Should Customer Acquisition be Painful?

Retailers and service providers use coupons to attract new customers to their businesses. The all important trial that an incentive like a coupon can provide is crucial for creating relationships. A new genre of couponing that has emerged is known as “social couponing,” driven by social media’s capability to spread information quickly from person to person. The leader in social couponing today is Groupon, the Chicago-based company that has become a $350 million dollar company in annual revenue in less than two years. The basic premise of Groupon is that a retailer or service provider offers a coupon at a deep discount (e.g., $10 worth of food at a restaurant for $5) as a carrot to create traffic. Groupon’s cut is up to 50% of the coupon sales. Most Groupon offers are local in scope, but it executed its first nationwide offer this week for Gap.

Deep discounting like that required by Groupon can succeed in adding new customers and revenues. My family found a great restaurant in Nashville, The Local Taco, which we would have never visited had it not been for a Groupon offer. We have been back once at regular price since using our Groupon, and we will go back again in the future. But, for all of the stories like mine, there are many other stories of failure to establish customer connection that will bring them back for future visits without the deep discount.

Businesses considering a Groupon program should be prepared to hold their noses while giving away about 75% in the transaction. Groupon may bring customers in to visit, but the experience they have once they arrive and marketers’ efforts to engage them (e.g., encourage sign up to receive emails to continue the relationship) will ultimately determine if the short term pain actually leads to long term gain.

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