Inside the Social Couponing Conundrum

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Inside the Social Couponing Conundrum

By Glenn Withiam - 11/18/2011
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Social couponing, also known as daily deals, has grabbed the attention of a substantial number of hospitality operators and their potential customers, many of whom regularly visit daily deals websites or subscribe to email offers.

Businesses in this space include Groupon, LivingSocial, and, for restaurants, OpenTable Spotlight and Restaurant.com, among many others. Given the rapid growth and “buzz” for such sites, researchers at Cornell’s Center for Hospitality Research examined customers’ attitudes toward these sites and businesses’ strategies to work with the sites to gain potential new customers.

The popular media coverage of daily deal sites has offered horror tales of businesses that ended up losing money on promotions when they cannibalized existing demand or were mobbed by one-time customers who were there only for the discount and did not follow up as continuing customers. Certainly that happens some of the time, but as I explain here, businesses that create well-constructed offers can gain new customers and improve revenues.

First, let’s look at the customers themselves. A survey of 931 restaurant consumers found that a relatively small percentage of the customers who used a daily deal fit the negative description of customers who were poorly matched with the business (Sheryl Kimes, Cornell University and Utpal Dholakia, Rice University). Instead, the benefits of offering daily deals seem to outweigh the disadvantages. A substantial percentage of the restaurant customers in the survey said that they would probably return to the restaurant that offered the most recent daily deal that they purchased—and they would be willing to pay regular prices.

Comparing those who use the daily deal sites and those who do not, Kimes and Dholakia found just a few differences. Those who purchased daily deals were significantly more likely to be younger, be married, and have a higher income than non-purchasers. With those demographics as a background, the researchers’ study attempted to develop a description of these customers who use daily deals. Although discounts are a motivation, something else is motivating the purchasers of daily deals. Kimes and Dholakia describe this as being a “market maven.” Many of those who purchased daily deals wanted to feel that they were on the front edge of market trends and price information.

By their own admission, the daily deals purchasers were good tippers, and based their gratuity on the full check, before the discount. They also said that they appreciated the value offered by their chosen restaurant, even without the discount.

The study did find some evidence of cannibalization. Forty-four percent of those who had purchased a daily deal coupon identified themselves as regular customers. On the other hand, many of the customers who identified themselves as new customers would not have tried the restaurant without the coupon offer. Moreover, the deal also drew infrequent customers. Again, both of those groups would return to the restaurant and pay full price.

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Now, let’s look at business strategy. What seems clear is that the restaurant or other hospitality business needs to carefully structure its daily deal coupon to ensure that the offer provides sufficient revenue to cover its costs, while it also provides value to the customers.

A case study co-authored by Cornell professor Chekitan Dev demonstrates how a tour operator in New York’s Finger Lakes worked with Groupon to develop a deal that made money even though it met Groupon’s usual standard of a 50-percent discount.

Had the tour operator merely offered one of its existing packages of visits to Finger Lakes wineries through the daily deal, the 50-percent discount would have resulted in a loss for every coupon redeemed. To make the deal work at all, the tour operator needed both to increase value and cut costs.

Although the tour operator did create a deal that would be profitable, the fact was that each 50-percent discount coupon represented considerable forgone revenue for the tour operator. This situation echoes findings by Kimes and Dholakia, who suggest that any promotion faces a substantial burden in trying to offset forgone revenue. They are now in the process of surveying restaurateurs to learn their experience in offering daily deals, especially given the customers’ assertion that they would return to the restaurant even without the deal.

The daily deals companies are popular with consumers, but Groupon’s move toward an IPO has caused many analysts to question the long-term viability of such sites, given that there is no real barrier to entry in that business.

Moreover, research on traditional types of coupons have found that customers eventually acquire a sort of indifference to coupon face values. Firms that offer traditional coupons use mechanisms similar to the hotel industry’s rate fences, usually by limiting redemption to one item per person and setting expiration dates for the promotions.

The couponing literature indicates that it is the presence of a discount that seems to be a trigger for the purchase, rather than the amount of the discount. Thus, hospitality operators can seek to enhance the value of a particular service to encourage customer purchases in conjunction with the discount. For the tour operator, the value added was an additional bottle of wine and back-of-the-house tours of selected Finger Lakes wineries.

There’s nothing new about a value-added strategy. What’s different today, though, is that hospitality firms’ customer databases allow them to tightly target promotions where they will do the most good.

Challenging though it may be, hospitality firms should continue testing ways to separate regular customers, potential new customers, and deal seekers. Even when competition is tight and incentives have become a way of life, if operators maintain their focus on analyzing the profitability of a possible deal, they can find ways to take away the focus on price and offer a value that will encourage their newfound customers to return.

Glenn Withiam is the director of publications for the Cornell Center for Hospitality Research.