WEB REVIEW: With Groupon and its ilk, daily deals drive demand

A few months ago, something interesting happened.

A small company in Chicago called Groupon sent out an e-mail offering to sell a Gap gift card with a $50 value for $25. It was part of a marketing campaign—fully endorsed by Gap, by the way—to test the waters with a national campaign of this type. With no prior frame of reference, neither Groupon nor Gap had any idea what to expect, but I think it’s fair to assume the results exceeded their wildest aspirations.

But first, a little background …

Groupon is a “deal-of-the-day” website created by CEO Andrew Mason and now operating in more than 150 markets around the world. The name refers to the business model: The company offers one “Groupon” per day in each of the markets it serves. If a certain number of people sign up for the offer, the deal becomes available to all. If the predetermined minimum isn’t met, no one gets the deal that day.

This approach serves two purposes:

First, it provides some risk mitigation for the retailer, who can treat the coupon as quantity discounts and sales-promotion efforts.

Second, it helps spread the word through social groups, as people who want the deal tell their friends about it to increase the chances of reaching the tipping point.

Until the Gap test, Groupon was known for its daily deals for local brick-and-mortar stores. This was the first time they dipped their toes in the national campaign waters to test results. It seems they caught lightning in a bottle.

CEO Mason explains, “We’ve worked with plenty of national brands, but this is the first time we’ve featured the same business in every city simultaneously.” By the end of the day, more than 440,000 Groupons were sold, bringing in a little more than $11 million and, one can imagine, lots of new Groupon customers.

Of course, to be successful, customers need to hear about the deal. Groupon handles this by sending out daily e-mail messages, updating its apps running on smartphones, posting the deal on its website, and sending out messages via social-network platforms like Twitter and Facebook. Customers then help spread the word through their networks, helping to cast a wider net.

Overall, the success has been astonishing. For local stores working to bring in traffic and sales, discounting makes perfect sense, especially in this economy. To be viable long term, of course, the stores will need to convert these new buyers into repeat customers, something that has dogged business owners across all markets, across all time.

From the perspective of the delivery mechanism, however, the results are far more compelling. With the marketing medium taking a cut of sales somewhere near half (and Groupon being recently recognized by Forbes magazine as the fastest-growing company ever), competitors have come flooding in.

Locally, there are a few that are working to capture market share from the de facto leader. Bogotown (bogotown.com) is a locally owned company specializing in half-price deals (hence the name: buy one, get one.) Half Off Depot (www.halfoffdepot.com) was created in Atlanta in 2008 and now operates in more than 26 cities, including Indianapolis. Living Social (www.livingsocial.com) was founded in Washington, D.C., in 2008 and is operating in almost 100 markets. The list continues to grow—and the differentiations continue to blur.

All of these work on the same basic premise: Make an offer to customers that is at or better than 50-percent off, use the power of the deal and their social networks to spread the word, and wait for the sales to roll in. Stores get an immediate influx of cash and can spread the impact of the sales over time. (For example, I bought a three-pack pass for rock climbing that is still waiting to be used. For some merchants, part of the benefit of the deal is that many paid-for coupons will go unused.)

The problem, of course, is how to differentiate. If each of these competitors can’t find a way to stand out from the crowd, the winner will be the network with the best deals. And the network with the best deals will likely turn out to be the one that delivers the best results.

It will be interesting to see how these “results” are defined over the next few months. If someone offers the stores a better return (even if it’s a smaller number of sales), they’ll have an opportunity to make a name for themselves. All this leads straight to the ongoing debate about the wisdom of adopting a discounting strategy and the potential harm it can do to your pricing structure and value proposition. But we’ll leave that for another time.

The good news is that the consumer wins, regardless of which of these delivery mechanisms ends up the king.•

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Cota is creative director of Rare Bird Inc., a full-service advertising agency specializing in the use of new technologies. His column appears monthly. He can be reached at jim@rarebirdinc.com.•