Fast Company recently ran an article titled The Dark Side of Web-Based Savings Schemes. The article includes a description of the experiences of two companies:
- The Gap. According to the article, “Groupon’s first big national promotional partner was Gap, with a seemingly amazing sounding offer of a $50 gift certificate for a knock-down price of $25.”
- East Coast Aero Club. In an attempt to lure people to take helicopter flying lessons, the firm offered 70% off of a first lesson for just $69 through Groupon. In the first five hours of the offer, 2,600 lessons were sold, which, apparently was “the very limit of what the company could stand.” (I, alas, responded too slowly and was shut out).
The article concludes that:
“Many promotional incentives through Groupon, its competitor peers, or other systems like Foursquare’s location-based game are run as loss-leaders in the hope of enticing new customers who may then deliver repeat business. But in in era of widespread Net use, when a simple promotional message can run round the country in a matter of hours, the risks for companies using Web coupons is potentially much much larger. Get your popularity-to-loss-leading ratio wrong, and you’ll attract thousands of unwanted new customers.”
This, according to Fast Company, is the “dark side” of web-based savings schemes.
From The Gap’s perspective, there was no downside here. How Fast Company concludes that a $50 gift certificate for $25 is a “seemingly amazing sounding offer” is beyond me. The Groupon deal: 1) generated immediate revenue (the price of the coupon), and 2) produced a set of highly motivated customers with a vested interest in reaping the benefit of that certificate.
And I’m betting that The Gap didn’t pick up any “unwanted new customers” from this promotion, nor was it trying to. My bet is that the firm saw Groupon has a far more effective way of distributing coupons to its target market than other distribution channels.
The Gap might have an email list, but an email from The Gap competes with emails that consumers get from lots of firms they do business with. Too much noise in that channel. FSIs in the Sunday paper? Direct mail? Sure, those were options, but at a lot higher cost (most likely) than through Groupon.
According to Mashable.com, 441,000 coupons — oops, I mean groupons — were sold. The offer might have crashed Groupon’s servers, but that’s Groupon’s problem, not The Gap’s. And it’s certainly not a systemic problem with web-based savings “schemes”.
While The Gap’s use of Groupon was to effectively distribute a deal to customers, East Coast Aero’s business objective was very different. ECA needed to create awareness for their brand (I live in their area and had no idea they existed). Utilizing Groupon to effectively reach prospects in their market was likely a very effective tactic from a cost and reach perspective.
It’s certainly possible that ECA got the “popularity-to-loss-leading ratio” wrong. But that’s not a dark side of web-based savings tactics (sorry, but I find the word “scheme” to be derogatory). What ECA did wrong was mis-structuring the offer.
More than 2,500 people will now be showing up at ECA’s door in the next few months looking to cash in on their lesson. My bet is that very few of them have any plans on continuing lessons. (I was looking to get in on the deal because I thought it would make a cool Mother’s Day present for my wife).
Did ECA think about the logistics of scheduling 2,600 lessons over the next 6 to 12 months? Does it have a plan for converting first-time flyers into long-term customers? I don’t know. If it doesn’t, then that’s ECA’s problem. But it’s not a “dark side” of web-based savings scheme.
Sorry, Fast Company, but the “risks” of web-based coupons that you’ve identified are simply not there.