New York City baker Eileen Avezzano says she has a better way than Groupon Inc. (GRPN)’s online deals to entice customers to buy her cheesecakes again: She doles out loyalty cards that reward buyers for return visits.
The cards, designed by Cartera Commerce Inc., are digital instead of physical, and are linked to credit cards consumers already use. They let merchants provide a discount, or a reward such as airline miles, every time consumers buy. A shopper may swipe a card, and a retailer will automatically deduct some money off the bill.
Groupon is seeking to raise as much as $540 million selling 30 million shares for $16 to $18 apiece, according to regulatory filings. Photographer: Tim Boyle/Bloomberg
Businesses like Avezzano’s can use the programs to collect data on when customers shop, how often they return and how much they spend — way beyond the scope of old-fashioned paper punch cards. That can make them even more valuable than coupons from Groupon and LivingSocial. About 900 million transactions will be conducted with cards connected to merchant loyalty programs in 2015, generating $1.7 billion in revenue for the providers, Aite Group LLC estimates. That’s up from $300 million in 2011.
“I see them going head-to-head,” said Peter Krasilovsky, a vice president at researcher BIA/Kelsey. “It’s an evolution of the deals space. The goal is to go beyond new customer acquisitions and become part of the integrated business of merchants.”
The digital loyalty program market began exploding around 2010, when startups and venture capitalists starting thinking about how to bring loyalty punch cards into the digital age, Krasilovsky said in an interview. Makers of loyalty-card software have attracted more than $155 million in venture capital, he said.
Cartera raised $12.2 million this month in a round of funding led by Venture Capital Fund of New England. Along with Cartera, startups such as Plink LLC, CardSpring and Mirth Inc. are gaining attention in the world of merchant deals.
“We think it’s a massive opportunity,” said Jeffrey Bussgang, a general partner at Cartera investor Flybridge Capital Partners. “Card-linked marketing benefits card issuers and consumers equally.”
These loyalty programs, which reward buyers on top of any airline miles or points their credit cards already offer, are often cheaper than coupon providers, too. LivingSocial and Groupon, the biggest provider of daily discounts, typically take a 30 percent cut of a transaction, versus 5 percent to 15 percent when a loyalty-linked card is used. The competition adds to concerns facing Groupon, whose shares have tumbled 51 percent since its initial public offering in November.
Some loyalty programs let consumers get rewards of their choice such as cash back, discounts or virtual currency for games like Zynga Inc. (ZNGA)’s FarmVille. American Express Co. (AXP)’s Zynga Serve Rewards card allows fans to amass the currency when they shop and use it for the online game.
Virtual currencies are seen as a way to attract people in their 20s, said Ron Shevlin, a senior analyst at Aite.
“Zynga has a large portion of players who are highly engaged in their games,” said David Messenger, executive vice president of online and mobile for American Express. “We can connect that online engagement with offline behavior.”
Plink, a Denver, Colorado-based startup, has designed a loyalty program that lets users earnFacebook Inc. (FB)’s virtual currency by dining at more than 25,000 restaurants such as Burger King Corp. and Outback Steakhouse. CardSpring allows clients to build their own Web-based and mobile applications for cards that can deliver coupons, digital receipts and loyalty programs.
Mirth, whose program is currently in trials in New York, rewards frequent customers with a 3 percent discount on purchases whenever they swipe their cards at participating restaurants.
“A lot of merchants have voiced their frustration with deep discounts and deals,” Jeremy Galen, Mirth’s chief executive officer, said in an interview. “With us, you don’t have to lower your price.”
On June 19, online-payments startup Square Inc. also introduced a loyalty program, letting small businesses offer rewards to customers who swipe credit cards through its handheld readers.
Increased competition may further damp analysts’ expectations for Groupon. The Chicago-based company in March reported a “material weakness” in its financial controls and said fourth-quarter results were worse than previously stated because of higher refunds to merchants.
