Ten years ago this month, on the morning after I gave this speech in Lucerne, my wife and I were walking through the restaurant at our hotel across the lake when a friendly American gentleman having breakfast buttonholed me to say he liked what I said in my talk. I thanked him and asked if he’d be at the conference again that day. He said yes, and that it would be nice to talk later.
Turns out he was the first speaker that morning. His name was Lee Scott, and he was the CEO of Wal-Mart. Later at lunch, which consisted of boxed food you could take out to tables by the lake, he came over to the table where my wife and I were sitting and asked if he could join us. I said sure, and we got to talking. One of the questions I asked him was why K-Mart had failed while Wal-Mart succeeded. He compressed his reply to one word: coupons. K-Mart had hooked its customers on coupons and couldn’t get them un-hooked. This tended to produce too many of the wrong kinds of customers, buying for the wrong reasons. Way too much of K-Mart’s overhead went into printing what was in essence a kind of currency — one that reduced the value of both the merchandise and the motives for buying it. By contrast Wal-Mart kept to old Sam Walton’s original guidelines, which minimized advertising and promotion, and simply promising “everyday low prices.” This saved money and helped build loyalty.
Lee’s lesson comes to mind when I read Groupon’s Success Disaster at the Redfin blog. It’s too hard to compress the story, so here it is:
There’s a fascinating essay on Facebook just now from the owner of the lovely Posie’s Cafe in Portland, about how Groupon nearly bankrupted her business.
The coffeeshop proprietor, Jessie Burke, was shocked at how much money the daily deals site charged to run the promotion. Groupon sold consumers a $13 Posie’s credit for $6, and then sought to keep the entire $6. Eventually, Posie’s and Groupon agreed on a 50% cut: Groupon would get $3 and Posie’s would get $3. Groupon’s $3 was almost pure profit, but the cafe had to use its remaining $3 to cover the costs of $13 worth of cookies and coffee.
Is it any surprise the promotion was a smash? Over 1,000 customers used the promotion, but the cost imposed by those customers resulted in disastrous losses:
After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally couldn’t not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month. It was sickening, especially after our sales had been rising.
The losses would have been worthwhile if the Groupon customers had become loyal, profitable patrons but many only cared about a discount, not about what made the cafe special:
Over the six months that the Groupon is valid, we met many, many wonderful new customers, and were so happy to have them join the Posies family. At the same time we met many, many terrible Groupon customers… customers that didn’t follow the Groupon rules and used multiple Groupons for single transactions, and argued with you about it with disgusted looks on their faces or who tipped based on what they owed.
And here is Jessie Burke’s original post on the matter, at Posie’s blog.
To be fair, the bad customers were neither “Groupons” (as Jessie calls them) nor “Groupon customers” (since they didn’t buy anything from Groupon — in fact Posie’s was the real Groupon customer). They were coupon shoppers. Promotion hunters. Nothing wrong with that, of course. Most of us play that role some of the time. The problem for Posie’s is one of the oldest in retailing: promotions are good for causing traffic, but lousy for causing loyalty. And making constant promotion part of your business changes your business, literally by cheapening it.
What’s clear about Posie’s is that it’s a business built on human contact, on conversation and relationship. Not just on transactions — and least of all on discounted ones.
Relationship is personal. Even at the biggest companies, success and failure ride on personal behavior, and personal connections. “Trust breaks down first over money,” David Hodskins (my business partner of many years and a very wise dude) observes. Throwing coupons into a personal relationships, especially business ones, is a recipe for trouble.
Since the dawn of the Industrial Age, businesses large and small have also looked at individual relationships with customers as a kind of cost — one that can be reduced or eliminated, often by avoiding or de-humanizing conversations with customers. Promotions like Posie’s with Groupon are just one example of how cheapening gimmicks can actually damage a business that depends on personal relationships between a company’s people and its customers. There are many more examples, especially at larger companies, which too often turn customer support conversations into reverse Turing tests: making humans sound like machines.
Making relationships work has always been both the foundation and the frontier of business. Ideally, technology should help relationships. And to some degree it does. Telephony and other “social” technologies certainly do help us stay in touch. But there are many other technologies, and uses — including some in the “social” space — that prevent or pervert relationships.
Earlier today, when I went looking for Bermuda tweeters, I went down the list of nearly (and now more than) 500 followers of @BDASun (the Bermuda Sun newspaper). A large percentage of followers are just there to promote something. On a day like today, when a hurricane is bearing down on that tiny country, you can tell the wheat from the chaff. The wheat is dealing with the hurricane (or stays quietly hunkered down). The chaff just promotes.
