The New eCommerce: Daily Deals

Groupon’s recent Super Bowl ad gaffe brought a new wave of attention to daily deal websites. The sites have gained immense popularity in the past couple years and have created a new powerful form of ecommerce and advertising. Groupon is the leading daily deal site and offers deals of 50% off or more to customers once a certain number of people have signed up for a deal, but there are many competitors popping up every day, like Groupon’s major competitor LivingSocial, with only slightly varied business models.

Groupon works by having a “deal split 50/50 with merchants,” according to CNN Money, and “they also charge merchants an additional 2.5% fee if people use their credit cards to buy Groupons.” LivingSocial, however “gives a 60/40 split right off the bat for merchants, and charges no credit card transaction fees.” Another difference in these two models is that Groupon requires a certain number of people to buy a deal so the merchants are guaranteed to make money, whereas LivingSocial doesn’t require a certain number of participants in order for you to redeem deals. The Harvard Business Review reveals how another smaller competitor, LevelUp, tweaks the daily deal model in yet another way and “offers a sequence of increasingly better offers from the same merchant to repeat customers — the goal being to make repeat purchasers out of daily-deal customers, who typically buy just once.” The company also “allows businesses to keep 100% of the revenue generated by the first deal to new customers and takes only 25% of the proceeds from the second and third deals when they are purchased by the same customers.”

However, coupon structures are not enough to differentiate companies in this industry if they’re looking for long term success. It is too easy to switch between websites to find a different daily deal company with a more favorable pricing structure, so companies must set themselves apart in different ways. LivingSocial investor Todd Chaffee points out the key divergences in his company’s strategy compared to industry heavyweight Groupon, focusing on the fact that LivingSocial is targeting a more “affluent, lifestyle-oriented target market,” while Groupon is focusing its efforts on just getting a large chunk of the general market. More specifically, Groupon is considered “down-market,” with a heavier focus on price through coupons, whereas LivingSocial is a more of an aspirational brand that focuses on the lifestyle component of its deals rather than just the reduced price.

This strategy allows LivingSocial to make its offerings attractive to many merchants and higher-end consumers who are wary of excess couponing. For example, LivingSocial recently introduced “Escapes, a unit devoted to travel packages, [that] provides not just a hotel room, but a number of deals in a package,” which emphasizes the experience more than the price, like a recent vacation deal “at a cottage in the Redwood forests California [which] costs $193 for a two-night stay plus breakfast at a nearby bakery and free wine tastings.” Clearly the consumer is getting much more than a bargain on a hotel room, and what draws them in is that LivingSocial is really “delivering a ‘weekend in a box.’”

Now that daily deals are a more familiar concept for consumers, technology and product innovation, like LivingSocial’s Escapes, are crucial for maintaining brand differentiation and a competitive advantage. Another LivingSocial specialized service is Family Edition deals, “focusing on family-friendly activities such as visits to zoos, aquariums, and art classes”, but Groupon is also developing its product and now offers “Groupon Now, delivering time- and location-specific deals on an ongoing basis to consumers through location-aware devices such as smartphones.”

Targeting is another crucial way for daily deal sites to differentiate themselves. Tomimo Geron points out on his Forbes.com blog, Social Markets, how “LivingSocial is getting more hyper-local so that people will be able to get a targeted deal not just for the San Francisco Bay Area but for each small town or neighborhood in the area” and that Groupon is trying to focus targeting in similar ways. But companies could also set themselves apart through demographic targeting like females vs. male.

Despite creative differentiation, the core concept behind all these daily deal sites is that they offer discounts – a potentially dangerous marketing tool. Ideally, daily deal sites can benefit merchants by helping them “[acquire] new customers and [leverage] existing assets and infrastructure so there’s no waste, whether in human assets or physical product waste,” but the reality is price promotions often “make consumers permanently price sensitive by lowering the reference price they expect to pay, and [they] distract customers from products' benefits, causing irreversible damage to brands,” according to the Harvard Business Review. In fact, coupons, like what these daily deal sites are offering, have historically proven to rarely “lead to increased sales; more often than not, they simply attract deal seekers or encourage consumers to stockpile items that are on sale,” which is one drawback for merchants wanting to promote their company through daily deal sites - getting customers a continue to buy even after they redeem their coupon.

In order to use the sites successfully, companies considering using Groupon, LivingSocial, or similar sites need to have a solid strategy of how the coupons fit in to their overall marketing mix. The most effective use of coupons has traditionally been for encouraging trial of a new product when companies have a clear idea of how they will “convert new users to regular customers when they come in to try the discounted product.”