A survey earlier this year by Susquehanna Financial Group and daily-deal aggregator Yipit showed that about half of businesses that had offered an online deal-of-the-day weren’t planning to do so again in the following six months. Merchants were concerned about a low rate of repeat business from new customers gained through such offers, the survey found.
“We continue to question whether Groupon can sustain its high growth and begin to generate sizable profits while scaling back marketing costs,” Edward Woo, an analyst at Ascendiant Capital Markets LLC, wrote in a May 15 note.
As a result, Groupon’s IPO has been among the worst market debuts for a Web company since the dot-com crash. Closely held LivingSocial, whose backers include Amazon.com Inc., Lightspeed Venture Partners and AOL Inc. founder Steve Case, doesn’t disclose sales or earnings figures.
Both LivingSocial and Groupon have started their own loyalty programs. LivingSocial introducedits first co-branded credit card with JPMorgan Chase & Co. in May. Cardholders can earn points that can be converted into DealBucks and used toward LivingSocial deals.
Groupon’s Rewards program, which gives consumers points for shopping at participating companies with a registered credit card, was rolled out nationwide at the end of the first quarter.
“We are signing up hundreds of merchants every week, and have hundreds of thousands of customers on this platform,” said Jay Hoffman, vice president and general manager of the Rewards program. “The adoption has been incredible.”
Still, some business owners view rival loyalty programs as a better investment than daily deals.
“With Groupon, it’s a one-time offer — it doesn’t last,” New York baker Avezzano said. Customer numbers at Eileen’s Special Cheesecake have jumped 18 percent since the shop started using Cartera’s loyalty technology a year ago, she said.
Article Source: http://www.bloomberg.com/news/2012-06-26/groupon-challenged-by-startups-in-doling-loyalty-cards.html
The “loyalty” aspect of our service is what has really fueled a lot of the interest we’ve been getting recently. There has been a huge spike in interest in SMS and other mobile marketing services since the beginning of 2012. And, for the past few years, the Groupon model has been relatively popular. The concept of social buying and heavy discounts was very compelling to small businesses that were looking for ways to drive business. However, we saw some backlash with this model.
The deep discounts and one-time buys are not ideal for the goals and needs of certain businesses. I’ve seen about 60-90% of business owners say they will never do another Groupon again. So if you look at the business market and see that most businesses will not use Groupon again, then how does Groupon have any kind of future?
We always knew that the No. 1 fail point of Groupon was that they had no client retention model. We knew they would eventually have to evolve into a loyalty company—and they did when they came out with Groupon Rewards.
Now, the company is distancing itself from small businesses. They realized their model failed to deliver loyalty, so they started offering a lot of other type of products. Now their focus is on “rewards”, which they obviously did out of demand in the marketplace. But, many businesses dislike Groupon because although they can offer great discounts to customers, they aren’t able to get their hands on the list of people who bought the Groupon. That list is important in building loyalty and personal, engaging interactions among customers.
At SMS Masterminds, we have taken the time and energy to build a very campaign-based and service-based program. We understand the concept of loyalty and how it relates to the needs and opportunities of small business marketing.
There are several elements of a loyalty program that absolutely must be included for the program to be successful. And guess what—Groupon has incorporated virtually none of them. Here are some of the must-have components to a successful loyalty program:
Personal Relationship Building
Whatever system you use for your loyalty program should be one that rides the trends of the loyalty marketing industry and the demands of consumers. Consumers are demanding relationships—they want to feel important and buy from people that they like. If a brand can create a personality and get people to like it, that brand will win over customers. It’s about making an effort to make the customer experience personal and engaging.
Engaging Ongoing Messaging
A loyalty program needs to have consistency in its touch points. We are in a very fast-paced industry today and people expect instant gratification. With our loyalty marketing program, consumers are constantly engaged—receiving text message updates and rewards for checking-in on the Loyalty Rewards Kiosk. With Groupon Rewards, there is no engagement. It’s a system that tallies up totals, and who knows when you will receive your reward.
