Lately, Social Media coupons offered by companies like Groupon and Living Social are getting a lot of attention in the media. They send consumers a daily stream of e-mailed offers where they can save substantial amounts on items they regularly buy, or on otherwise-unaffordable luxury goods & services.
How do these Social Coupons work?
A business offers their services for (say) 50% OFF, which is pre-paid by the consumer to the Social Coupon site, which promptly deducts its fee of 50% of the proceeds, holding the rest for the business. In other words, the loss-leader offer earns the business only 25% of their regular price, on the expectation (hope/gamble?) that you might become a repeat customer.
The coupon company gets its money up-front, (so they don’t have to worry about the credit worthiness or typical payment cycles of businesses making the offer), and only pays the business when coupons are redeemed. In the meantime the coupon company sits on a pile of money, with which to fund their marketing and growth
Are they a good deal for the Business?
Impact on Profit Margins
Some businesses, like restaurants with a 33% food costs, or retail stores with a 50% product cost, can actually LOSE MONEY on Social Media coupons. Service providers may also lose money, depending on the wage levels of their staff. Some businesses, like hair salons and spas, where staff earn (or share) a percentage of the gross, the staff take the hit.
The Substitution Effect
An established business with established clients, may find their web-savvy regulars using their Social Media coupons. This means that instead of earning 100 cent dollars from your regular customers, you get 25 cents from the coupon company,. This is not only a 75% drop in revenues, but you have to wait for funds for coupons redeemed.
Few Add-On Sales
The Social Media coupon companies argue loss-leader coupons provide an opportunity for add-on sales. Many coupon redemptions are for products or services normally unaffordable or unattainable (or rarely bought). Such price-sensitive buyers are less likely–if not outright unwilling– to buy other products or services at similarly unaffordable price points or mark-ups. After coupon redemption, they are also less likely to return.
Impact on Cash Flows
Businesses are paid when the coupon is redeemed. After all, the Social Media coupon companies need to protect themselves, and customers, if a business goes bankrupt before a coupon is redeemed. This means business are buying inventory, and paying cost of goods, and wages, before they collect payment.
This is a double-whammy if they end up selling goods below cost, where industry margins are typically lower than the coupon discount. A business might appear to be busier, but is actually operating at a lower level of profitability.
Impact on the Industry
The more businesses adopt Social Media coupons can adversely impact price points and margins of all businesses in that sector. The discounting can quickly escalate into a race to the bottom where more businesses are chasing customers with guaranteed losses on each sales. While the Social Media coupon companies benefit, businesses cannot stay profitable earning 25% of the going rate.
Are they a good deal for Consumers?
Who can Refuse a Half-Off Offer?
When some one is offering a product of service below cost, or at least below the going rate, OF COURSE a smart consumer will take advantage. A savvy shopper might go out of their way for a really good deal, and that is not conducive to becoming a loyal customers. Next month youll take advantage of whoever makes the best coupon offer.
Is It a Really Good Deal?
If the coupon is for a store or service you already use. You are guaranteed to save money! If the price, net of the discount, is a better price than you usually pay for the same item or service from a competitor, then the coupon is a good deal.
Are Markups Padded for the Offers?
The federal Consumer & Corporate Affairs competition bureau is rife with complaints against retailers showing inflated regular prices before fantastic sounding discounts.. But they typically only prosecute the biggest retailers or chains. The new businesses, which are typically the ones using Social Media coupons to build their business, have a shorter track record for their regular price, so it may be tougher to establish a realistic market value.
Am I still paying a good price?
Consider an offer of $200 designer t-shirt at half price. A consumer can reap the status benefit of having bought a $200 t-shirt, while justifying the purchase by knowing they saved $100 on the t-shirt. But thats still al lot of money for a t-shirt. Consider each coupon offer in terms of your lifestyle and budget.
How Do They Stay In Business?
Businesses offering Social Media coupons still needs to cover their monthly cost of goods, wages, overheads and marketing costs, to stay in business. If all customers of a business used the coupons, they business would never be able to recover costs, and will quickly go out of business. Youll find fewer Social Media coupons for established brands of goods, or in established industries that have tighter margins.
What about Tipping?
In some sectors where tipping is expected, a higher base price means the person providing the service gets a higher tip. It’s expected that you tip on the value before coupon. A 15% tip on a $200 massage or haircut (even when the discounted means you only pay $100) is a much larger tip than 15% on a $50 massage or haircut. When using a Social Media Coupon, the tip adds substantially to the money the service-provider earns, assuming its not split it with the house.
We All Pay for High Marketing Costs
Should a consumer consider how a business advertises in their purchasing decisions? In the end all costs get passed on to customers, or else the business disappears. Did you realize in major markets a on-page Yellow Pages ad can cost $8,000, and in WHERE Magazine $4,000.
A company (typically locksmiths and lawyers) with a full page Yellow Pages ad has a $100,000 higher annual overhead than a competitor, and that restaurant with a full page WHERE magazine ad has $50,000 year more overhead than a competitor. Somebody has to pay for that! If you’re the customer, it’s you! Marketing costs impact prices since a business that overspends on advertising must necessarily charge higher prices than their competitors for the same product or service.
A Better Solution: Offer Discounted Gift Certificates
Some merchants and services are offering their own gift certificates or gift cards at a discount. In this way, they offer their customers a saving, but they get their money up front. A business can reward its customers, improve its own cash flow, and have better margins than with Social Media coupons. Certain consumer protection rules also apply (which may vary by province) .
And if you’re a Canadian Business..
Of course, add your Canadian businesses (with a local street/mailing address in Canada and a a local phone number) to FoundLocally.com’s free business directory and post all the coupons you want, FOR FREE! As well as any sales or special discounts.
Just go to the SAVINGS tab in your listing and click ADD NEW or use the Post SAVINGS option in theAdministrator Action menu. To add your listing, choose your comunity from this list:
West > East
National chains should read our blog’s web marketing tips for multi-location businesses and CALL us at 403-245-2194 to discuss some time saving tips, for (a) getting all your stores into our directory and (b) quickly posting your coupons, sales or other discounts to all your locations. It only tkes a minute, even if you have hundreds of locations across Canada!