However, these sites are more than just coupons, as I discussed earlier by pointing out their added values like creating experience. Daily deal sites can actually be more like a new form of local advertising if used correctly. The “pay-for-performance model” of the sites is a unique benefit when the sites are treated like local advertising, since traditional advertising like newspaper or radio ads, doesn’t let the business know directly when people are being driven to purchase because of the advertising. With daily deal sites it is very clear if a customer comes to your store because they heard about it through a Groupon deal. Also, this way companies don’t have to pay up front for advertising and hope that it pays off and increases traffic, because they pay through discounted services when coupons are actually redeemed-a direct response to their advertising’s effectiveness.

I agree with Todd Chaffee that the “daily deal market is not nearly saturated” and despite Groupon’s first-mover advantage in the industry, I think that LivingSocial is following the most effective strategy for sustained growth and success, which will eventually result in it surpassing the success of Groupon. The company’s innovative product development, like Escapes and a new mobile app providing immediate deals in a geographic area, strong management, and clear strategy to avoid the pitfalls of strictly using price promotion all indicate that LivingSocial has very strong potential. They will be the daily deal site of choice for merchants because their value is not just based on price but “on the experience–that gives the merchant a little bit of latitude,” as well as customer service, like its major investor, Amazon.

Americans have always loved getting the most for their money and daily deals are helping consumers do that every day, but merchants should also been keen to this new tool for not just unloading excess merchandise, but also spreading awareness about their company. Now excuse me while I buy some Mother’s Day flowers for my mom thanks to LivingSocial’s timely deal.

Living Social

Sharing Perceptions

It's common knowledge that celebrity endorsers add to the perceptions of the brands they represent. When Michael Phelps was caught smoking pot, Kellogg's immediately dropped him as an endorser because his actions weren't aligning with the cereal company's family values, Tiger Woods was dropped as a sponsor after his shameful affairs were exposed, and many other celebrities have been given the boot after their actions threatened to reflect poorly on the brands they were aligned with.

Companies choose celebrities to endorse their brand because they will increase awareness and add the positive associations that people have with them to the brand. However, celebrities are only human and bound to make mistakes that don't mesh with what the brand wants to convey, making such endorsements risky.

The Harvard Business Review makes an interesting point that the potential reputation damage can go both ways. Celebrities may be people but they are also brands themselves and need to take care of their image and credibility. If a celebrity chooses to endorse a brand with a tarnished image, it can make them look bad too.

Earth Day in a Consumer's World

Earth Day is today, April 22. Everyone should be extra environmentally conscious in honor of Mother Earth, but if you need more motivation, it turns out that being "green" can save you a lot of money too. Just follow these easy tips from Consumer Reports and it will be a win-win situation for both you and our climate. Also, for those of you who have followed my posts on Apple or are just fans of the brand, they have been singled out as the "least 'green' tech company" according to a recent Greenpeace report. Everyone realizes the environmental impact of cars and plastic bottles, but often times they don't think about how the "paperless" technology we use effects the environment as well. All those iPhones have to be manufactured somewhere, and if leaving lights on in your house wastes electricity think of how much energy is used powering Apple's massive servers!

So get outside to day and connect with our beautiful earth, we only have one life and one planet.

Yo Quiero Taco Bell!

For all those loyal Taco Bell fans out there, like me, the fast food phenom's name has been cleared and the petty lawsuit against it has been dropped. Now let's all go enjoy a crunchy taco - who cares if there are meat fillers, we know it's not "gourmet", but that doesn't make it any less delicious!

So You Failed In China, Now What?

My Sophomore year, I attended a presentation by Mattel discussing the marketing initiatives for Barbie's 50th birthday. The crow jewel of the marketing strategy was the brand's expansion into China and the Shanghai superstore I discussed in my previous post. My favorite professor that year was also a former Mattel marketing executive who was responsible for much of the strategy behind bringing Barbie to China, so needless to say it certainly caught my attention when I read about how unsuccessful their strategy was after only a couple years. Around this time I also came across a Harvard Business Review article about "7 Remedies for a Bad Strategy Hangover." Although it's directed towards the individual, I think the same ideas easily translate for companies like Barbie, Best Buy, Home Depot, and any other company who has failed overseas. I know leaders at those companies heeded the advice of #7, to move quickly and get out of the bad strategy fast, but I'm curious if they followed any of the other suggestions.

American Retail's Final Frontier: China

The story is all too familiar; a prominent and successful American company seeks to expand its global empire in the world’s fastest growing consumer market, China, but within a few short years the giant pulls out of the country wondering what went wrong. The most recent company to fall prey to this unfortunate cycle is Mattel, who recently closed its $30 million Barbie superstore in Shanghai.

