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The Downside of Social Coupons

Social coupons can appealing--but make sure you're prepared to handle the rush of new customers they can bring.

Make sure you put realistic caps on the number of coupons sold and apply expiration dates or blackouts that won't work against your best interests.

Social coupons--those offers from Groupon, LivingSocial and the rest that hold out big discounts if a set number of web users opt in to purchase them--make me think of efforts to split the atom: If handled improperly they can melt down, leaving nothing but a big hole in the ground where a lead-gen campaign used to be.

The most recent example happened overseas, where a social-couponing acquisition by Groupon had a serious fail over the New Year holiday. The company ran an offer of a traditional Japanese New Year osechi meal--made up of various dishes with good-luck symbolism--home-delivered from the Bird Café in Tokyo for $127, a big rebate off the regular price.

Too big for the Bird Café to handle, as it turned out. Those who bought the deals quickly started complaining that the meals were very late in arriving, and a substantial number found their quality intolerable. Some even began posting photos of the meals as they arrived.

I've seen the photos. Take it from me, they're not good advertising--for Groupon Japan or for the Bird Café.

What happened? Here it is from the mouth of Andrew Mason, CEO of Chicago-based Groupon, who went on YouTube with a video (subtitled in Japanese) right after the complaints started coming in: "We really messed up."

Specifically, he said, Groupon had not yet set up the systems in its Japanese subsidiary for checking that the businesses making offers on Groupon can actually handle the traffic. As it happened, the restaurateur overestimated what his team could turn out while keeping quality and service high. And the customer fallout from this error was serious enough to lead the CEO of a company that turned down a $6 billion Google acquisition bid last December to go online with a very sincere and respectful apology.

The moral here is that as alluring as the power of social coupons may seem for drawing new customers and reactivating old ones, marketers need to really think through the implications of making an offer over Groupon, LivingSocial or the like.

Related: When a Groupon Promotion Went Wrong

Ask yourself if your service staff will be able to handle the extra business. Make sure you place realistic caps on the number of coupons sold and apply expiration dates or blackouts that won't work against your best interests (for example, specifying a Monday-to-Thursday restaurant offer to avoid cannibalizing weekend business).

For those who get the social-couponing equation right, the future can be bright indeed. Case in point: By the Side of the Road Inn & Cottages, a bed-and-breakfast that Janice Fitzgerald's family has operated for 12 years in a 200-year-old house in Harrisonburg, Va. For many of those years, Fitzgerald says, she had been doing co-op advertising with other B&B operators in her area, running ads in regional publications and on WashingtonPost.com to get her inn's name in front of users.

In early 2010, her son mentioned the family lodging business to his new employer, Washington, D.C.-based social buying platform LivingSocial. And they opted to work with Fitzgerald to craft an offer to run over LivingSocial's website: $549 for a weekend stay in one of the seven suites of the main house, or $689 for a weekend in one of the three cottages. As with Groupon, registered users log onto the local LivingSocial site to see deals in their vicinity.

The response was tremendous, and unexpected. "We had no clue going in that in 11 hours we would sell 702 two-night getaways through LivingSocial," Fitzgerald says. "That's 1,400 room-nights, more than double the amount we sold in 2009."

But with 10 rooming facilities and only 52 weekends a year, the response also took up a lot of By the Side of the Road's inventory for the next year. That does concern Fitzgerald, who wonders about the impact on her regular customers.

"On the one hand, I don't know who moves on because they can't get in," she says. "On the other hand, I had one gentleman who called and said, ‘You're so busy! When can I come?' We actually booked him at the full price. He heard about us through LivingSocial, but he didn't care about the discount."

Fitzgerald's best advice for anyone driving new prospects with social coupons: Don't rely on the couponing platforms to remarket to those first-time customers. She followed up on the LivingSocial coupon users with an e-mail offer to buy a gift certificate for a weekend stay for one of their friends.

"Since I'm a hotel, I get e-mail and snail mail data on those [first-time]customers," Fitzgerald says. "So if I don't market further to those people, how stupid am I?"

Got a tip about lead gen? E-mail quinton at entrepreneur.leadgen@gmail.com.

Brian Quinton is executive editor of Chief Marketer magazine.

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This article was originally published in the April 2011 print edition of Entrepreneur with the headline: The Downside of Discounting.

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