In the first quarter of 2012, more than 100,000 businesses ran a Groupon campaign. What’s more, the mobile market for social coupons will hit $46 billion by 2015, Juniper Research predicts, compared with $5.6 billion in 2011. That’s a lot of cheddar.
But before you jump on the bandwagon, take heed: “In their current form, social coupons are not ideally suited to ensure customer acquisition and yield business profits,” report V. Kumar AND Bharath Rajan in MIT Sloan Management Review. The authors studied coupon campaigns at three profitable businesses, all of which bled substantial red ink immediately afterward. Moreover, the businesses struggled to retain the new customers they’d lured.
The authors developed three rules to help guard against this:
1. Use coupons to build broad relationships with new customers.
“Although most customers buy coupons for a specific purpose and redeem them for particular products, there may be some opportunities to broaden the relationship….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.” In short, cross-sell.
2. Be strategic about 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….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.”
3. Beware cannibalizing existing revenue.
“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.”
If you’re hungry for specific profit-and-loss data surrounding coupon campaigns, we recommend the New York Times blog series, “Is Groupon Good for Small Businesses?”
In it, MP Mueller details a study by Utpal Dholakia, marketing professor at Rice University’s Jones Graduate School of Business. “Mr. Dholakia concluded that Groupon promotions were profitable for 66 percent of the businesses surveyed and unprofitable for 32 percent,” she notes. “He found that 42 percent of the businesses said they would not run another Groupon promotion.”