Bulk discount coupon sites have been the talk of online shopping for the past 18 months and they have created quite a buzz among retailers, shoppers and the media. Some retailers and service providers have received incredible responses to their offers, and discount chasers have never been happier. Groupon in the USA, Stardeals (the name for Groupon in Australia), Cudo and JumpOnIt in Australia have done a roaring trade by providing members with discounts on offers such as branded merchandise, restaurant deals and even whale watching cruises. Great if you are a consumer, but what about the retailers and restaurant operators?
Are bulk discounts good for all types of businesses?
Sure there is an immediate upturn in customers but what about the future? These bulk discount deals are effective for product retailers that want to move redundant or excess stock. So too for movie theatres with empty seats, because customers will buy the drinks and popcorn at inflated prices, and the seat would have been empty anyway.
Bulk discount schemes don't work for all businesses
However, bulk discount schemes aren't so great for those businesses with variable input costs. Generally these deals are advertised at 50 per cent of the normal price. Let me give you an example. A restaurant offering a meal at $100, would be offered at a group discount of $50. The promoter then takes 50 per cent of the balance as a fee ($25) and leaves the balance of $25 to the restaurant. For a restaurant operator, whose cost of sales is between 25-34 per cent and with wage costs of at least 35 per cent these offers become unsustainable.It's ineffective to promote these coupons regularly and it is only a matter of time before they begin to say no to these offers.
Are bulk discount schemes sustainable?
So are the group deal companies sustainable? Research coming out of the USA is starting to question the sustainability of this model. Consider this research from Rice University:
"For the second time in eight months, Rice University has bad news for the likes of Groupon and LivingSocial. Among its findings: Only 19.9 percent of deal users are returning for full-price purchases at restaurants, bars, salons, and other retailers."
Recent research has raised question about the sustainability of group deal company models.
Utpal Dholakia, associate professor of management at Rice's Jones Graduate School of Business, said small businesses are exhibiting low levels of loyalty to Groupon, LivingSocial, and other deals sites.
"The major take-away from the study is that not enough businesses are coming back to daily deals to make the industry sustainable in the long run," he said in a prepared release. "And our results from three studies and close to 500 businesses surveyed show that the deals are nowhere close to the rates of financial success for participating businesses that some companies claim to be having."
Just like a ponzi scheme, these deal sites need more new people to join in order to replace those people leaving. So to effectively retain customers, these companies, like Groupon, are having to morph themselves and are turning the deal structure around asking the customers what deals they want. The next big wave coming out of the US to hit our shores in Australia will be the 'Consumer Driven Deals.'
The next challenge: How to encourage loyal customers
The question is: What are these deal drivers going to do down the track to retain loyal customers? It must be in their best interests to encourage loyalty in order to reduce the cost of finding new customers, right? In fact, recent news from the US appears to back this up.
According to news site The Next Web: "AdAge reports that Groupon, together with two Boston marketing-services and analytics firms, has just announced its first partnership with a U.S. grocery chain, to introduce its first full traditional grocery integration using a loyalty card system."
While these deal sites may be here to stay in our new cyber economy, expect a major shakeout of the smaller operators. LivingSocial has been on the acquisition trail and the company is snapping up good operators in various countries. But like Groupon, they too will have to start considering a strong loyalty offering to retain the customers they have worked so hard to sign up. What do you think? I would love to hear your views in the comments section below!