While Groupon claims that merchants that offer deals on the site are generally satisfied, there has been much talk in the press about unhappy merchants. One main criticism is that Groupon does not offer merchants profitable deal terms. In approximate terms, the deal offered to customers is in the range of 50% off with the remaining 50% split between the deal buying site and merchant which means the merchant makes about 25% of the actual price of an item or service offered. However, not accounted in these numbers is the value of the merchant’s exposure to potential new customers. Groupon not only offers a channel for merchants to sell their products and services but also serves as a marketing tool.

Yes, some merchants say that once they have run a deal they aren’t seeing a significant increase in the number of customers returning and paying full price for the product or service. This may be because Groupons and other similar deal sites may be serving a different type of customer. They could be classified as one of the following

Customers who buy Groupons are flexible on the merchant they use and willing to take their business to whichever merchants offer the best deals for the service or product they are looking for. In this case, these newly acquired customers are not going to be loyal.

Customers who make a purchase using a Groupon may not value the good high enough to pay the full price but would be a customer if the price was lower. These customers may return if they can continue to get the product or service at a discount.

In either case, these new customers may fill a gap in a merchant’s business. For example, restaurants generally tend to be busy towards the latter half of the week and are looking for ways to fill seats during the beginning of the week. If Groupon allowed their merchants to restrict the days of the week that the Groupon is valid to Mondays, Tuesdays, and Wednesdays but not the peak days when they could fill tables with customers paying full price, merchants might be more open to the idea of running a Groupon deal. With this change, merchants would avoid crowding out their traditional customers and any Groupon customers would be incremental business.

In addition, the deals could be structured in a way that encourages the customer to return. For example, if an online grocer offered a deal for discounted goods, they could also include a membership to their premium loyalty program which offers free shipping on orders. As long as the membership is priced into the deal, it could help out the merchant by leaving value on the table only to be redeemed with continued business thus encouraging the customer to return for future online grocery purchases.

Finally, to get the most out of the promotion, merchants should tie the deal to a new service or product and time the deal with the launch. This will not only provide exposure for the merchant but also help jump start the new service or product allowing customers to try it at a reduced price. By doing this, even if current customers purchase the deal, it should not affect current business but instead expose current customers to additional services and products you offer. While this doesn’t completely solve the problem of losing money on a deal, it does get the merchant a bit more bang for their buck.

While Groupon is currently the market leader, their real challenge is maintaining this position which depends mainly on their supply of great deals. Given discussion around merchants being dissatisfied with their Groupon experience, Groupon is at risk of new merchants hesitating to work with Groupon. Without merchants offering deals, Groupon has no business. Therefore, a long term perspective suggests that some changes need to be made to ensure merchants are happy with their experience.

When Jane Smith walks into her neighborhood boutique to buy a sweater, how does the shop capture the information about her purchase?  In traditional customer relationship management (CRM), Jane’s sweater purchase is recorded at checkout into a database along with her credit card information.  To link up Jane’s information to an email address, the store associate will often ask Jane for her email.  With the advent of the smart phone and as adoption of check-in services like foursquare and Facebook becomes more and more mainstream, there is significant opportunity for retailers to take advantage of the changing behavior of its customers.

 This year, foursquare launched a “Merchant Dashboard,” allowing businesses to access data and analytics about the type of customers checking in.  This tool allows merchants to see how many people are checking in, when they check in, gender breakdowns, new vs. repeat check-ins, and broadcasts to social networks.  This represents a huge step for merchants in thinking about how to drive traffic into its physical stores.  While group-buying sites like Groupon and LivingSocial have proven successful in driving traffic and increasing awareness for retailers, there is debate as to how representative the users of such sites are in terms of the customer profile for that retailer. Check-in services seem to be less distortive and present a more robust way for retailers to segment out their customer base based on behavior.  As check-ins become more mainstream, the potential for targeted segmentation is huge:

-       Loyalty: Ability to create robust customer loyalty programs based on frequency of patronage.  Able to micro-segment and offer individualized rewards at a much cheaper cost than traditional loyalty programs

