Fixing Daily Deal Sites
Posted on Harvard Business Review: September 30, 2011 9:58 AM
By Mike Schneider
Since filing their S-1 ahead of their potential IPO, Groupon scrutiny has been intense. More and more, sales costs are rising and subscribers are buying fewer Groupons. Meanwhile, the company needs cash to keep ahead of its mounting expenses; one journalist compared Groupon’s model to a Ponzi scheme because the company is using the float from new deals to pay off merchants from previous deals. If they keep going in this direction, many feel that Groupon will run out of cash and be unable to pay merchants who have run deal programs.
And when asked at the recent Gravity Summit if his company’s program was profitable for merchants, the CEO of BuyWithMe (another deals site) responded: “We don’t know.” He added that although statistics suggest that it is working, the long-term value for merchants is directly correlated to the long-term value of the customer. In order to prove it, they need to make the deal model a cycle for customers—and one the company can trace. For this reason, BuyWithMe is in the early stages of integrating card-linked offers to their daily-deals program.
Daily deal sites are beginning to realize that in order to profit, merchants need these new customers to return; and without any implemented way of marking transactions as “deal transactions,” it is extremely difficult for daily deals providers or merchants to track whether customers are coming back for more business. Daily deals also must fight a phenomenon known as price renormalization, when consumers have a hard time paying full price because they are conditioned to the deal price. Add benchmarking—when coupon customers try not to spend more than the original deal amount — and we need to start looking for solutions.
But what if we looked at this in reverse? Rather than paying for the deal beforehand, what if the deal were waiting for a customer at the point of sale? This is called the “inverted deal,” because the customer acquires the deal by signing up for a service and pays for it later, rather than buying a coupon and then executing the deal by buying something.
An inverted deal is:
* Seamless. The deal is executed by either a mobile or card transaction, and perhaps more importantly does not require any knowledge of how the deal is executed by the person at point of sale. Everything happens in the back office.
* Reasonable. Rather than a deal that is seemingly too good to be true, customers feel like they are getting a really good value.
* Traceable. The customer and merchant can both see deals that have been used and—in the case of the merchant—who used the credit.
* Loyalty-building. The deal model will encourage the customer to return to that particular merchant because they receive further incentives. The idea is that the deal inspires a repeated behavior.
Two pioneering inverted deal services I am keeping my eye on are LevelUp and Mogl. They attack from different angles: LevelUp uses a QR scan at the point of sale, and Mogl is linked to a card. LevelUp is positioned as allowing merchants to give customers instant credit in place of a deal; where Mogl is a flat 10% discount for each visit, and the person who spends the most at a location receives a monthly jackpot. Realizing that perhaps their customers are giving away the worm without the hook, Groupon themselves also released a competing card-linked rewards platform technology.
While LevelUp has only been in place since July, 41% of users have returned to the merchant to pay full price within 30 days. The average merchant is giving about an 18% discount on their merchandise, compared to a minimum of 75% off with Groupon. And Seth Priebatsch, Chief Ninja of SCVNGR (the company that runs LevelUp), reports that their average customer is spending 5.7 times more than the incentive. A daily-deals model cannot tell us this information across businesses.
Is this loyalty in the making? Priebatsch told me, “LevelUp shows things to businesses that they’ve never been able to know before. It unlocks knowledge. How often do my customers come back? What do they spend? Do they spend more or less over time? Where are they from? Where else do they go?”
It is clear that daily deals will not change behavior in favor of the merchant on their own. A customer needs an incentive to try, but also a reason to form a new habit. Inverted deals platforms can prove effectiveness and allow merchants to test, learn and optimize based on “recency”, visit frequency and monetary stats like sales and profitability. Add seamlessness and convenience to the user experience and we have the next great loyalty program.
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