In July, I wrote a post titled Bargained to Irrelevance. In it, I identified a huge problem with coupon / deal sites as the inability to segment and hyper-target buyers. I also briefly touched on a second issue: when a brand is discounted frequently, most consumers will wait for the next sale period (especially online, where instant gratification is rarely a driver of purchase behaviour).
I was reading a post (courtesy of Spencer Thompson) by Bradford Cross. In the article, Why is Groupon so Important?, Cross points out that both Google, Groupon and other online advertising companies are in the business of selling relationships.
I don’t at all disagree with Cross. What I think we need to question is the differing value of these relationships across channels. Search-based ads are generally prime time to build relationships as the customer has often admitted a price insensitive intent. This is not always the case with bargain sites, who often stimulate intent.
The shift in channel value
Coupon-based sites profit by taking a spread of top-line revenue (a percentage of all sales). It is a Catch-22 situation in which to maximize revenue, coupon sites focus on increasing their top line audience and conversions. By doing so, they decrease the value of each audience member (collectively) and reduce their channel value.
There is a cause / effect relationship here: – Your audience shifts, from ‘explorers’ to one that is value driven; and – Value driven audiences are less likely to become customers.
A value driven audience
Let’s compare how an average user would discover a company via a coupon-based site vs search.
- Search: User X has decided he wants to take fencing classes (user x likes swords). He searches for fencing classes in his local area via Google. Search marketers buy keywords for fencing classes within his city and promote their company to him, knowing that User X could very quickly become a long term customer (because Google are in the business of selling business relationships, as Cross points out). User X has expressed an intent that is likely not yet price sensitive. Coupon: User Y subscribers to regular coupon sites and occasionally buys deals. He sees a one-month package of fencing classes for 70% off so decides to try. He has always had a loose interest in fencing. While this is User Y’s first deal, some purchasers of this coupon are also trying yoga classes and some have purchased restaurant deals.
The example above may seem unfair, but my point is that most coupon deals are not based on intent-based discovery. They are based on generating interest. User X, who was interested in fencing, has only a small chance of discovering a deal for fencing unless he is already part of the bargain community.
If he was part of the bargain community, he is the most likely person in the pool to become a long-term customer. This is the golden premise of coupon based sites, to unlock potential customers who have a level of interest. Yet, by promoting to the larger pool, we create waste (like most marketing tactics), customers who purchase with little intent of continuation. As the pool gets larger as does the waste (and loss, coupons are rarely profitable), and our audience shifts from one who explore new things to one who are mostly value driven.
The second danger is that while in other marketing tactics our waste is in terms of marketing expenditure, coupon-based waste generally needs to be fulfilled by the vendor. Yes this provides increased opportunities for conversion but carries with it larger risks and operational overheads.
Value driven audiences do not become loyal customers
Because coupon sites are trying to increase their top line revenue, naturally the above-mentioned waste increases. The challenge here is that while User Y was interested in fencing, several of his counterparts who also participated in the buy were not. They buy coupons because they are novel, interesting and, more importantly, cheap. User Y’s counterparts are dangerous. They are social loafers. We can convert some to customers but the percentage would be small. This is not the fault of these users, while completing fencing classes the coupon site has also promoted yoga classes, skydiving, tennis and hundreds of restaurant deals. Each of these deals are as cheap, interesting and attractive as the last so these customers continue in a value driven cycle of trial. Converting value driven audiences to loyal customers is difficult, and these users always have cost effective, new activities infront of them to try.
We have created
What we have created is a viable marketing channel that, for many vendors, is struggling to convert. Right now, the channel / relationship value when compared to other tactics is not there. Coupon sites, like Google, are in the business of selling relationships. Right now, these relationships have a very different value.In my mind, what we are sorely needing (and only half seeing) is a way to filter deals with very strong targeting. That, paired with intent based search is clearly where we are heading. Sadly, we are not there yet.
Cheap masses do not build a business, they build short term revenue and long term ramifications.