About 1,100 years ago, a little before my time, this country was ravaged by Vikings who would sail over from Scandinavia each spring and rove around burning, looting, killing, raping, enslaving and generally having a good time.
The inhabitants, whose ancestors had done much the same thing after the Romans left 300 years previously, used to pay Danegeld – bribes to keep the villains away. This had little effect, other than encouraging the Vikings to demand more and more money each season.
This went on until the locals finally fought back and what eventually because England started to emerge
70-odd years ago when I was an infant, the newspaper industry engaged in a ruinous promotional war, with huge give-aways to attract subscribers.
I have to admit I wasn’t paying much attention but before they all came to their senses and stopped, some nearly went broke. I read somewhere that one paper was giving away complete sets of Encyclopaedias to attract subscribers.
About 30 years ago when I was paying attention, the Ogilvy Centre for Research in San Francisco was engaged in a joint project with the late Professor Andrew Ehrenberg and colleagues, at that time with the London Business School. It was called PIMS, and stood for Profit Impact of Marketing Strategies and was conducted among (if memory serves) some 200 large firms in the U.S. and Europe.
What they discovered was that on average the 25% of firms that spent most on discounting and least on advertising were half as profitable as those that did the opposite.
This does not mean you should never discount and put all your money into advertising. Proctor & Gamble have upped their advertising spend by (I think) 24% in the last two years and their profits have taken a terrible hit.
However I have always said that you should generally incentivise sparingly. Incentives are like crack cocaine. Firms get addicted and can’t get off them. They also end up telling shocking lies. For one of my clients in the home improvements industry – which is largely driven by phoney discounts – my main creative task for years was to invent excuses for the latest wave of money-off deals.
I strongly believe that Groupon in particular is for the most part only good for Groupon. Ryan Healy has put up an illuminating case history I suggest you read at http://www.ryanhealy.com/better-than-groupon-restaurant-case-study. Just check out how Groupon make their money and ask yourself how you can..
Ryan’s stuff is so much better than some of the other stuff I come across. I just saw something by one man who misquoted David Ogilvy as saying “A huge promise is the soul of an advertisement“. In fact Dr. Johnson said “Promise, large promise is the soul of an advertisement” some two centuries before David arrived on the scene.
I have never used discounting at any level above introductory offers. Even then, it's about 10% or so. Groupon not only kills profit but it does not generate any measurable return trade.
In a restaurant we used to own the new team decided to use Groupon. It's not only the gross margin that gets murdered but also the reputation. Heavy discounts attract real graspers. These people expect extra free veg, bread etc. They won't go for side dishes or drinks, unless you count tap water. A couple of days later the place went from 1st place on TripAdvisor to 2nd as a few of these pikies put on their “expert” opinions.
If you want to give away free cash and have a desire to vandalise your hard won status, then heavy discounting is for you.
I think the real problem with people discounting isn't necessarily whether your do it or not… it's WHEN and HOW you do it.
For example if you discount a front-end product but have a killer back-end to back it up, discounting can give you a tremendous ROI.
The problem is… most of these companies using Groupon have no marketing funnel in place. So they basically feeding the flame to an already broken system.
Couldn't agree more
I hope it may be very useful to me.. Groupon clone
I read online about an up market restaurant in the US who used Groupon and it was a complete disaster. Instead of attracting more of it’s target audience it attracted people who could not normally afford to go there. These people then went online to complain about the cost of the meals at full price. The restaurant lost tens of thousands of dollars on the deal, their carefully nurtured reputation was in tatters and Groupon walked away with about $50k.