Groupon phenomenon bad for business?

CHICAGO Wed Jun 30, 2010 4:30pm EDT

A screenshot of groupon.com, June 30, 2010. REUTERS/Groupon.com

A screenshot of groupon.com, June 30, 2010.

Credit: Reuters/Groupon.com

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CHICAGO (Reuters) - Shopkeeper Greg O'Neill has personally used popular Web discounting service Groupon for deals on local Chicago eateries, but chooses not to for his own business.

Despite the huge success Groupon has enjoyed since launching three years ago - the company has sold more than 6 million coupon-type deals for various businesses, according to their website - O'Neill, who runs three upscale Chicago wine-and-cheese shops, decided it wasn't the right avenue to boost sales.

"I'm not a price player," said O'Neill, who added he doesn't have a shortage of consumer demand for the fine wines and foods offered at his Pastoral stores. "That's not the market we play in. Frankly there's no need to replace full margin business with lower margin business."

The proliferation of Groupon, which offers subscribers a new deal at cut-rate offerings of often 40 percent or more daily, and a host of subsequent copycat programs such as Tippr and Livingsocial has spawned big discounting movements in major cities such as Chicago, New York and Washington.

There are many factors behind the sites' sustained popularity, not the least of which is a prolonged economic downturn that has turned skittish consumers into perpetual bargain-hunters. The economy has also thrown businesses into survival mode, leading them to experiment with more viral methods of building traffic afforded through alternative means such as social media.

But for many marketing professionals, there's a big difference between introducing customers to a product, restaurant or service with a blockbuster offer and the act of repeatedly feeding them regular discounts that create Pavlovian expectations, as some businesses have done. It begs the question: When should businesses stop ringing the dinner bell to hungry consumers?

BRAND EROSION

At least one marketing expert promotes the abstinence method used by O'Neill, likening the effect of perpetual discounting to drug addiction for both consumers and the companies making the offers. Severe perhaps, but after considering the analogy, it may not be far off.

"We make the comparison that coupons and all of these things are like crack cocaine," said Laura Ries, co-author of "The 22 Immutable Laws of Branding" (HarperCollins) and president of Ries & Ries, an Atlanta, Georgia-based brand consulting firm.

"That first high is fantastic," she said. "It becomes very difficult once you get consumers into that pattern, into that habit where they won't go without the coupon. Like drugs, the best way to avoid the problem is not starting to begin with."

The overuse of promotional deals puts companies on a downward spiral toward erosion of their brand and operating margins that eats into long-term profits, said Ries, pointing to the airlines and department store retailers as culprits who have suffered from this pitfall. She added rhetorically: When was the last time a savvy customer ventured into a Bed Bath & Beyond store without a 20-percent-off coupon?

Groupon, for its part, said the discounting service has led to permanent growth for companies.

"There are many examples where businesses have been able to expand or permanently hire new employees because of the permanent growth resulting from the customers we deliver," said founder and CEO Andrew Mason in an email response. "Ninety-seven percent of our featured businesses want to be featured again."

He said Groupon's goal is to "nudge" consumers to try different businesses by offering one "handpicked" deal each day.

DISCOUNTS MASK PROBLEMS

In recent months, offers are coming not just from the corner deli or the newly opened neighborhood yoga studio, but also from high-end players such as marquee restaurants and spas. In late April, Chicago's Spring restaurant - long considered part of the city's upper echelon of eateries - offered Groupon patrons a $30 prix fixe menu valued at $59.

"We have always thought that luxury products were immune to the recession," said Salah Hassan, a professor of strategic brand management at George Washington University School of Business. "This is probably the first recession where we see luxury under siege."

Discount websites allow customers who ordinarily wouldn't indulge in high-end products and services to partake, he said, adding that many of those customers are constantly hunting for the next great deal. The obsession with price doesn't necessarily make for a lot of brand loyalty or even brand awareness.

That's the main reason why marketer Ellen Malloy, a well-known promoter of fancy Chicago restaurants such as Blackbird, The Gage and Publican, recommends her clients eschew such discounting programs. If a business needs to drive traffic with discounts, she said, it often means there are underlying problems.

"The race to the bottom is never the way to get to the top," said Malloy, who has blogged about the topic of discounting. "Why are people not buying the product? Maybe what you should do is fix the problem." Not only do businesses risk a potential cheapening effect on their brand, she said, but the quality of the overall experience or service is threatened if an oversubscribed offer leads to a short-term spike in demand that taxes the business's ability to meet it.

O'Neill agrees: "Groupon brings in a pretty robust amount of business in a pretty short period of time," he said. "Too much of a good thing can turn into a bad thing - if you end up creating a situation where your staff or your infrastructure can't handle it."