Timely Push Technology
You want to be able to PUSH your message out there. In order to continue that personal relationship with consumers, you must be able to reach them and provide them with something of value. Push technology is so important in marketing—and that’s why mobile is so big right now—because being able to push out your message and almost INSTANTLY reach consumers is unbelievably powerful.
In-House Engagement Element
You need to have something in-house that people can engage with when they walk into your business. There needs to be something they can do, touch, see, feel—whether it’s a table tent or some other form of signage or a Loyalty Rewards Kiosk conveniently located at the point of purchase—so customers can see, in that moment, how many check-ins they have so far, how many rewards they’ve earned, etc.
Habit Forming Consumer Use
A loyalty system needs to teach your customer how to buy. A successful program can help them develop habits that they will continue to act on over time. Consumer buyer habits are one of the most critical elements of any analytics because understanding what your customers are doing and helping them further mold their buying habits will directly affect your bottom line.
Social Media Integration
It’s 2012. If you are still aboard the anti-social media “I don’t see how it will help my business” train, then you should probably get off at the next stop. You can no longer turn a blind eye. Social media is out there, it’s big, and you can’t deny the success that many businesses have using it to promote brand awareness. A system with elements of loyalty, brand building and consumer engagement should absolutely include social media to round off the entire experience.
If you’re in the marketing industry, you’re going to have people ask you about the differences between Groupon and other loyalty marketing programs. Be prepared to answer those kind of questions by being informed.
Anyone can buy a full-page advertisement in a newspaper, but it’s what the ad says and how it looks that makes the difference of whether it works or not. It comes down to service. When we see other companies providing a technology-only solution, it comes up short in terms of what expectations should be. Value is the key, which is why our system has been built the way it has and how it has remained sustainable among all the other variations that are out there.
Speaking in confidence to Reuters, two unnamed sources confirm that the daily deals giant is now actively testing in the field a new mobile payments platform with a select few Groupon merchants.
Groupon’s nascent payment service comes with an Apple iPod Touch, and a case that wraps around the back of the device, which allows merchants to swipe credit cards, the people said. They did not want to be identified because the service has not been officially announced, and is in an early testing phase with some Groupon merchants.
If the offering successfully makes it out of testing with the company’s blessing for national launch, the service will likely be competitively priced and perhaps significantly undercut the transaction fees charged by Intuit and Square.
Would you be inclined to use a Groupon-branded mobile payments service?
Amazon will use a two-for-one gift card offer next week to get consumers to check out AmazonLocal, its daily deals service.
On Tuesday, March 20, Amazon will let consumers buy a $10 gift card for $5. The catch: They have to go to amazonlocal.com to redeem it. The card is good for any Amazon merchandise, though. The retailer is limiting buys to one per customer.
Mike George, vice president of AmazonLocal, says the promotion is the most high-profile yet for the service, which launched last June in Boise, Idaho. AmazonLocal is now in 90 locations in 26 states and Washington, D.C.
Though others, including Facebook, have backed out of the daily deals category after it seemed to cool off last year, George says Amazon is applying its experience in the online retail space to the segment. “Some of our customers have up to a 17-year relationship with us,” he says. “Our job is to make sure they can make really informed purchase decisions.”
AmazonLocal isn’t the retailer’s only competitor in daily deals. Amazon has a stake in LivingSocial, the number two player in the category, next to Groupon. Last year, Amazon lent its considerable heft to LivingSocial for a similar deal, offering a $20 Amazon gift card for $10. LivingSocial sold more than 1 million of the vouchers and greatly increased its visibility.
That offer came after Groupon partnered with Gap in August 2010 for a deal that offered $50 in merchandise for $25.
A British bakery owner loses at least $19,500 after creating a Groupon offer and being swamped with thousands of orders.
LONDON — A bakery owner was forced to make 102,000 cupcakes after being swamped by customers taking up her cut-price Groupon offer, according to reports Tuesday.
Rachel Brown offered a 75 percent discount on 12 cupcakes, which normally cost $40 (£26), the BBC reported.
