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From Coupon to Groupon

September 12, 2011

367 Billion

Face value: $1.44

$3.7 Billion in savings

78.3% Usage

Now that I got your attention, let me explain the significance of these numbers. 367 Billion coupons were issued in 2010 with an average face value of $1.44. 78.3% of US population regularly use coupons with savings pegged at $3.7 Billion in 20101.

In this volatile economy when you think about your daily expenses you are pretty surprised with the daily activities going on and you think “Is $15 worth for this deal?”. With the recent economy turmoil the question of “is this item worth the value” has become even more important and the recent success of daily deal sites like Groupon, LivingSocial, BuyWithMe can be attributed to this phenomena.

Coupon History

Coca Cola pioneered the art of coupons where Asa Candler gave complimentary soda coupons to potential customers as well as placing these coupons in magazines. It is estimated that between 1894 and 1913 one in nine Americans had received a free Coca-Cola, for a total of 8,500,000 free drinks2. The concept of coupons got widespread attention when in 1909 CW Post used it to market breakfast cereals. In 2010 the coupon transactions for CPG goods amounted to $3.7B within US. The business model around the coupon industry is that the businesses entice the customers to purchase/try their products with a strong enough incentive – so this is a kind of push mechanism. Couponing has become an integral part of marketing strategy for all major brands with couponing becoming an effective strategy to “How to get new customers?”  or “How to retain existing customers?”.

New Trends

Majority of the coupons that are distributed are through offline channels – inserts, store handouts etc but there has been a dramatic shift to online couponing. It is expected that by 2013 e-couponing spend reaches to $4 billion with a projected return on investment of $45.62. There will be 840 billion coupons sent through emails of which around 258 billion messages from the retail & wholesale industry1. Another trend over the past three years is the pull technology that has been re-packaged as social buying. In this business model several middlemen including Groupon, Living Social aggregate emails/subscribers of end customers and present to them a deal with very massive discounts. The only way the end customer can get this deal is that a minimum number of people buy into this deal and that is where the social media aspect comes into play. For example a company like LivingSocial negotiates a deal with a local merchant say a restaurant – the deal specifics are that a customer can get $20 worth of food for $10 along with other specifications of time period, any exclusions etc. One of the conditions could also be that the restaurant honors this deal only if a certain number of people buy into this deal which is called the tipping point. So the local business pays Living Social only if the deal tips and typically the payment is based on the number of customers bought into the deal. Once the deal is finalized LivingSocial sends an email to its customer base and uses different social media including Facebook, Google+ to advertise the deal3. Customers start buying the deal and refer their friends/family as well if the deal is very enticing. This business model can be viewed as an alternate advertising model – an effective and accountable advertising model where business spending money on the customers walking in through the door. Another important factor in this model is that it creates an instant buzz around the business as customers who are getting these emails are those who opted in and who are actively looking for deals.

Growth of this model

This business model was made popular by Groupon that started its operations in Chicago around 2007 and with other players jumping onto the bandwagon. The beauty of this model is that one can start operations with less than 2k in investment – a website and couple of hours of free time every evening to go around local businesses to procure deals. This led to mushrooming of sites across the world and spawned another industry all together – deal aggregators which include Yipit, Deal Nation, Dealery etc. As for the recent mark there are over 400+ sites that are listed on Yipit and many more coming up daily. Most of these sites cater to local sites but there are quite a few others which are specific to a particular need like the site that offers deals on garden needs, a particular community like Jewpon4 (targeting Jews in NY & other cities), DesiSauda5 targeting South Asians in Dallas & Houston or sites like Mamapedia6 targeting moms.

Analysis of the Model

This industry attracted quite a bit of attention over the past 6 months after Groupon turned down a $6B offer from Google. Much has been said and analyzed about this model – both +ves & -ves, whether the model is sustainable, whether it is creating customers who are habituated to deals and not profitable customers in the long run.

According to a survey done by Prof. Utpal from Rice University7 – In a survey-based study of 324 businesses that conducted a daily deal promotion between August 2009 and March 2011, 55.5% of businesses reported making money, 26.6% lost money and 17.9% broke even on their promotions. Although close to 80% of deal users were new customers, significantly fewer users spent beyond the deal’s value or returned to purchase at full price. 48.1% of businesses indicated they would run another daily deal promotion, 19.8% said they would not, and 32.1% said they were uncertain.

On the contrary great analysis has been done over the sustainability of this model and this model came under a lot more scrutiny after the intended Groupon IPO filing. Some of the analysis revolves around the financial numbers –

  • The sequential growth rate that has been projected
  • Explosive growth of the employee base
  • Gift card liability on the books
  • Customer acquisition and retaining costs

This site8 has links to a bunch of articles that dissects this model. But for now this industry is a hotbed of investments. We are seeing plethora of other players like Facebook, Living Social, and Google have already launched the daily deals websites and many other startups continue to launch. Now time will tell whether the social buying phenomena is another social fad or is this model is here for people to adopt and adapt.

Reference:

  1. http://www.santella.com/Trends.htm
  2. http://en.wikipedia.org/wiki/Coupon
  3. http://tomuse.com/groupons-group-buying-guide-faq-how-to-daily-deal-tips/
  4. http://www.jewpon.com
  5. http://www.DesiSauda.com
  6. http://www.mamapedia.com
  7. http://www.ruf.rice.edu/~dholakia/
  8. http://blog.agrawals.org/
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