What’s at the end of the discounting conveyor?

Last year Google offered £4bn for Groupon, the peak of an explosion of interest in discount websites. So will we ever pay full price for goods again?

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Discounting could be the oldest trick in the marketing book. In fact it is probably older than the book itself. But the past two years have seen an unprecedented expansion of voucher websites that has turned discounting into its own industry – one that asks whether consumers will ever pay full price again.

Advocates argue that discount sites provide brands with a more targeted and measurable strategy than local media advertising or the high street sale ever could. The still growing website Groupon is leading the charge, with more than 6 million subscribers to its daily emails in the UK alone. Speaking exclusively to Marketing Week, UK managing director Christopher Muhr claims the site “changes the way people interact with local businesses”, offering individually crafted daily discounts specific to each of the regions in which it operates. When a minimum number of buyers is reached, the deal goes ahead.

Restaurants, hotels, spas and beauty services typically use the site, as well as other services. Certainly, discounting could change the way these are bought. It seems unlikely any consumer would currently need to pay full price for teeth whitening, for example, given the frequency with which such packages are featured.

Discounts offered by Groupon are typically more than 50%. The business or brand pays nothing to have its offer featured but Groupon takes a commission of half the profit made. In the UK, around 89% of businesses ask to be featured on the site a second time, claims Muhr.

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He says businesses should not need to discount constantly to bring customers through the doors, but should see Groupon as a more accountable alternative to regional or local media. Instead of buying local advertising, a business can attract customers with a one-time offer, and can measure every sale made. “You have to think about the discount as an investment. A business would otherwise be paying a newspaper up front to advertise,” he says.

Groupon was reported last year to be the fastest-growing business in the world. It operates in 44 countries and has been hiring 150 new employees a month at its Chicago headquarters.

It has already spawned hundreds of imitators. Google, whose reported $6bn (£4bn) bid for the site was turned down in December, has announced it is trialling a similar service. And Microsoft’s Bing launched a deals aggregator site last week. Meanwhile, around the time of Google’s Groupon bid, Amazon invested £111m – a rumoured 7% stake – in rival LivingSocial.

Peter Briffett, the UK managing director of LivingSocial, says the site is a “local discovery engine” and “the future of local marketing”. While the model is easily replicated, given the investment in a sales force, Briffett says scale and quality is crucial in attracting businesses and consumers. “It is very much the quality of the deals that you are putting out there as well as the type of subscriber base you have,” he says.

Deals culture
The group-buying model is not the only way to exploit the discount culture. Sites such as VoucherCodes.co.uk promote nationwide deals from bigger brands, usually with less money off, but for a wider range of businesses. It does not rely on group buying to make a deal available.

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As with Groupon and LivingSocial, the benefit to consumer and business is the ability to bring a product or service within the price range of more buyers, says VoucherCodes.co.uk co-founder and managing director Duncan Jennings. But in a few sectors, he admits, consumers have come to expect price cuts as the norm.

“Take restaurants, where there is heavy and consistent discounting. If the brands have lots of restaurants and high fixed costs, they have to have a lot of volume going through them every day,” he says. “It is so competitive in that area and the level of [brand] differentiation is not always there.”

The implication is that the market is so saturated many restaurants would struggle to compete at full price. Jennings argues they would be suffering more without discounting.

It may come as a surprise that deals promoted on such sites include those offered by premium brands. Men’s tailor The Savile Row Company has been promoting a number of discounts on competitor site MyVoucherCodes.co.uk. Jennings claims vouchers and discounts offered through sites of this kind are in fact a more targeted marketing tool than might be imagined.

“Any brand that is willing to run a sale should be willing to run a voucher. If you are running a sale, you are effectively hoisting a sign in front of your shop or on your website saying you are discounting. If you run a voucher, you can target a particular set of customers who are price-sensitive,” he says.