However, Brown under-estimated the popularity of the deal and was unable to cope when 8,500 people signed up for the $10 (£6.50) bargain.
Brown’s Need a Cake bakery, which employs eight staff in Reading, U.K., had to bring in temporary workers through an employment agency to fulfil the orders, at a cost of $19,500 (£12,500) — wiping out her profits for the year.
She also lost between $2.90 (£2.50) and $4.70 (£3) on each batch she sold, the BBC reported.
“Without doubt, it was my worst ever business decision,” she told the BBC. “We had thousands of orders pouring in that really we hadn’t expected to have. A much larger company would have difficulty coping.”
Chicago-based Groupon sells Internet coupons for everything from spa treatments to cosmetic surgery.
Firms sign up in the hope of getting new repeat customers out of the initial deal or selling additional goods to shoppers during their first visit.
Groupon went public earlier this month at $20 a share, valuing the business at $13 billion.
Brown, who has run the business for 25 years, was quoted in the Daily Telegraph saying: “We take pride in making cakes of exceptional quality but I had to bring in agency staff on top of my usual staff, who had nowhere near the same skills. I was very worried about standards dropping and hated the thought of letting anybody down.
“My poor staff were having to slog away at all hours — one of them even came in at 3 a.m. because she couldn’t sleep for worry,” she told the newspaper. “We are still working to make up the lost money and will not be doing this again.”
Heather Dickinson, international communications director for Groupon, told the BBC there was no limit to the number of vouchers that could be sold.
“We approach each business with a tailored, individual approach based on the prior history of similar deals,” she said, adding the company had been in “constant contact” with Need a Cake.
She later told msnbc.com: “We work very closely with small businesses, but ultimately, they know their businesses best and what they’re able to handle.”
She added: “Need a Cake wanted to run a national deal with us, but we advised them to feature in a few cities so they wouldn’t overextend themselves.”
The flaw in Groupon’s business model is a big one–loyalty. The daily deals juggernaut has made a few changes to amend its issues, but who knows whether those changes will suffice.
I needed sunglasses, the prescription kind. I hadn’t owned a pair in years, but this past summer I finally became fed up with squinting and wincing while daytime driving. Lo and behold, a few days after I decided to invest in some new shades, a Groupon for a local optical shop appeared. Pay $75 now for $175 off frames and lenses later. Serendipity.
That was in July, and a couple of weeks ago, I finally found some free time to head downtown and cash in my coupon. I found some nice frames, haggled a little on the price ($312 was hard to justify for sunglasses when I spend half my time in front of a computer screen), then I pulled out my Groupon. “Ugh,” groaned the sales clerk, eying the piece of paper in my hand. “You have one of those.” And a little twinge of guilt set in.
It turned out that the Groupon promotion had been much more popular than the tiny shop had anticipated. They’d been inundated with Groupon wielding customers and had a hard time keeping up. More salesperson hours plus deep discounts for a luxury item that most people only buy once every couple of years. Was it worth it? The clerk shrugged his shoulders noncommittally. Maybe. Would you use Groupon again? A blank stare that seemed to ask, “Are you daft?”
Sometimes Good, Sometimes Bad
That’s long been a popular refrain from small businesses who have tried Groupon. On the one hand, it’s a virtually guaranteed way to reach large numbers of new customers. On the other, unless you can turn those customers into repeat business or up-sell them, the deep 40-60% discounts Groupon demands can be damaging. Plus, if you can’t keep up with demand or the influx of new customers annoys regulars, your business could suffer a hit on reputation.
Yet, Groupon reports in its IPO prospectus that it featured on its site over 45,000 merchants in North America in the first two quarters of 2011 compared to just over 27,000 in 2010 — small businesses keep signing up. Why, in spite of well-publicized horror stories, would businesses jump into such a risky marketing strategy?
