5 July 2011

What’s Your Deal? A Quick Take On Discounting

by Freddy Tran Nager, Founder of Atomic Tango + Occasional Coupon Clipper

Just read a Mashable article by daily-deal entrepreneur John Amato, who trumpets how great Groupon and other discountosaurs are for everyone (“Why Daily Deals Are Here To Stay”).

His key points…

1. People have always loved discounts.

True. I dig me some sales myself.

2. The customer acquisition costs are relatively low compared to other methods.

Amato needs to provide some data to support that generalization. Most retailers find that they have to advertise their deals. No, not even deep discounts can rely on word of mouth.

3. The market is still maturing.

What’s that got to do with whether a tactic is worth employing? And isn’t that an argument to hold off until the market’s ripe?

My thoughts: While there are certainly some businesses that benefit from offering deals, let’s not apply this tactic too broadly…

First of all, discounting devalues the product.

If you have a luxury or prestige brand, you will destroy its hard-won position with overzealous deals. Also, any kind of discounting, whether a coupon or a clearance sale, teaches consumers that they shouldn’t pay full retail, and they should simply hold off until the next sale. As advertising legend David Ogilvy once noted, discounts are addictive. Give them once to a consumer, and the consumer will want them again and again.

The second problem is that this kind of daily deal is not discriminatory enough.

A company should make special offers to the kinds of customers and the kinds of behaviors it wants. It’s a waste to offer a money-losing deal to a short-term bargain hunter who has no brand loyalty and will not return. It’s also a waste to offer a massive discount to a regular customer who was going to pay regular price anyway. A more strategic approach would be to offer special loyalty rewards to current customers, and special long-term incentives to prospective customers. And those rewards and incentives don’t have to be discounts.

There are other issues with daily deals…

Retail staff and inventory managers may be unprepared to handle rushes, and consumers are already suffering from daily deal fatigue. (I’ve personally unsubscribed from the onslaught of discount emails that were little distinguished from spam. Really, how many tanning offers do I need?)

So while daily deals offer some benefits, such as a performance-based advertising platform, they’re definitely not a good deal for everyone.

Update 7/17/13: Amato was clearly so wrong in his post that the text of the article is no longer here to stay. In the meantime, daily deal sites like Groupon are changing their business models or shutting down altogether.

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches graduate-level marketing communication courses at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

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Jeff Yablon
13 years ago

Freddy, I’ll add another spin to this:

Yes, deals have a place. NO DOUBT. And: as long as you understand WHY you’re doing one (customer acquisition/reacquisition, pure and simple), it almost doesn’t matter that you’re likely to lose money on it.

But you’d better understand why you did that deal, and my fear (https://answerguy.com/2011/06/29/groupon-daily-deals-business-change/) is that many deal do-ers … don’t

13 years ago

Sure, there’s a degree of devaluation from discounting, but it’s also a good way to set your price at a relatively high point and stick with that price. In that way, it’s much, much better than cutting your prices.

Now, as you say, you need to have a goal for your discounting so that you’re offering it to real customers to encourage buying behavior you want, and not people who are only prepared to buy at the lower price.