Barbie superstore in Shanghai

The six story pink Barbie wonderland opened in March of 2009 in honor of Barbie’s 50^th birthday with lofty goals of targeting China’s upwardly mobile, trend-setting elite, and turning the fashion doll into a full-blown lifestyle brand with a heavy branded-merchandise focus. The store had much broader offerings than any other Barbie store, with a cosmetics counter, adult clothing, spa, nail emporium, and even a wet bar. For the first time not just in China, but anywhere, Barbie was being targeted to women as old as their early 30s - decades after most girls in America probably “grew out” of the blonde bombshell doll. Regrettably for Mattel, the strategy flopped. Within eight months of opening, the store had to cut sales goals by 30%, and now it’s closing the store completely, citing a strategy change.

While the recession couldn’t have helped, it is important to point out that amidst Barbie’s failure, retail spending in China rose 18% in 2010 - clearly some shortcomings in strategy are to blame. Analysts have cited problems like poor store location, not localizing the brand, and overpricing for reasons why the store didn’t work.  As Shaun Rein noted on Forbes.com, “Chinese women tend to like cutesy, girlish pink clothes (think ‘Hello Kitty’), not the sexy and skimpy kind Fields (Patricia Fields: Sex and the City) designed,” which are more akin to the clothes that Barbie wears. This lack of localization isn’t the root of all Barbie’s troubles; however, since the dolls are still well-liked in the country, and Mattel did make efforts to localize the brand, like introducing Ling, a Chinese Barbie.

Other American companies have struggled to effectively take advantage of China as the biggest and fastest-growing consumer market as well - Best Buy and Home Depot recently pulled out of China. These failures also cannot be attributed only to lack of localization. Businesses often dismiss their struggles in China claiming that they’re caused because the Chinese prefer to haggle, but that excuse is faulty. A popular Chinese electronics store, Gome, has fixed prices and when it transitioned to that pricing strategy its sales actually rose because wealthy Chinese actually fear over paying and don’t want to bother with negotiating prices, so Best Buy was perceived as overpriced because its products could easily be found at local shops for much lower prices, not because Chinese people just wanted to haggle for lower prices. Apple has maintained a successful high price strategy in China – its Shanghai store sells more iPhones per square foot than any other Apple store in the world even with prices that are 30% higher-because its products are not easily substitutable.

The deeper issue that chains like Best Buy and Home Depot faced was that big box chain stores cannot maintain their price advantage in China. Local retailers are more competitively priced for things like standard electronics because the country has a prolific piracy problem that makes such goods extremely accessible, and the companies pay lower salaries, benefits, overhead, etc.

As Barbie, Best Buy, and Home Depot have shown, the flagship store model is difficult to pull off in China. The extreme traffic and lack of parking make such stores a logistical problem for consumers who consequently prefer to shop closer to home where they can walk to the store. Also, since the Chinese government banned free shopping bags, consumers tend to shop more often, buying less at each outing, which only perpetuates the preference for local stores. Even the world’s largest and most powerful retailer, Wal-Mart, must scale down its stores to succeed in China. As a Forbes.com blog pointed out, “smaller formats that appeal to consumers in emerging markets might be more appropriate to connect with consumers and establish brand presence.”

But Barbie’s problems may not be as simple as localization issues.  Mattel’s greatest downfall was lack of confidence in its strategy, not knowing how to balance localization with staying true to the American heritage that makes Barbie the most iconic fashion-doll in the world. Barbie’s expansion into Shanghai was more than a new location; it was also a foray into being a lifestyle brand. The Shanghai store was selling dolls, of course, but its vast other offerings seemed to take center stage, which was new territory for Barbie. The lifestyle concept may have been more successful if tested in the US first where only one variable of the brand was being altered instead of two.

Barbie branded makeup at the Shanghai store

Even though millions of dollars were lost due to the faulty strategy of these companies, they all moved quickly to end the bad strategy and cut their losses. Hopefully other companies can learn from their mistakes and effectively localize but also choose a clear strategy when expanding to China, or any other new market. 

Consumer Reports Take on the iPad

As a follow up to my post about the iPad 2, here is Consumer Report's take on the new gadget compared to other tablet computers.

http://www.consumerreports.org/cro/electronics-computers/computers-internet/computer/tablets/overview/index.htm

This electronics trend has exploded in the past year, much as the iPod did when it first came out. It will be interesting to see how the trend progresses and if it has the same immense cultural impact as the iPod and iPhone or if it gets surpassed by the next big thing, like e-readers did when tablet computers caught on.

What to Buy When

In the world of Consumernomics, it's not only important to know the best products to buy, but when to buy them, which is a key part of the smart consumer buying process that most people overlook. Here's a link to an interesting and useful article from Time Magazine that makes the dilemma of what to buy when much more simple:

http://money.blogs.time.com/2011/03/24/what-should-you-be-buying-right-now/

I hope you find its advice as useful as I did!