-       Brand Awareness: Sharing of check-ins on social media sites like Twitter or Facebook is invaluable – ability to reach a more targeted audience via a medium (your friends/word-of-mouth) that is arguably more powerful than traditional advertising

-       Promotion Driving Traffic: Ability to promote as needed to drive traffic on an individual level – no need to dilute the brand by promoting to entire customer base

 While this is a great first step, what is lacking still is a way to tie check-ins with actual purchase behavior.  If purchase behavior integration can be achieved, retailers would have the ability to further deepen their segmentation.  The other main challenge will be how to get large national or international brands to adopt the same platform, since customers are likely to use only one platform for all their check-ins.  

On September 28^th, Groupon’s blog announced that the company would be launching a new rewards program – it would start in Chicago and Philadelphia and customers could start benefiting on October 14^th. The process basically has two steps. First, a merchant needs to decide how much a customer needs to spend in order to get a Reward Groupon and how much discount the Reward Groupon will be. Then, based on the credit card information Groupon has on file, Groupon tracks spending and automatically alerts the customer when a Reward Groupon is obtained. Along the way, Groupon can alert the customer on his/her status, sending messages such as “You just spent $15 at Merchant X, you’re only $30 away from unlocking a reward”.

For the customer, this sounds like a great idea. Not only can I use Groupon to get massive deals on new places, but I can also work to get an even larger discount at places I go to a lot. As one article states, Groupon envisions the Reward Groupon to be an 80% discount versus the typical 50% discount offered on Groupon’s daily deals. In addition, Groupon does the tracking so the customer is not burdened with holding onto a loyalty card or needing to “check in” every time a purchase is made.

But here’s the thing, what merchant would ever sign up for this program?

As most merchants who use Groupon unhappily realize, consumers typically use Groupon for a one-time trial of a new service or place. Most customers see a daily deal they would use, buy it, use it, and then move onto the next daily deal they see for another company. For example, I know friends who jump from hair salon to hair salon, just using whatever brazilian blowout deal they see (across Groupon, Living Social, Gilt Groupe, Ruelala, etc.) when they need to get their hair done. There is no sense of customer retention, which is why Groupon is launching this new rewards program in the first place.

However, who are the likely users and beneficiaries of these 80% off Reward Groupons? Most definitely the customers who actually like a merchant enough to want to come back time and time again.  These long-time or frequent customers are already, by definition, a merchant’s most loyal customers. Therefore, a discount to this group just eats into a merchant’s earnings. On the other hand, the customer who only visits a restaurant once using a daily deal does so because she was not impressed enough with the restaurant to want to come again (let’s say it’s the food she is not impressed with), or is too price sensitive to the restaurants full-price options that she cannot afford to come again. In those two cases, dangling the 80% off coupon at some unknown point in the future is not going to incentivize that customer to pay full-price or bear the mediocre food for five, or three, or even two more times. Furthermore, although one article mentioned that the split between merchants and Groupon on Reward Groupons has not yet been determined, you can be sure that Groupon will pocket at least the typical 30%-50% fee.

On a side note, it’s interesting to note that this rewards program is called Groupon Rewards, not “Merchant X Rewards”. This branding is very telling of what Groupon is trying to accomplish – improving its own image in the eyes of the consumer.

We’ll see how this program plays out, but to me, it just doesn’t make sense for merchants to want to join Groupon Rewards. Groupon Rewards is a loyalty program that benefits Groupon at the expense of the merchants.

In class, we discussed the relative merits of Groupon versus Restaurant.com. I would like to examine another recent entrant to the restaurant promotion space: Savored.com.

Savored operates a bit like OpenTable, a bit like Restaurant.com, and a bit like Hotels.com. You register on the site and search for restaurants in your area, specifying the date and number of people in your party. Like on OpenTable, you’ll receive a list of restaurants in Savored’s system that have availability. You pay $10 to make your reservation, and in exchange you’ll receive 30% off your entire bill (40% off in Boston because they are just starting out). There’s no need to print out a certificate or code although a gentle reminder to your hostess is encouraged. If you don’t make your $10 back, Savored promises to refund your money.

