Tuesday, August 24, 2010

Calkins on Groupon & Gap

Interesting blog post from my old Kellogg Marketing Strategy Professor, Tim Calkins, on Groupon and Gap. I read his blog religiously and in hindsight, his class was in the top 3 of most interesting & useful that I took at Kellogg. He's gradually starting to cover technology companies more too, which of course I appreciate. The post is interesting because he evaluates the offer from the brand's perspective, something that people associated with tech sometimes forget to do.

For what it's worth, I've had a lot of informal conversations with small business owners about Groupon and the established ones are generally aligned with Calkins thoughts. At the same time, I think Groupon is hugely valuable and as real-time couponing goes mainstream, which I think it will, there is going to be gigantic slide into game theory, specifically Prisoner's Dilemma, for local retailers. Each neighborhood shopping area is going to become a micro couponing climate. I predict a short term raise to the bottom in couponing. Something that will greatly benefit consumers and the couponing companies but hurt retailers.

"It isn’t hard to figure out why the Gap deal was such a big success.  It was a great offer.  Gap sold a $50 coupon for $25, a 50% savings.  Gap is a huge retailer with broad appeal; I suspect a large share of the people following Groupon participated in this offer.

The question to consider: why did Gap offer such a deal?

Financially, the offer has to be a disaster.  If Gap got Groupon’s usual deal, then the company sold $50 worth of merchandise for $12.50.  This isn’t a good way to make money.

Worse, Groupon buyers are presumably price sensitive, so they will use the coupon on merchandise that is on sale.

Indeed, I struggle to figure out why any established, successful company would want to use Groupon.  Driving sales through deep discounting does not build a strong brand or a good business.  Appealing to promotion buyers is dangerous.  Groupon surely provides excitement and some short-term revenue, but at a very high cost."