For some businesses, Groupon makes sense. For large corporations, like Gap, which ran an extremely popular promotion on the site last year, Groupon provides a great way to reach millions of potential customers. A business that large can eat the cost out of their already sizable advertising budget. For businesses that provide oft-repeated or critical services, such as auto mechanics or hair salons, a Groupon might be able to convert more repeat business, and thus be beneficial (note: that’s idle, but logical, speculation on my part).
But why did a boutique optical shop run a promotion? I suspect they thought they had to, and I suspect many other small businesses feel the same.
A down economy and low consumer spending numbers that refuse to rise out of the doldrums have forced business owners to do whatever they can to get people in the front door. Groupon’s millions of potential customers are just too attractive to pass up, even at a high-risk. In other words, small business owners feel compelled to gamble because the economy has forced their hands. When the economy turns back around — whether that’s in a few months or a few years — business owners won’t need sites like Groupon, and certainly not on Groupon’s terms.
A June study from Rice University that looked at deals across five major daily deal sites found that 48.1% of businesses would run another deal — a number that closely mirrors Groupon’s own internal data, as well as that of another recent study. Almost one in five say they would not run another deal and just about a third are on the fence. Half isn’t a terrible merchant retention number. According to the study’s author, Professor Utpal Dholakia, however, it is indicative of flaws in the daily deal model.
“Over the next few years,” writes Dholakia, “it is likely that daily deal sites will have to settle for lower shares of revenues from businesses compared to their current levels, and it will be harder and more expensive for them to find viable candidates to fill their pipelines of daily deals.”
Businesses Won’t Always Need Groupon
In an online presentation about the upcoming IPO, Groupon CEO Andrew Mason runs through what he says is a typical deal on the service. His example is Seviche Restaurant in Louisville, KY, a seafood restaurant that is, according to Mason, already very successful. Seviche wasn’t happy with traditional advertising, and ran a Groupon as a way to attract new customers. The details of the deal are as follows: $25 for $60 worth of food. Groupon keeps $12.50 of that price. Mason says that Seviche’s average bill is $100 and its cost of goods is 33%, which means that each Groupon customer should be worth, on average, $19.50 to the restaurant. His point was the prove that, when properly structured, Groupons are indeed profitable for the businesses that run them.
But let’s take that math a bit further. We’re getting into the land of hypotheticals here, but bear with me. Let’s say that the Groupon brings in 100 new customers. 100 x $19.50 = $1,950 in profit. Let’s also say that a traditional ad would perform only 40% as effectively at bringing in new customers, so it brings in just 40. Those 40 customers are paying full price, so they’re worth $67 in profit. 40 x $67 = $2,680 in profit.
How many of each become repeat diners? The Rice University study found that only about 1 in 5 daily deal users become repeat customers. If 20 customers from the original 100 that bought the Seviche Groupon come back, say, twice in the next year and spend the full $100, that’s worth another $2,680 in profit. I’d argue that the traditional ad customers probably convert to repeat visitors at a higher rate simply because they spent $100 on a dinner from the get-go (that is, they were all definitely customers willing to fork over full price), unlike the Groupon-wielding customers, who are getting a big discount . But for simplicity, let’s use the same metric as the daily deals for repeat customers. That’s another $1,072 over a year.
So who wins? In our hypothetical situation, the Groupon nets the restaurant $4,630 over the year while the traditional ad gets us just $3,752 — and there were probably some upfront costs that still need to be deducted. So Groupon is the clear winner, right? It’s actually trickier than that. According to the Rice study, just 35.9% of daily deal customers spend beyond the face value of the deal. Or, in other words, a large chunk of those initial Groupon users might get to the $100 average bill, so the profits from the Groupon might be much lower. (In our example, Groupon customers would be worth negative $7.30 if they only spend the Groupon price. That means they’re worth about $235 the first time through, assuming 64 of them only spent the coupon amount and the rest spend the full $100 average, and about $2,915 over the year.)
