Today I noticed a website that had enabled a social discount promotion (think Groupon, LivingSocial, Yolodeals, etc.) directly on its own website. An interesting switch, where the retailer owns the deal, eliminating the middle man and their take.
Social discount sites offer a product or service at a deep discount if enough people buy into the deal. A typical deal would be to allow consumers to pay $15 for $30 in food and beverages at a specific restaurant. It’s a pretty good deal for consumers if they are certain they will use the deal.
I LOVE these deals, I have several queued up in my inbox as I write this. But I worry.
Last week I had the opportunity to talk with a small tour company operator who had offered one of these social discount promotions. He said that they had no idea what to expect, but managed to sell over 1000 of their tours during their day-long promotion. This is a LOT for a small, local business, especially when you look at the numbers. They discounted their tour by 50{441e98ab4eb14964b1e0df147b8b3bee52fa5206b7547362a4a8ea39a86b962d} PLUS the discounter took another not-insignificant percentage of the discounted price. These promotions can be a great way to gain exposure for your business, especially since most of these sites are local-facing, BUT the deal can be a financial killer.
With deals such as this, the business owner is counting on a certain percentage of people not redeeming the deal, aka “breakage”. This particular business owner is looking at about 80{441e98ab4eb14964b1e0df147b8b3bee52fa5206b7547362a4a8ea39a86b962d} redemption. That is HIGH. In the end they will most likely lose money on this promotion, and only time will tell if they make it back in increased business at full price.
Businesses need to take a close look at their price point and costs before committing to this sort of promotion. Giving away $20 in food and drink to get $10 up-front cash-in-hand can work well, and consumers are more likely to blow off something they only paid $15 for if it’s inconvenient to redeem. If you’re giving away $75 of a $100 item to get $25 cash-in-hand, that might not work out as well AND your breakage is bound to be lower because the consumer would be out $50.
Even large retailers are getting in on the action. The now famous $25 for $50 to spend at The Gap Groupon from August resulted in $11 million in sales on Groupon during the one day promotion. The Gap has yet to figure out what the promotion will mean for their bottom line, but I anticipate a LOT of Gap products under the trees this year.
The question is, how long before businesses start getting killed and back away from these promotions? Or at least start to back away from paying the middle man to run the promotion? Where is the line between paying for exposure and taking a hit? What is the cost difference between running an ad with a coupon, with zero guaranteed revenue and running a social promotion with guaranteed revenue but higher per-customer costs?
I’d LOVE to hear from anyone else who has sponsored a social discount promotion, how have they worked out for you?
