The Perils of Social Coupon Campaigns

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

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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. In the case of the restaurant, the loss in the first month was more than $7,000; for the car wash service, it was $6,300, and for the spa it was $11,760. (See “How a Social Coupon Campaign Affected Three Businesses.”) Such losses would not have been so serious if the businesses were able to achieve higher revenues and increased profits in future months. However, this was not the case. Despite their best marketing efforts, the three businesses had difficulty retaining most of the new customers who were attracted to the coupon offers. Based on our analysis, it will take the car wash service and ethnic restaurant 15 and 18 months, respectively, to recover from the profit shortfall following the coupon launch; for the beauty salon and spa, the recovery period for the coupon campaign at current business levels was projected at more than 98 months, or eight years. Needless to say, extended recovery periods discourage businesses from initiating new coupon launches. Businesses that want to prevent social coupons from cannibalizing profits need to design their deals carefully so they aren’t giving too much away.

 

Avoiding the Pitfalls

Businesses considering social coupon campaigns should make an effort to understand how and why coupons work, and how they can affect the economics of the business both in the short term and in the long term. We have developed some general guidelines that can help businesses identify and avoid the pitfalls of social coupon campaigns.

Use coupons to build broad relationships with new customers. Businesses typically think of social coupon launches in terms of adding new customers. But at the three businesses we studied, the impact of new customers was decidedly mixed. Every new customer visiting the restaurant with the coupon resulted in a $14 decline in profits; for the car wash, the decline was $17; for the beauty salon, $39. One way for companies to mitigate such potential losses is to see customer visits as opportunities to up-sell or cross-sell other products or services. Although most customers buy coupons for a specific purpose and redeem them for particular products, there may be some opportunities to broaden the relationship. For example, a roofing contractor can try to cross-sell its gutter installation and cleaning services, and a massage studio can try to cross-sell health and wellness products. As much as possible, the decision to launch a social coupon campaign should be viewed as part of a broader business strategy rather than as a specific marketing tactic.

Related Research

V. Kumar and B. Rajan, “Social Coupons as a Marketing Strategy: A Multifaceted Perspective,” Journal of the Academy of Marketing Science 40, no. 1 (2012): 120-136.

Be strategic about offering discounts. Customers purchase social coupons for their deep discounts. While the low price is an incentive for new customers to try out the product or service offering, many will expect to pay the same low price later on; in a competitive market, any price increase may be viewed as a reason to take their business elsewhere. There is a segment of consumers who buy items only when they are discounted, which obviously undermines profits.

Against this backdrop, businesses should think twice about how social coupons are designed and how the discount will be structured. Depending on what is feasible and practical, a business might decide to limit the number of coupons offered, restrict which categories of customers are eligible to use them (for example, only new customers) or offer a more modest discount rate. For example, following its initial coupon campaign, the ethnic restaurant we examined decided to experiment with a less generous offer. The new coupon was only good on Tuesdays and Wednesdays, their slowest days of the week; the discount was reduced to 30% from 50%; and a minimum purchase was required to make use of the offer. The early results of the second campaign have been promising: Losses in the month after the coupon launch decreased to almost zero (compared with the earlier loss of more than $7,300 in that month).

Guard against cannibalizing existing revenue. Given that the primary motive of launching a social coupon is to attract new customers, most businesses wouldn’t ordinarily want to encourage their existing customers to use discount coupons. Making coupons available to people currently paying full price damages profitability and encourages deal-seeking behavior.

One way to address this problem — and protect profit levels — is to provide social coupons to new customers only. When businesses restrict offers to new prospects, the chances of improving profitability are greatly increased. None of the three businesses we studied anticipated the negative impact of offering coupons to existing customers. As they saw it, with more customers signing up for the coupon, they would only benefit from the increased customer visits. However, we found that less can be more: A 1% reduction in the number of existing customers receiving coupons trimmed the beauty salon’s profit shortfall by $495; for the restaurant, the 1% reduction was worth $187; for the cash wash service, $224.

By changing the nature of the coupon deals, businesses can better control the number of new customers visiting them, the effect on profit margins of the discounted purchases and the number of existing customers taking advantage of the offer. How campaigns are calibrated can have tremendous implications for revenues and profits, both in the short term and over extended periods of time. Typically, the network effects of group buying are considered desirable. But unless managers are careful about how coupon programs are designed, network effects can become a negative force.

Topics

Social Business

Social business research and more recent thought leadership explore the challenges and opportunities presented by social media.
See All Articles in This Section

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Comments (9)
Harry Jacob
Quite motivating tips found in the 1st paragraph, that have helped me a lot. It is true that coupon has become more popular nowadays and according to my opinion coupons are more beneficial for those people who prefer shopping online. I have viewed a couple of websites that are giving fabulous coupons offer from a lot of stores.
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Intrigued Reader
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.
notxin
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 www.couponco.com. This one works with Apple iPhone and Android.
dimanise
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
mjbhatti
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.
fatsgrill
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.
tlfogarty
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.
KathyMcCurry
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!