Tuesday, August 9, 2011

The Deal-Hunting Bubble - and Why it Should Burst

Don't look now, but the Deal-Hunting Bubble is rapidly expanding - faster than most merchants and marketers probably anticipated. But is this ultimately a good thing?

Hinted at about a year ago with the growing success of Groupon, the rise of "social shopping", and recession-fatigued consumers embracing frugality, deep-discount deals seem to have taken the industry by storm. Groupon is now said to be worth more than $20 billion, with LivingSocial not too far behind. Daily deals reach nearly half of US online consumers in a recent PriceGrabber survey. Wag Jag Express, a freshly-launched location-based and time-sensitive deal application owned by The Toronto Star, is offering jaw-dropping $1 deals on activities throughout the city. The market couldn't be hotter.

But is the excitement - and addiction - that is spreading among consumers a good thing for the merchants serving them up the salivating offers and unheard of discounts? I would argue: not so much. Although they seem enticing, although the potential for traffic can be too good to be true, daily deals and group discounts will kill local businesses, creating deal-hungry consumers that just aren't good for anyone.

Below are five reasons local merchants should think twice before jumping onto the deal-hunting bandwagon:

(1) It's Not Sustainable Over Time

Ask any major marketer about discounting, and they'll tell you that, while useful as an incentive, it's not a sustainable practice over time. It's one of the many tools that they use in their marketing mix, in addition to advertising and branding, which help to build an affinity among consumers over time.

The problem with the Deal-Hunting Bubble is that deep-discounts are being pitched to merchants as the be all and end all of marketing - the easiest and fastest way to get people through the door.

How long can they keep relying on the practice, though? And how long until they realize that the payoff doesn't last as long as they thought it might? As an ex-Living Social salesperson tells Business Insider, "a lot of these merchants are also getting dealed out because they realize that the margins on these things aren't what they thought."

(2) It's an Arms Race You Just Can't Win

Although a local merchant may be offering a deep discount as part of the Deal-Hunting Bubble, they aren't doing it within a bubble themselves. With group and local deal sites springing up by the dozen and a plethora of local merchants falling over themselves to offer deals on them - deal-hunting fatigue is beginning to set in.

According to the PriceGrabber survey, 63 percent of US online consumers receive emails from two or more deal sites a day, with about the same proportion admitting that they feel the industry is getting crowded with too many sites. As a result, the only way to break through the deal clutter is to shock people by offering even deeper discounts. Wag Jag Express' $1 deals is one mind-blowing example.

The bottom line for merchants: no matter what kind of deal you're able to put together, there are likely hundreds of other similar businesses that are looking to out-deal your deal, turning the Deal-Hunting Bubble into an arms race you're not likely to win.

(3) It Devalues Your Brand and Product/Service

Discounts reduce the perceived value of a brand and product or service, period. Although an earth-shattering deal may be good for getting people in, it sets a lower expectation of the value of a business, resetting the price that people are willing to pay for whatever a merchant is selling.

Many local merchants don't realize that their brand is a part of the product or service experience - whether it's a yoga class or meat from the butcher, it's part of what makes the retailer what it is in the minds of consumers. By selling their service at full price, they're sending the message that their particular service, their brand, is worth paying for.

Getting in on the Deal-Hunting Bubble, however, sends the opposite message. It tells consumers that they're selling a commodity, that they're desperate for business (and that the commodity they're selling is undesirable), and that they've rethought how much their product or service is worth. Not a good thing!

(4) It Gets You the Wrong Kind of Consumers

Offering daily deals doesn't get merchants more traffic from their usual crop of consumers, it gets them a very special kind of consumer: the deal-hunter. And although this psychographic group has been growing steadily since the recession, they aren't necessarily the kinds of consumers that merchants ultimately want. They only really care about the deals.

Again looking at the PriceGrabber survey, 78 percent of respondents that said they purchase
local deals said that they do so because they like saving money, while only 19 percent said they pulled the trigger on them to try out new services that are normally out of their price range. That discrepancy is startling, and should be a wake-up call for local merchants.

Although deep-discounts are being pitched as critical lead-generation tools, the buck will typically stop at the deal. Deal-hunters aren't necessarily in it to discover new and interesting businesses or try out new products that they'll happily pay full price for later - they're in it for the thrill of the deal. No deal, no customer!

(5) It Ignores Your Loyal Customers

Ever get annoyed when it feels like your cable or wireless service provider always seems to be offering new customers their most enticing deals and promotions, leaving those who are already with the provider out in the cold? That is exactly what the loyal customers of these merchants should feel like when deal-hunters are welcomed with open arms (offering $1 deals).

Getting swept up in the Deal-Hunting Bubble is like putting all of your time and energy into trying to get potential customers to like you, all while ignoring the customers who - guess what - like you already! Daily deals are not about building loyalty, they're about getting a quick, fleeting hit of new business, all while missing the mark with your bread and butter.

Instead of deals to entice traffic from new customers, why not offer rewards that build loyalty and affinity among your current customers? Instead of trying to get new people to try you out, why not try to get more business from the people who know you well?

Deal-hunting isn't a behaviour that will ultimately serve local merchants in the long run. It isn't sustainable, it's an arms race that can't be won, it devalues the brand and product or service that's being offered, it appeals to the wrong kind of consumer, and finally, it ignores the people who should be given the most attention - one's loyal customers. All of these are reasons why, from the merchant's perspective, the Deal-Hunting Bubble needs to burst!

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