This has me wondering how much of “social media” today is devoted to being social in the old-fashioned literal sense, and how much is about marketing and promotion. Because I think there is a huge split between the two: a split as sharp as the one between Posie’s good and bad customers.
something-for-nothing economic inducement is practiced at the highest levels, countries wanting to devalue their currency so they can cheaply pay back debt, increase exports at expense of others …
may groupon and its imitators choked upon itself
Whereas the data don’t lie, your article and the Redfin article shed an unnecessarily negative light on discounts. Trying to attract new customers through a Groupon (or Groupon-like) deal can indeed have a negative affect on profits if you don’t have a retention plan in place aimed at keeping those new customers and making them profitable. But a different kind of reward/coupon — one given to regular customers to say thanks for being loyal — has the opposite effect. It encourages loyal customers to stay loyal (and profitable!) and it encourages occasional customers to turn into loyal fans. There’s most definitely a place for those kind of coupons in my wallet and in modern (e)business.
Something for nothing is also the model of the current US Greenback. We’ve been through many devaluations, and it shouldn’t surprise anyone to get hit with another one. If you look back at other civilizations you’ll see the same pattern, over and over.
On another track… imagine a world in which twitter isn’t a silo, and it’s possible to rate other users on any scales you wish. You could rate someone on how “corporate shill” or “honest” or “intelligent” or “funny” or how they lean ideologically… and share those ratings.
You’d be able to do it on a single piece of data, or a string of them, or on the person sending them.
This would be a tremendously useful filtering mechanism.
It could apply to almost anything, not just tweet streams.
Thanks Doc, your post has helped me put a few things in perspective 🙂
In many ways, businesses are learning old lessons again. Being social in the off-line world was a necessity for customer-facing businesses. Being unsocial was a sure of loosing your job. Or your business.
Social media/networking should provide businesses with an even more scalable way of being social rather than an excuse to make mechanical, sterilized and inauthentic conversations.
So you randomly come accross Wal-Mart CEO? There is a blog post somewhere about the use of “As it happens,” when telling a story…
Regarding Groupon: they have been adamant to say that their job is to tell a well crafted story, at a human scale and that Rosie’s case is both isolated, and precisely what they are paying a lot of rep to be sure to avoid — so you certainly are right about raw discounts being ineffective, but maybe wrong about condemning Groupon.
I don’t think offering 50% off after the third buy a week apart is any more human than 50% off the first one: both rely on rather invasive tracking that is generally not meant to empower buyers; on the bright side, both are pretext to have the customer make sense of what your business is, or rather, who you are. There is more curiosity the first time, as pointed out by Groupon’s enthusiastic ideal merchant, and there certainly is more courage the third with the opportunity of saying “Last time I came, there were those pineapples…” but what is important is to point out: those are pretext.
What is wrong is an employee responding “There is nothing I can do about that”, be it about an expired coupon or a discontinued product. Rosie’s very humane blog post will probably drive a lot of people in, and justify all the expense.
Really good post. A couple of observations. One is that, as much as I personally like deals, I think they are a bad idea if they require much overhead. The Groupon scenario is *very* high overhead. Keep in mind, gross profit margins in most business are at most 50%, often much less; and net profit margins are usually single digits. The Groupon deal was about 70% overhead–not worth it. Much better to go after “everyday low prices”.
On the “everyday low prices” point, I think there is a fascinating analogy to the tax breaks that localities give new businesses to move there. Very high overhead, all the work the locality does to attract the businesses, and the lobbying effort the businesses go to to attract the breaks. I have always thought it was much better to keep taxes low for everybody, instead of offering big breaks to induce companies to relocate, in a zero-sum game. It is a basic application of the old rule that it costs 10X as much, in marketing efforts, to attract a new customer, as it does to simply retain an existing customer. (Yes of course I am all-too-aware of the political calculus that makes this infeasible–the voters are unlikely to see it that way.)
Great post. It’s my belief that no business that has it’s act together in search marketing, social media and other areas would ever take a Groupon sales call seriously as they would not need it.
The real question is why didn’t what is left of the business press scrutinize the economics of Groupon for a business in relation to other more cost effective marketing methods that bring relevant customers? (instead of glorifying the company)
That’s remind me those little restaurants at the side of the road that pours you free coffe with your breakfast… the bartender who listens to those who sit in front of the bar for a drink, calling people by name, small things on small business, the small details that creates loyal customers.
Apparently as the business grows we become a mere statistic. Even in this “social media” era.
Good article but I think it is wrong for the original author to say Groupon $3 was pure profit. Don’t they have a site to maintain, and programmers to pay?
I think coupons are bad for selling items, but I think it can really help during down times for the service industry.
I think too much coupon is bad, but a one or two week promotion every quarter seems like a good boost.
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