The Downside to Driving Traffic with Deep Discounts

You are a small retailer and you decide to run an e-coupon campaign with Groupon, Living Social or with any of the other coupon companies that have burst onto the scene.  You are amazed at the results.  Your store is flooded with customers. 

What could possibly be wrong with that?    

A friend was telling me about a Living Social coupon his wife and he bought: 50 percent off massages with their favorite masseuse.  They bought two and called to schedule an appointment. 

“How is that Living Social coupon working out for you?” my friend asked her. 

“It’s been overwhelming!” the masseuse said.  “I just got a check for $20,000 from Living Social!”

The masseuse went on to say that appointments are booked well into the future thanks to the coupon. 

Her in-store traffic is temporarily soaring, but will it help her business in the long run?  Take a quick look at the numbers. The coupon was 50 percent off for a massage.  For this offer, consumers who bought it paid Living Social approximately $40,000.  Living Social turned around and wrote a check to the masseuse for her part of the deal--half, or about $20,000.  That $20K in cash to the masseuse represents $80,000 in massages.  The masseuse is now booked up with customers who have paid her 25 cents on the dollar.  

Her fixed costs--rent, materials, employees--won’t change for the month or two she is providing all of those massages at 75 percent off her normal rate.  How will she cover those costs?  What happens to her regular customers who have no Living Social coupon but want massages and are willing to pay full price?  She is booked.  Will they go elsewhere?  What about future business?  Will her 50-percent-off massages be so wonderful that customers will scurry back to the masseuse to gladly and consistently pay full price?  Or will they wait for another e-coupon to come along, either from her or perhaps from another masseuse?   

You will get no argument from me that e-coupons are often sweet deals and that recession-battered consumers are eating them up.  But at what price to the business owners offering them? 

Will those retailers and merchants learn that landing a boatload of customers is not always a good thing?