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A third type of discount service is the location-based platform, such as Foursquare and Facebook Deals, which launched in the UK in January. While the other two types depend on email as their main communication channel, location-based services use global positioning systems on smartphones. When a Facebook user ’checks in’ to a business to claim a deal, a notification is posted to that person’s news feed, where friends will be made aware of it.

Check in for a discount
Dan Rose, vice-president of partnerships and platform marketing at Facebook, says: “We think of social first in everything we do, and I think our check-in deals product reflects that.” Launch partners for Facebook Deals include Yo! Sushi, Alton Towers and Argos.

Yo! Sushi’s deal sold out within the first 24 hours, while, according to Alton Towers, 1% of its Facebook fans took up the offer of free entry on Friday 18 February. This amounts to 6,000 or so visitors, about half the number the theme park gets on average each day, according to the Theme Index of park attendance figures. However, Alton Towers states the deal was considered successful.

Some confusion surrounds the success or otherwise of Argos’s charity ’deal’ with Facebook. It allows smartphone users to donate £1 to the Teenage Cancer Trust without physically entering a store. So it is possible to donate at three Argos stores in London without leaving Marketing Week’s office. Users can ’check in’ and donate remotely like this several times a day.

This does not appear to be how either Argos or Facebook intend the deal to work. “We do want people going into our stores,” says Argos’s digital brand development manager Jim Clear. According to Facebook it should be necessary to physically go into a business to redeem a deal.

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Clear admits, however, that this first effort is mostly being carried out as “a trial to understand a bit more about how the system works and see where the uptake is”. One upside is there is no cost to use Facebook Deals, nor does the social network take commission from sales.

Each of these models has advantages, but also drawbacks that the sites are seeking to address. Groupon is looking to personalise deals as there may be a limit to the number of emails a user will open each day. Increasing competition could also put pressure on how much discount sites can negotiate with merchants on pricing.

From the merchant’s point of view, the online voucher sites could offer greater data incentives in the long run compared with other types of discount site. Users often supply their email address to the merchant through the voucher site, allowing brands to keep in contact with people.

Facebook has not made any demographic data on its Deals partners available, though it says brands can get access to publicly available data shared by users who check in. This must be used in accordance with Facebook’s terms, however, and cannot be sold, at present.

All these models have growth ahead of them, given the sheer number of businesses looking to draw people in. Buyers, meanwhile, will never tire of a good deal. But only once consumer confidence returns will it be apparent whether the discount culture has a long-term future, or is merely a symptom of our economic times.

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Case study

Yo! Sushi’s Facebook Deal

As a UK launch partner for Facebook Deals, Yo! Sushi’s first experiment with the location-based mobile voucher system was to offer five free plates of sushi plus a drink to the first 1,000 people to ’check in’ at a restaurant.

Customers claiming the deal could ’tag’ a friend, giving them access to the same offer at the restaurant. Yo! Sushi marketing manager My Ly says: “This meant regular customers were able to bring a friend who had never tried us before – and maybe were intimidated by our concept – totally risk-free.” Every one of the deals was redeemed within 24 hours of the platform going live.

According to Ly, the brand’s motivation for signing up to the Facebook launch is both in the retention and acquisition of customers. “We wanted to reward loyal customers by a unique mechanic but also create excitement and acquisition among a cool, early-adopting, younger demographic who may not be familiar with our brand,” she says.

Though Yo! Sushi tends not to partner directly with other voucher sites, Ly says that its offers are promoted on sites such as VoucherCodes.co.uk, MoneySavingExpert.com and HotUKDeals.co.uk. The brand did partner with MyVoucherCodes.co.uk to feature its first January sale, where diners could get 40% off. This was advertised throughout December.

With a presence on Twitter and Facebook, as well as a loyalty programme with about 300,000 members, Yo! Sushi has taken a multi-channel approach to targeted discounts for regular diners. Discounting all year round is not on the menu, however. Instead, Ly says, it concentrates on designing “value-added offers and promotions” for important times of the year strategically.

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