3Qs: Fishing for customers through deep online discounts

Dis­count web­sites like Groupon, Gilt Groupe and Slick­deals, which offer sig­nif­i­cant price cuts to their mem­bers through daily, weekly and monthly “deals,” have become a thriving corner of online com­merce. Richard Hanna, assis­tant pro­fessor of mar­keting in the Col­lege of Busi­ness Admin­is­tra­tion, whose research focuses on pricing strategy, pro­mo­tions and e-​​commerce, explains the advan­tages and dis­ad­van­tages, for busi­nesses and consumers.

Rich Hanna, Assistant Professor of Marketing at Northeastern University. PHOTO: Mary Knox Merrill/Northeastern University

How do the companies that sell their wares for a discounted price benefit, and are consumers really getting a deal?

The primary benefit to companies is generating awareness for their business.  Getting your name out on Groupon can be a major plus for small business, especially because of the sheer numbers reaching their listings. For the most part it’s low-cost marketing in the sense that firms are not spending money other than the forgone profit of the discounted sale. Essentially, the allure of a daily deal to businesses is the sheer exposure to thousands of people.

As for whether or not consumers get a good deal — yes and no. Daily deals can offer phenomenal discounts to consumers, especially for local services. However, consumers need to do their homework. Other versions of this, such as online sample sales — overstocked clothing and accessories from brand-name designers — run by Gilt or other deal aggregators may be offering the same deals that you would find at Amazon or eBay. As always with online product purchases, watch out for the shipping or other costs to make sure the deal you just received isn’t eliminated by paying a higher delivery cost.

Some of these sites offer discounted gift cards to small restaurants and boutiques. Are the deals sustainable for the small businesses?

Unless these deals lead to regular repeat business, it’s unlikely that the continued deals are sustainable. Research in promotions has shown that customers tend to devalue products that are deeply discounted. Moreover, the deeper the discount, the less likely the customer will make another purchase.

In a retail setting, where a store might discount one item to drive the sale of another full price item, discounts have a specific tactical role. However, as a device to acquire a new customer, the deep discount may suggest low value to consumers or even desperation on the part of the business offering the deal.

It seems like there is a new discount website every week. Is there a risk that the market will become oversaturated?

The market for daily deals may already be oversaturated. More and more companies seem to be jumping in to this space whether it is their primary business model or an added feature. For example, OpenTable, a restaurant reservation website, now offers daily deals for restaurant customers.

To be successful in this space, the intermediary offering the deals to local businesses has to do more than provide deals; they need to differentiate in order to stay ahead of the pack. On the business side, participating businesses need to have a pathway to customer retention. For this to happen, consumers need a different reason to participate than simply deep discounts.

For example, some recent Northeastern graduates are launching a new service, Tweecal.com, which will differentiate itself by focusing on deals from local businesses and leveraging social networking so that customers can track their own network’s interaction with those businesses. It will be less about deep discounting and more about building customer loyalty.

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