Of course, I can make the numbers say whatever I want — it’s all hypothetical (changing the numbers this way can make Groupon look great or look terrible) and I’ve made plenty of assumptions about customer value. The point is this: Other forms of advertising don’t have to be that much more effective (and can still be less effective from a pure purchaser standpoint) to create similar revenue and offer similar customer acquisition costs.
When consumer spending is low, it makes sense that fewer people are spending on things like expensive dinners out. A discount Groupon is an attractive incentive to get them out to the restaurant, and it is more effective at driving new business, even for successful restaurants like Seviche. But that likely won’t always be the case. If and when the economy rebounds, businesses might have an easier time getting customers in the door to spend at full price. They may no longer require the high-cost marketing that Groupon offers.
Can Groupon Keep Growing?
Groupon’s growth relies heavily on marketing. When the company cuts its marketing expenditures, revenue growth slows dramatically. That’s in a poor economy that is friendly to Groupon. What happens to that growth when businesses with desirable products and services can afford to refuse offering such attractive discounts? What if merchants refuse to play at all? Just 29.5 million of its nearly 143 million subscribers have ever purchased a Groupon (again, according to the company’s IPO prospectus). What will that conversion ratio look like if deals cease being as attractive to buyers as they are now?
As the company nears its IPO, investor confidence appears to be waning. In a piece in VentureBeat Monday, analyst Rocky Agrawal, who thinks Groupon is bound to fail unless it significantly reinvents itself, painted a bleak picture of who loses if the company goes under. Spoiler alert: it’s not just Groupon’s executive team and investors who would feel the pain.
Customer Retention Over Acquisition
So is Groupon destined for collapse? I’m not ready to say that just yet. Any economic turnaround in the U.S. won’t happen overnight — and could take years — and Groupon has aggressively expanded into international markets over the past year, whose economic climates I can’t and won’t comment on. They’ve also launched some new programs in an attempt to diversify their offerings, such as Groupon Now, which allows businesses to target deals to specific times and sell excess inventory during slow periods (though some reports indicate that Now is not gaining Groupon-like traction), as well as a travel deals service.
However, I do believe that Groupon will be forced to significantly alter its existing business model to survive long-term.
More than decreasing customer acquisition costs, Groupon needs to find new ways to add value for merchants to keep them offering deals. I predict that once the economy rebounds, small businesses will need to risk less to get potential buyers in the door and will be more interested in ways to retain and reward customers. This is something that Groupon only just recently began to address with Groupon Rewards, a clever program that allows merchants to reward customers for repeat business with exclusive deals. Groupon isn’t alone in this space — they’ll face stiff competition from companies like Swipely and Google’s yet-to-launch Punchd, which incentivize full-price purchasing through discount rewards, and Foursquare, which drives repeat foot traffic at a low cost.
This is the future. Customers will always buy deep discount deals, but fewer merchants will need them. What they’ll need are ways to turn existing business into repeat business.
Groupon Rewards is a loyalty platform for the company’s merchants — and a set of incentives for its most active subscribers.
The product integrates with merchants’ Point of Sale systems to let them offer customers special deals whenever they spend above certain thresholds.
“Consumers earn rewards at participating merchants simply by paying with the credit or debit card they have on file at Groupon.com,” the company explains in a blog post about the new product. “After spending an amount set by the merchant, the consumer unlocks the ability to purchase a special Groupon for that business.”
The product has been piloted in test markets, including the Chicago area, and is now being released to Groupon merchants free of charge. Merchants can sign up to configure reward coupons and use the product to view new and repeat customers, as well as see how much customers are spending and how often they visit.
Groupon Rewards is being marketed as an alternative to the punch card and is designed to help merchants drive repeat business — instead of just attracting one-time deal-hungry patrons. It may help the pre-IPO company quiet naysayers who question its ability to drive quality customers to participating merchants.
Groupon joins other startups such as Foursquare, SCVNGR and Swipely, all of whom have experimented with loyalty initiatives that link a customer’s credit card info to automatic rewards for spending at merchant venues.
Article found at: http://mashable.com/2011/09/28/groupon-rewards/