Fast Company

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.

To keep up with this news, follow me, Kit Eaton, on Twitter.

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