Promotion Addictions

March 18, 2014

Nikki Baird

Last week I gave a webinar to a group of financial advisors and investor types on the transition to digital coupons, and I also spent a few minutes on the phone with a grad student in London who was exploring her options for a research project on customer loyalty. You wouldn’t think that these two activities had much in common, but actually, they both had one single theme: promotion addiction.

Paula touched on this topic a couple of weeks ago, when she previewed some of the results of the upcoming 2014 Pricing Benchmark (check back in next month for the full results). She noted that US retailers seem trapped in “promotions fever”. I would submit that when a compulsive behavior becomes self-destructive, it moves beyond a predilection and into addiction.

We saw last year in the 2013 pricing report that the number of price changes that retailers sent to stores increased, as it has over the last few years. And anecdotally, we’re hearing from pricing groups that limits on the number of price changes that stores are allowed to execute each week or each month are becoming constraints on retailers’ ability to hit their margin objectives. Of course, that perspective doesn’t exactly take into account the fact that labor spent on repricing merchandise also has its own margin impact – it just doesn’t happen to show up in the margin measurement that merchants are measured against.

And Paula previewed that US retailers in particular noted that their pricing strategies have become more promotional over the last three years, but while in past years, retailers were able to manage such promotions against margin, this year, especially for the holiday season, that all fell apart.

Now throw in the recent rip-roaring success of the Coupons.com IPO (which certainly did not take the Facebook dip in trading price out of the gate) – which was what I was tasked to explain to said investor group. Coupons.com is but one of many sites out there that focus on distributing offers to shoppers. And not just manufacturer coupons for groceries, either. Retailers like Macy’s and The Home Depot can be found posting offers on some of these deal distributor sites.

There are all kinds of models out there, too, but they tend to fall into a couple distinct categories: paid distributors, advertisers, affiliates, and white label providers. Paid distributors make their money from brands (which could be manufacturers or retailers) who pay for the site to make offers available. Advertisers tend to make their money from being a kind of audience aggregator – drawing large crowds of ideal shoppers (moms, for example) to the site, and then making money from advertising on the site. Affiliates follow the same model, but put a little more of their money where their mouth is – collecting a referral fee when consumers click through to a retailer’s site. And finally, white label providers set up a coupon distribution site within the brand’s own site.

The great news for brands and retailers is that clearly, these digitally-oriented coupon distributors seem to be quite popular. Coupons.com is one of many out there, and it has a business model that distributes its risk across almost every single one of the business models I outlined above (which is probably one of the reasons the IPO did so well). However, the bad news is, these sites seem to be quite popular.

Which raises the question: will consumers buy if there is no deal? And on the flip side, can retailers and brands only incent consumers to buy if there is a deal? That’s the question the London grad student wants to center on. I hold that while there is a portion of the population of shoppers that will always be extremely price sensitive (and by the way, retail has long had a name for them: cherry pickers), there is also a large portion of the population that believes in value over price – or at least, is more willing to pay a little more in exchange for better service on top of the product’s intrinsic benefits.

I think that the biggest challenge facing brands as they engage with these digital coupon distribution sites is whether their ultimate goal is audience or targeting. These sites aren’t made for targeting, unless you mean by acquiring an audience that represents a specific swathe of shoppers – price conscious moms, for example. So while engaging with these sites means an opportunity for reach, it also means training yet more shoppers that the only way it’s worth their while to part with their money is if there is an offer on the table.

Retailers tell us in our benchmarks that they want to get more targeted in their communications (and offers) to shoppers. Theoretically, higher relevance would mean fewer net offers per customer, and fewer total offers overall. Theoretically, well-designed offers mean offers that achieve specific objectives, rather than general activation (getting shoppers to buy).

But the success of Coupons.com’s IPO says to me that the London grad student has her work cut out for her. Hopefully she can get far in identifying tactics that retailers can employ to wean consumers off of promotions. My experience, at least as I see it play out in the US, is that consumers and retailers both are fully engaged in an addiction. One that has moved from a necessary evil in a down economy to self-destructive behavior that ultimately will harm both parties.

 

 

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