Still skeptical? Here are a few characteristics that give Savored an edge in both sustainability and marketability:

Better restaurants: A common complaint about discount sites is that discounts aren’t available for restaurants that I want to go to or that minimum purchase requirements are difficult to meet. Savored addresses these problems by targeting relatively high end restaurants (Upstairs on the Square in Harvard Square is a participant) where it’s quite easy to make your $10 back (Dinner for 2 at Upstairs could easily run $150 resulting in savings of $45). By providing greater value to customers who are likely to spend more in restaurants, Savored can attract better restaurants, creating a virtuous cycle.

Fills otherwise empty tables: Unlike both Groupon and Restaurant.com where restaurants have little control over when customers show up, Savored allows restaurants to determine how many tables they would like to make available each night and at each time. In this way, Savored operates as an excess inventory clearinghouse, giving restaurants a way to fill tables that truly would otherwise be empty at prices that should more than cover their marginal costs.

It appears that restaurants are indeed using Savored to fill tables at non-peak times: in Boston 16 restaurants have availability for 2 on Wed 10/26 while 12 restaurants have availability on Sat 10/29. In New York City, the comparable numbers are 177 and 132. Reservations at Upstairs on the Square are only available for 5:30, 6:00, 9:00 and 9:30 – all non-peak times. (Numbers checked on Oct 13, 2011)

Drives incremental customers: Savored has a spiffy, easy-to-use-and-filter website and has partnered with OpenTable (to advertise deals) and Zagat (to provide reviews). They also have a blog and plan to feature recommended restaurant lists from celebrities. These discovery and curation features encourage potential diners to spend more time on the website and to use it for restaurant discovery based on quality, rather than on price.

Encourages incremental spending: By offering a flat percentage off the entire bill, Savored encourages diners to spend more (hey, that bottle of champagne’s 30% off). In contrast, Restaurant.com’s fixed discount encourages diners to spend the minimum where the discount is deepest. Ultimately, restaurants will likely benefit more from the increased spending than they will from having capped the discount.

One potential problem is that Savored may accidentally convert its high value customers into discount users. For instance, the very discretion advertised by Savored (no physical coupon) may also appeal to expense account managers looking to reduce business entertainment expenses. Losing expense account diners would be a serious hit to any restaurant’s bottom line. However, it appears that restaurants have been able to ameliorate this problem through date/time restrictions: The Capital Grille on Wall Street only offers Savored reservations on Fridays and Saturdays when businesspeople are unlikely to be around.

Savored seems to have found an untapped niche in the restaurant promotion market. They should stick to their strategy of providing high end customers access to high end restaurants. This isn’t a model that would work for restaurants where the average ticket is $30 or restaurants with primarily walk-in business nor is it a model that works for customers looking for 50%+ deep discounts. It is however a model that could successfully drive traffic to certain types of restaurants while retaining the restaurants’ ability to price discriminate.

Sources:

Carrns, Ann. “VillageVines: Dining Discount Site Tries New Name.” New York Times Online. June 21, 2011. http://bucks.blogs.nytimes.com/2011/06/21/village-vines-dining-discount-site-tries-a-new-name/

Duryee, Tricia. “Savored is a Groupon Competitor That Feeds Off Merchants’ Fears About Groupon.” AlllThingsD. June 21, 2011. http://allthingsd.com/20110621/savored-is-a-groupon-competitor-that-feeds-off-merchants-fears-about-groupon/

Olmsted, Larry. “Get Paid to Eat Out!” Forbes.com. Oct 5, 2011. http://www.forbes.com/sites/larryolmsted/2011/10/05/get-paid-to-eat-out/

Tigar, Lindsay. “Not Just Another Coupon Site.” The New York Enterprise Report. July 5, 2011. http://nyreport.com/articles/80736/not_just_another_coupon_site