Discount voucher sites are all the rage. Groupon, Living Social and a host of other players are entering the mushrooming markdown market. This begs the question if discount sites are good news for brand value?
In summary we don’t think so. It may be good for short term revenue spikes and potentially contribution margin boosts but not long term brand value. This is based on our experience with hotels, spas and restaurants to name a few. Let us share how we arrived at this position. This will be in summary format and then in detail for those that want to read on.
To increase brand value brand equity needs to grow. Numerous empirical studies demonstrate how increases in brand equity drive a brand’s financial performance. Don’t treat the symptoms but the cause if you will. Equity is measured in a number of ways. We’ll consider these in the context of discount sites to develop our argument. Do discount voucher sites drive the following dimensions of brand equity?
1. Ability to charge premium prices? No.
2. Brand awareness (recognition and recall)? Yes but in a way that delivers debatable value.
3. Brand reputation? Yes but only if you want to be a discount player.
4. Brand loyalty? No.
5. Brand differentiation? No.
6. Perceived quality? No.
7. Favourable, strong and unique brand associations? It’s complicated. You could develop strong and favourable associations if you want to be a bargain basement brand. Is this a unique position? No.
8. Relative customer satisfaction? No.
9. Employee engagement? Debatable
The above paints a rather pessimistic picture for the discount sites. Discount voucher sites work for certain brands in certain markets under certain circumstance. You may want to develop a loss leader? You may want to cross or up sell higher margin goods or services? You may want to scale your business? Your market may be seasonal e.g. I need to sell those damn Christmas puddings by the 24th December.
All valid reasons.
However, to date we’re aware of no hard data that establishes the causal relationship between brand value and discount site usage. Our money is on it creating a negative for your brand. When you scan Groupon, Living Social and the like do premium brands that have real value market there? We’ll leave you with that thought.
Ps: for the interested reader some interesting stats on Groupon can be found here.
PPs: Interesting article here which outlines how most of the big investment banks don’t seem too sure about Groupon’s business model.
The discount voucher debate is complex. Here’s some detail underpinning our thoughts:
1. Ability to charge premium prices: Does Groupon or Living Social help with this? Err, no. They discount brand price. This is the acid test for brands. When brands drop their price it’s hard to raise them. Consumer behaviour and perceptions are habitual. A new brand status quo emerges very quickly. There’s no going back. A negative.
2. Brand awareness (recognition and recall): Does Groupon drive brand awareness? We’d say overall yes. Your email account being peppered with offers can only raise awareness. On the assumption you click through, this puts the brand in your consideration set. A key aspect of awareness. However, this point assumes your brand keeps providing discount offers. Also, do you want to be recognised and recalled as a discount brand? Possibly a positive. It depends on your strategy.
3. Brand reputation: Brand reputation is brand perception (image) built over time. Do discount sites help build reputation? Possibly. Only if you want to be known as a discount retailer. That’s fine but maybe you don’t want that effect. A negative.
4. Brand loyalty: Loyal customers tend to be more profitable. They’re less costly to service and act as brand advocates. Cost effective, credible and powerful marketing. A positive. The standard discount voucher customer is a serial bargain hunter. Sure, customers may try a spa day, love it and go back. We think it’s more likely they’ll try the spa day, love it, realise what they’re missing then find another discounted Spa Day elsewhere. These customers are loyal to bargains not brands. So do discount sites drive brand loyalty? We don’t think so. This segment churns quickly. There’s no money in churn. Just call your mobile phone company and say you’re thinking of leaving. You’ll see what we mean. There’s a double whammy too. The discount adversely affects the target market you really want i.e. those that will pay a premium and are loyal brand advocates. How would you feel sitting in the spa pool if the couple next to you are gloating about how they paid a fraction of what you did? It’s unlikely you’ll go back. It’s also unlikely you’ll recommend the spa. You may mention they offer discounts but that’s no good for your brand’s long term value. No positive word of mouth. You also feel a little cheated. Not a nice emotion for a brand to engender. Negatives.
5. Brand differentiation: As brands discount they risk moving into cost driven markets. “Reduce-our-price-to-compete” is a common business logic especially during tough trading times. This is bad news as it means brands compete on cost not value and that means competing in crowded and commodity-like markets. One of brands’ primary goals is to drive differentiation. Differentiating a commodity is possible (just look at the bottled water market) but it’s pretty damn tough. Do discount voucher sites help differentiate your brand? We don’t think so. If anything it adversely affects the quality and respect the market has for your brand. A Negative.
6. Perceived quality: If you have to discount your brand what does in indicate? Simple. You can’t compete on value so have to on price. Strong brands don’t have to do this. Witness the soaring share value of Apple (circa 15% stock increase during the last calendar year) and John Lewis’ strong performance in the UK. It’s almost as if these brands are recession proof. There’s a nice thought. If you discount your brand it adversely affects the perception of your brand in a number of ways. So, do discount sites improve your brand’s perceived quality? No. That's a negative.
7. Favourable, strong and unique brand associations. If you’re perceived as a discounter is this favourable? In some respects yes as people love to bag a bargain. If you’re perceived as a discounter do you create strong associations? Possibly yes – only if you’re a serial discount player and your brand marketing is consistently on-brand in terms of being discount driven. CostCo provides a good example of a discount player with strong brand associations that has performed well. It is what it is and consumers are happy with this. Clear brand essence. The water gets murky when you think about what type of associations do you want to create? If you want to be a discounter that’s fine. If not it might be time to rethink your use of discount voucher sites. What about unique associations? If you discount your offer and your competitors follow suit you enter a vicious and downward discounting cycle. What’s unique about that? Strong brands compete on value. There are infinite ways to create value.
So, do discount voucher sites help develop favourable, strong and unique brand associations?
Favourable? Possibly – if you want to be a discounter.
Strong? Yes – but only if you use such sites frequently and in a consistent manner. You just need to be clear that you want your brand to be perceived this way and you can live with that.
Unique? Probably not. It only takes another discounter to enter the market and then you enter a downward cost spiral. The minute you start discounting you move into the commodity space where brand value is hard to create. Let’s hope you can scale your business. This happened in the UK’s mobile market when Three entered. However, 02 have demonstrated superbly how value can thrive through their rich brand proposition.
8. Relative customer satisfaction. Most brands measure customer satisfaction. It’s a good start because it drives loyalty. However, it’s more important to measure relative satisfaction. This metric provides competitive context. So, do discount sites drive relative customer satisfaction? At the moment of purchase and consumption (assuming the brand and initial offer meets the customers’ needs) we’d say yes. We all tend to like a deal and feel pretty good when we’ve bagged a bargain. If I’m sitting in the spa jacuzzi and overhear two folk saying they paid twice my price I’m going to feel fairly satisfied. Result for the discount sites? Short term yes. Long term, well, that’s more difficult to ascertain. It’s hard to know if discount site customers go back and pay the full price. Only then is relative satisfaction a fair metric. Our evidence suggests customers don’t go back. The jury is out. This problem is compounded by bargains not being redeemed because businesses have gone bust. A Negative.
9. Employee engagement. This is a key metric for service brands. Your service brand is only as good as your employees. They deliver your promise. Simple. People like to work at quality brands. It’s a halo effect. It says something about them. It’s debatable if employees’ enjoy a cost brand employee association. It’s open to debate.
Contributed to Branding Strategy Insider by: Dr. Darren Coleman, Managing Consultant,Wavelength Marketing®
Sponsored by: The Brand Positioning Workshop