Thinking Social / Value

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Socially-Driven Deals: 3 Ways They Help and 3 Ways They Hurt

Google. Facebook. Groupon. Yelp. LivingSocial. Amazon.

It’s a lineup of online juggernauts – all executing thrusts and parries to build an empire in the group buying space. In case you can’t keep up – and who could –  Google is testing Google Offers in Portland, Amazon is playing around with AmazonLocal in Boise, ID, and Yelp continues to dodge cable cars in San Francisco and keep its Deals afloat.

Oh, and there’s this little company valued at $15 to $30 billion, a smaller, but emerging competitor in LivingSocial, Bloomspot, KGB Deals, Buy With Me, EverSave ad infinitum. All of these socially-driven deals add up to an estimated 2,670,000,000 clams and growth rates continue to be astounding.

Yowza! The number of offers published has nearly doubled in the last quarter.

Yowza! The number of offers published has nearly doubled in the last quarter.

Logic would say with the space’s proliferation  restaurants, bars, and yoga studios must be praising the day Andrew Mason and co. decided to bring cut-rate organic spray tans to the masses. Logic would say that, but it’s up for debate.

Like most tactics, group buying has its right places and wrong places. And whether or not it’s cooler to start one or lambaste them for eroding the margins of small businesses, here’s a list of benefits and cautionary lessons that might help you decide.

Three Ways Social Deals Help

1) Inducing Trial. Do you have a new product? A reinvented one? Maybe a crazy one that no one knows about? Group buying might be helpful. An example that comes to mind for me is when Domino’s offered a mea culpa for its sub-standard pizza and went soul-searching to earn back trust and customers. In this case, I think a group deal would’ve been a fabulous complement to this campaign. Of course, as we’ll discuss later, there are issues of brand-eroding, margin-imploding ways this tactic can backfire. Regardless, group buying for this purpose does have its place.

2) Building Critical Mass. Sometimes, there’s a service or offering that just needs to hit the tipping point to be viable. Whether it means more funding, revenue, or usage, there are offerings that just don’t work unless a base of customers or users has been established. A great example in my life is Capital Bikeshare in Washington, D.C. The program, which undoubtedly required a sizeable investment in bikes, stations, and other infrastructure, was introduced in early-2010 and experienced solid, steady growth. However, I suspect it wasn’t being used enough to justify the use of a large chunk of municipal funds. Enter a LivingSocial deal, which brought more than 8,100 new or renewed bikers into the system in one day. Of course, there were unwanted impacts we will also discussed later, but it still ensured that an offering that didn’t need to worry about branding, discounting, or other adverse side effects while getting a lot of new cashola into the system. It also helped put potential advocates on bikes (it rocks), increased visibility for the service (those lame red bikes are hard to miss), and helped Capital Bikeshare become the largest bike-sharing program in the country.

3) Using Perishable Inventory. If you’ve ever studied Services Marketing, you’ll know there is a huge, but under-appreciated distinction between tangible shelf goods and intangible offerings  perishability. Inventorying a concert or haircut is as easy as using tonight’s vacant hotel room tomorrow. That is, impossible. Say there’s an event  or city-wide scavenger hunt ” next week and it’s half-full. Group buying might be a great option. Using an earlier example, say your organic spray tans aren’t so hot in the summer when people are more apt to get bronze under the supreme organicness of the sun. Group buying might get them in the door. Honestly, I think this is the most appropriate use of the tactic – you can drive traffic and sell perishable inventory when otherwise it may go to waste. There are caveats for regular service providers, but most could use these strategically to increase revenue during low-demand periods.

Three Ways Social Deals Hurt

1) Exhausting Capacity/Compromising Quality. Have you ever experienced the Groupon Syndrome? It’s the week before a social deal expires at a restaurant and an otherwise sleepy bistro is overcrowded with ravenous hordes of deal-seekers. Of course, this puts pressure on the restaurant, stretches the waitstaff, and creates annoyingly long waits for customers. Not the best way to generate return visits, eh? I experienced this myself two weeks ago at a popular biergarten in D.C. It was a rainy day and I wasn’t worried about getting a seat in what is a pretty remote part of the area. Instead, I waited 45 minutes to get a bartender’s attention and literally shared a stool with my dining companion. I can acknowledge it was silly of me to go the day before the deal expired, but it still doesn’t engender warm, fuzzy feelings when people are putting their elbows in my schnitzel. And, obviously it’s not just mom-and-pop restaurants, when capacity is overwhelmed with most things as I alluded to with Capital Bikeshare above quality suffers. This means quality of the product, quality of the experience, timeliness of delivery, etc. Good luck getting into that yoga studio any time after 2 a.m. once Groupon Syndrome takes hold.

2) Unsustainable Profitability. Businesses may see a boom the week after a promotion when customer traffic is steady and they get a big, fat check from a social deal site. But it creates a back-log of unearned revenue that needs to be stretched over the life of a deal, when customers come to redeem over months and months. There’s no guarantee you’re gaining new customers and  if you have an experience like I described above they’re likely not returning.

3) Conditioning Customers. This seems obvious, but it’s clearly not being heeded considering new deal sites continue to pop-up. The crux being that you meant to price your products or services at a certain level for a reason. In fact, your pricing structure is likely strategic and based on extensive research. Why would you reduce it by 50% and give LivingSocial a cut of the remaining 50%? Last year, I  along with 2,538 others  bought $40 worth of food at a local Thai restaurant for $20, which was great. The problem was, after buying it at $20, I wasn’t inclined to pay 2X ever again because, in my mind, it wasn’t worth the price. How’s the Thai restaurant doing now? Not so hot  out of business. There’s a long story about unsustainable expectations and reduced margins, but basically a lot of customers don’t want to pay twice as much for something unless they are truly satisfied.

The point is, it’s both hot to participate in group buying and it’s cool to profess its pitfalls. Hopefully this post will help you decide if it’s strategically sound for your business or brand.

Have you participated in group buying and did it work? Share your stories with us and tell us why  or why not.

*Image source: http://www.localoffernetwork.com/, report: http://scr.bi/jNk0hp.