magazine: “Cutting prices or putting things on sale is not sustainable business strategy.” I take that to mean that we won’t see a Groupon deal for Starbucks any time soon.

I think the “daily deal” coupons need to be evaluated as you would any other marketing effort. Does the ROI work or not? In this case, since you are selling the product or service below cost in most instances, can you generate enough verifiable repeat business to be profitable?

As it turns out there is still no “magic bullet” in the world of marketing and advertising. However, good old-fashioned common sense and vigorous evaluation will guide you to the right decision when considering if the latest development in marketing is right for you.

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