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During the recession, many of us discovered and began to use services that offered large discounts for restaurants, retailers, service providers, etc through website offers. In some instances, the discounts were limited to only the first “x” users who consented to pay upfront through the website offering. The frequently mentioned sites are; GroupOn, LivingSocial, and Dealster.

For the Consumer

The excitement of gaining a huge discount for a product or service one ordinarily uses makes terrific sense for the consumer.  Whether it is a meal at a favorite restaurant, a reduced cost for a movie theater’s showings, or getting a year’s gym membership for the cost of six months; the idea of saving money on something that was already in the shopping intent of the consumer often provides that last bit of incentive to make the purchase and not put it off.

Additionally, the risk of trying something new is greatly reduced through participation in these website daily deal offers.  For instance, paying $50 for a meal at a new restaurant may be harder to justify than spending an equal amount or less at a place one is familiar with from previous experiences.  However, if the cost of a meal at the new restaurant is reduced to $25, the “downside” to having a bad meal is not nearly as likely to dissuade someone from trying it.  Especially when the new restaurant may in fact provide a wonderful experience, the possibility of having a terrific meal at a greatly reduced price is attractive and compelling enough to generate interest.

A list of some of the common daily discount sites can be found at http://tomuse.com/group-buying-sites-coupon-deals-discount-savings/

For the Business

The business looks upon the daily discount as a potential way to generate new business.  First, the business does secure the initial purchase (albeit at a greatly reduced profit margin, however, when the business is not currently operating at full capacity, the “loss” may not be at a loss at all, but rather an instance of “half a pie is better than no pie”).  Second, the power of advertising through the discount websites may “remind” other customers of the business that choose not to participate in the daily deal, but may choose to purchase at a later date at full margin.  Third, the hope from the business’ perspective is that the consumer who participates in the discount may return for a subsequent visit and remain a loyal customer.  Even at the full margin.  The benefit of “trial and repeat” serves both the customer (they include a new restaurant in their repertoire of choices) and the business (they get the initial sale and all future sales.

Of course, there is a “flipside” to this offering of discounts.  The business is at risk that the people who will choose to take advantage of the deal or offer may be the existing and loyal customers to begin with.  So the business is offering half-off discounts to customers that were previously paying full margin and had every intention of continuing to do so – only now are only being asked to pay less for the service or product.  The business loses half of their profit on existing customers who participated, and may have the jeopardy of not attracting more (or enough) new customers to make it worthwhile for the business.  In essence, the business has only subsidized existing sales without adding an incremental business.

Results

A recent website posting (http://www.retailcustomerexperience.com/article/185303/What-Whole-Foods-gained-from-its-LivingSocial-deal?utm_source=NetWorld%20Alliance&utm_medium=email&utm_campaign=emna_rce_10102011) examined the results of a recent Whole Foods attempt at using a daily discount.  Their results as quoted on the website are impressive:

• Customers could purchase $20 for $10.
• Coupons sold on the site at 115,000 per hour accoding to company spokesman, Andrew Weinstein.

What remains to be seen is if there will be incremental sales that the offer generates in the coming months.  Some experts are doubtful that given the “niche” that Whole Foods maintains, that new customers can be incented to try their shopping for groceries in that store.  

Ben Sprecher, Founder and VP, marketing for Incentive Targeting, a company involved in tying daily deals to loyalty card programs had this to say on RetailWire.com about the issue:

“Whole Foods is, in essence, placing a $10 – $15 million bet (1 million deal cap times $10 discount each, plus LivingSocial commissions of up to 50 percent) that the publicity, new shopper acquisition, basket lift, and change in long-term shopper behavior driven by this program will outweigh the costs, the tragedy is that, at the end of the day, it will be impossible for Whole Foods to tell what the real ROI and impact was.

Will $10 off $20 entice new shoppers to the store? Will those new shoppers come back? Will existing shoppers buy more, or simply subsidize their current purchases? And are there even enough shoppers out there who haven’t heard of Whole Foods (or haven’t tried it), but who are subscribed to LivingSocial and who can be tipped over by a $10 discount?”

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