While I don’t pretend to be a social coupon expert, I have been a troubled observer of this growing phenomenon for some time. As Rocky Agrawal said in Monday’s widely circulated post, the model simply does not make sense. http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/
There are all types of economic reasons why this model is poised to fail, but that is not what troubles me most. I am most concerned about the long term “destruction of value” that this tactic promotes. Let me explain. Jack decides to buy Jill something nice for Mothers Day, perhaps a $75 massage. Miraculously, ping, a $17 Swedish massage coupon appears on his iPhone. Its an incredible deal so he buys it, gives it to Jill, and everybody is happy…right?
Well, not really… First, the spa probably wasn’t doing well in the first place, which explains why it was so desperate to “buy” a customer. Now the spa is so overwhelmed that it was almost impossible for Jill to get an appointment. A month later she finally has her massage, from a service provider who has been losing $30 on every customer since Mothers Day! Maybe the quality of the spa’s service hasn’t degraded yet, but customers are tipping less and I am willing to bet that it won’t be the kind of extraordinary experience that builds long-lasting loyalty. Maybe Jill comes back, maybe she doesn’t… but neither she nor Jack will pay anything close to $75 for her next massage. Furthermore, those loyal customers that have been gladly paying full price are now feeling cheated. Apparently, it was worth less! Eventually this retailer, and others like it, complete their death spiral and go out of business.
In some ways the “irrational exuberance” of social couponing was predictable, much like the dot com and real estate bubbles. Consumers and investors get excited by opportunities where the cost to value equation is dramatically in their favor. But, long term, that imbalance is simply not sustainable. No retailer can lose money on every customer but hope to make it up in volume. That is simply mortgaging the future. Eventually it has to collapse.
But the collapse doesn’t hurt just that retailer. It hurts all of us. The pervasiveness of deeply discounted couponing is changing consumers perception of value and driving down margin for many reputable retailers in competitive categories. It’s very similar to the dynamics of the current real estate market. Why would a buyer pay “retail” for my home when my neighbor or his banker is willing to sell a comparable product at a distressed sale price? Ultimately, value is destroyed because a few ill performing merchants are willing to canabalize themselves in a futile effort to survive another month or two.
Retail excellence and corresponding financial success comes from delivering real value not the lowest cost. Retailers need to identify those products, services, activities, behaviours and customer experiences that differentiate them from their competitors in a way that supersedes price. Create a learning relationship with your customers, become the destination of choice in the category… and you’ll have customers for life!