Race to the Bottom: The Perils of Groupon and Excessive Discounts – by Matthew Olson

(Signalfire’s President, Matthew Olson, reviews different tips, strategies and news for maximizing social media to benefit your business.) read full article

I strongly recommend reading Carla Dewing’s article “Will Groupon Really Boost Your Local Business?” on Social Media Examiner. Be sure to follow Carla, too. Great stuff…

Groupon has been on everyone’s lips for some time. Businesses are flocking in droves to jump on the current “local” coupon bandwagon and promotional platforms like Groupon, LivingSocial, etc. These geolocation coupons seem to be the dream of small business owners near and far.

And why not? The geolocation coupon party is hot and has the attention of consumers near and far. What business owner would turn away hundreds, if not thousands, of new customers at a cost that, on the surface, seems negligible? Here’s the bite: the cost is more than you think.

So how does Groupon work? Carla Dewing recently described the process well in a Social Media Examiner post, saying: First, you agree to become a featured business on their network. You then reduce your product or service price by 50% or more. Groupon promotes the deal and gets new customers through your doors. For every deal, Groupon gets between 30% and 60% of your drastically reduced price.

That’s right, you’re knocking 50% off your product or service and splitting what’s left 50/50 with Groupon. I’m no math whiz, but I think it comes out to be about 25% of the face value of your business’ product or service. Are you making money, breaking even or losing money?

If you’re losing money on one transaction, how is it possible to then make money on many transactions? What happens when that loss suddenly cripples your profit?

Horror stories abound when it comes to excessive discounting, and not just with Groupon. Look how businesses continually slash prices to “one down” the competing shop around the corner. Hair salons, hardware stores, and coffee shops all cut deeper and may even strike bone. I’ve been referring to this unsustainable business practice as a “race to the bottom.”

Race to the Bottom

The term “race to the bottom” has evolved from the international economics of the 19th to 20th centuries (nations or states competing to lure businesses into their jurisdictions) into the current model that keeping product costs low, hurts the producers more than it benefits the consumers. Similar can be said of competing businesses.

Businesses can continually offer deeper and deeper discounts. In turn, the business looks to reduce costs even further. Lower costs very likely impact the quality of ingredients or the people providing services. Lower quality, lower costs, but also a lower value to a business’ goods or services.

This lower value hits the customer before it hits the business bottom line. Statements like, “They just don’t seem to care anymore,” can be followed by, “we used to get bigger portions.” The perceived value to your customers begins dropping like a rock.

Will the few cost-obsessed customers you’re hoping to lure in replace the value-conscious loyalists who suddenly go elsewhere? Not likely, because the cost-obsessed will always be looking to spend a few pennies less, rather than valuing your quality.

When we look at Groupon, discounting races, and all the other cost-dropping teasers out there, what is your reaction? Can you save a couple bucks? Sure. Will the cost outweigh the value? That is, ultimately, up to the customer. But before starting that race, find out why you have the customers you do. Maybe find out what the loyal customers like and do more of it. I’ll bet adding a few more fiercely loyal customers will far outweigh the flash-in-the-pan masses driven by lower costs.

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