The Perils of Social Coupon Campaigns

To achieve benefits from social coupons, businesses should design deals carefully — without giving too much away.

Although most customers buy social coupons for a specific purpose, there may be some opportunities to broaden the relationship.

Social coupons have become a popular form of marketing promotion. On any given day, scores of businesses such as restaurants, car washes and dry cleaners pitch coupon discounts through Internet sites such as Groupon and LivingSocial in hopes of attracting a new crop of customers. But a poorly designed coupon campaign can do serious harm to a business’s profit margin. While the coupons can generate value for customers and the social coupon service providers themselves (who earn a percentage of the revenue), they can lead businesses into a thicket of problems.

We explored the impact of social coupon campaigns on three locally oriented businesses located in a southeastern city in the United States: an ethnic restaurant that normally earned $2,500 in net profit per month; a car wash service that normally earned $6,000 per month; and a beauty salon/spa that normally earned $6,600 per month. We tracked these businesses for one year following their coupon launches, providing us with information on several business variables, including the revenue trend and acquisition and retention rates. Based on this data, we developed business models to project how the coupon campaigns would affect both short-term and long-term performance. (The detailed results of our study were reported in the January 2012 issue of the Journal of the Academy of Marketing Science. See “Related Research.”) Our goal was to determine the extent to which coupon initiatives could lead to an increase in profits, the factors that work for and against the businesses acquiring and retaining customers, and the opportunities for program design changes (including revamping the coupon’s discount percentage and the rules regarding existing customers) that could be used to improve profitability. We also studied the potential for up-selling and cross-selling initiatives that could improve profitability.

 

What We Found

HOW A SOCIAL COUPON CAMPAIGN
AFFECTED THREE BUSINESSES

View Exhibit

In their current form, social coupons are not ideally suited to ensure customer acquisition and yield business profits. Although all three of the businesses we studied captured significant numbers of new customers with their coupon offers, each saw substantial losses during the month the coupon campaigns were launched, which in turn created significant financial burdens.

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8 Comments On: The Perils of Social Coupon Campaigns

  • KathyMcCurry | May 11, 2012

    Thank you for the great review – I’ve often wondered about the impact of social coupons on the small/local businesses who can least afford to take a loss.
    I spoke (finally) with a local gal yesterday after buying a Groupon for a shellac manicure that I paid $15 for – a great deal for me. This small business woman is a solo-owner and said that 500 people had purchased the Groupon deal, so she was struggling to schedule the 500 takers. She told me that Groupon got 50% – which means she only makes $7.50 per customer, and each customer takes about 45 minutes for the service. As if that’s not enough, she said that the biggest problem was that with so many to serve, it left her little open time to take the repeaters – the customers she really wanted to attract. Yikes!

  • tlfogarty | May 11, 2012

    Great review and excellent compilation of the issue. One other point I think worth noting is that sometimes it is necessary to “buy” the business initially. If a customer is spending money in your business (even at an initial loss to you) then they are not spending it a your competitors business. Also, I think people that take advantage of a coupon (via social media or otherwise) such as described are also more likely to pay full price at a later point having felt that they are still averaging out a savings across multiple purchases.

  • fatsgrill | May 18, 2012

    Interesting & valuable comments from both above. Love the idea of “New Customer Only” offers. I am a bookkeeper at a restaurant. How do we participate in these social coupons for “NEW CUSTOMERS ONLY”? What if the night bartendar knows them but not the day bartendar, or the Fri night bartendar, etc. Some could slip through and then are we at fault for something someone would call or label – favortism or prejudice or something else. Wish the article expanded on this topic.

  • mjbhatti | May 19, 2012

    Very useful research and conclusion. In my view discounts could be a good attraction for new customers to get a tester of what a business is selling. Now, its the core strength of the business (various variables like; product, service, environment, after sales etc) that can or cannot pull the customer back from competitors in future.
    So, a new/small business can experiment with Discount coupons, if it has got a competitive edge to glue new customers and/or collect feedback on new products/strategies.

  • dimanise | May 21, 2012

    It is unfortunate that some businesses are not able to make the ends meet by going with group buying deal sites. What we’re looking to do is find a way to help businesses up-sell those customers who are already at their business location. For example, offer customers to recommend your business and in exchange get a reward like a free appetizer or free shampoo sample. This way you get return business, loyal customers, and personal recommendation. There’s a great tool that allows you to setup a quick campaign like this, and offer incentive for clients to share your business on facebook, check out http://www.sitomic.com

  • notxin | January 6, 2013

    You could also use a mobile coupon distribution network. Unlike social coupons which target friends, mobile coupon networks uses the customer’s location data from their phones. These networks are free or very low cost to use and distribute your business coupons to mobile phones. You can try http://www.couponco.com. This one works with Apple iPhone and Android.

  • Intrigued Reader | January 22, 2013

    I think everyone here is missing a huge point of information. How are they calculating losses? Are they calculating the discounted amount of the Groupon as losses(which sounds like it), if so that is not the proper way to calculate losses for any business. I have worked for many restaurants in my day. We usually operate at about 30% food margins. So, if I offer a group coupon for 20 and you get 40 bucks worth of stuff then the business would get 10 of that 20. If my food costs are 30% then I am spending 12 for that 40 bucks of food. Losing 2 bucks for every coupon sold. That is assuming that every customer comes in and spend the absolute minimun. Which is not realistic. I don’t understand how a restaurant can lose money? Your light bill is going to stay the same? You are paying the employees the same whether or not you have people coming in or not. the only cost associated is your actual hard cost of the food. I would be interested in knowing how the writers calculated the losses of each place. I don’t know anything about salons and car washes, but with restaurants I don’t see how you lose money. All this is not taking in consideration of a repeat customer. I don’t think it is possible for the writers to track if a group coupon customer ever returns. Which would be a additional money made that is more than likely not taken in consideration here.

  • Do Mobile Coupons Work Well For Car Wash Businesses? | April 27, 2014

    […] social coupons hinge on creating a mass volume of new 1st time customers, social coupon campaigns can easily “tip” into a long term loss for the businesses if it’s not planned and implemented effectively from the […]

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