The Dark Side of Web-Based Savings Schemes: No Free Launch

Groupon

Groupon and a host of other Web-based spending incentive schemes, including location-based games like Foursquare, are transforming one corner of the marketing game. But for some retailers it's bringing a double-edged benefit.

Groupon's first big national promotional partner was Gap, with a seemingly amazing sounding offer of a $50 gift certificate for a knock-down price of $25. By signing up for the scheme you, of course, gave Gap your loyalty and a slice of marketing data the store could use to shape its future PR offerings, but you also got a free $25—so everyone wins. (Gap Groupons sold initially at a rate of 10 per second.)

But speaking to NPR, the chief helicopter instructor at East Coast Aero Club revealed the riskier side of smart Web-based promotional campaigns like Groupon. In collaboration with Groupon, and with the aim of attracting local-area people to think about taking helicopter flying lessons, Greenspun's company came up with a 70% reduced offer of a first lesson for just $69. Groupon happily transmitted the offer, and in the first five hours of the first morning of the phone-in offer, the Aero Club had sold 2,600 lessons. That's a great success, certainly, but the club was relying on goodwill by its instructors to help with the loss-leading incentive, and 2,000-plus sign-ups was at the very limit of what the company could stand—at 11 a.m. Greenspun said they "begged" for the phone to be cut off.

Many promotional incentives like this run through Groupon, its competitor peers, or other systems like Foursquare's location-based game (and associated advertising partners) are run as loss-leaders in the hope of enticing new customers who may then deliver repeat business. It's a classic marketing trick. And it's a trick that's prone to be a victim of its own success even when you use traditional marketing methods: Just back in July in the U.S. McDonald's was running a scheme to tempt customers to buy smoothies with free tasting sessions. Too many people took part, and production was outstripped by demand so the offer was terminated—that's basically code for "someone in the executive team realized the scheme was going to hemorrhage cash."

But in in era of widespread Net use, when a simple promotional message can run round the country in a matter of hours (in exactly the same way as viral Web videos spread in popularity) the risks for companies using Web coupons is potentially much much larger. Get your popularity-to-loss-leading ratio wrong, and you'll attract thousands of unwanted new customers.

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