The Good Leak is Missing: Why Daily Deals & Groupons Need a new Business Model and Won’t Scale

Deals businesses like Groupon are based on an old model of rewards rewarding leakage, instead of participation.

Leaks sink ships, leaks in business usually cause you to sink, yet there is one leak that is good…this followup to my article on Groupon’s deal looks at numerous questions around Redemption, how many people redeem their various Groupons, coupons, and rewards.

Deals businesses like Groupon are based on an old model of rewards where leakage is rewarded, instead of participation.Most people assume that smart folks buy Groupons and of course fulfill the purchase by actually going. And for Groupon, they do, which is part of the weakness of that Deal Model, which like all previous deal/reward/coupon model, works much better when people don’t redeem.

That is the Redemption Leak, the failure to redeem a coupon, daily deal, Groupon, and/or gift certificates. Redeem and the customer wins, don’t redeem and the business wins…that’s the model.

Every deal business builds on leakage. Here’s one place where old media has it better than digital, and where digital needs a newer model that grows AND rewards Redemption.

  1. The leakage is where the gold is, and old media is filled with Deal leaks. Cutting out a coupon and bringing it to the market takes alot of work, and only about 20-30% of those coupons given out are redeemed.
  2. TV Commercials that used to tell people to go to a store with the specific code cause leaks, just trying to remember to actually do that.
  3. Many people are astounded that when they give out simple discount codes on the Internet, sometimes 1/3 of the orders will not include the code, because the person forgot or chose not to write it in.

One of the Primary Rule of Deals is…make the customer work to get the incentive, or make them delay thinking about it. Digital Deal companies are encouraging redemption in a model profitable only when leaking!

Understanding deals and coupons alike, you find a commonality; the Deal is the advertisement, the incentive to redeem and try is a teaser that should not be used, at least half the time to be profitable.

You need leakage to make these work economically, because at their core Deals are just another form of incentivized advertising; make it hard to get the incentive and people drop off…

Think of the old iPad giveaways, where you entered to win and had to either redeem offers ala Zynga-like walls of lead generation, had to fax something in, had to bring in 5 friends…they pile task upon task so that there are very few users who get the reward.

Here’s what I’ve seen in as ballpark redemption rates:

A. Coupons offline, 20-30%; online coupons 60% (limited experience)

B. Gift Certificates/Reward Cards, 50%;

C. Groupon: 70-85% (based on my previous article’s research, referencing 15-30% of the people did not redeem).

The lower the redemption rate, the better for the business, right? (and NOT a great deal for the customer?)

How do you achieve that? Maybe lower ticket deals, like $20-30 that people don’t care so much about?

Possible, yet the cheaper the Deal becomes does not impact redemption that much. It’s more the time to do it, which is why many Deals have no time limit. Give people a reason to procrastinate and they will…

Higher ticket items are usually perceived as Gift Certificates; when someone gives a Gift, the other person can forget about it. People who buy one for themselves do redeem, as seen in success as spas…because people will fit that day into their schedule.

Compare that to getting a free cheap breakfast from Groupon…you could blow that one off if time didn’t work out, and justify it.

One expert actually asked me how to get more leakage:

  1. One way to do this is make a forever Groupon, ie get this now and use it for up to a year…give people a reason to delay, they forget and are disorganized. Make it instant, then they take action, with higher redemption.
  2. Stop paying merchants; it’s a form of advertising, and they sure don’t want leakage, but by paying them it’s a nice way to close a sale, just not a great way to run the Deal business. It is an ad, treat it that way and sell it that way; compare a Groupon to running a local ad, and it doesn’t look so bad!
  3. The Deal should be like a game without end, accruing more and more without actually using the currency. This would mean working up to a bigger prize by redeeming Deals, and even points for NOT redeeming. (Sounds crazy but you’d be amazed what people do for points)

I don’t know the answer to the new model, I think it lies around managing the Deal yield, how many get redeemed versus not, without getting folks angry.

Now that’s not a magic model, that’s an old model. And with all the social media bubble talk about customer loyalty and being like Zappo’s, no one is out there creating something that works time and time again for the customer, AND converts for the merchant and deal business at the point of redemption.

Mobile is going to make this point of redemption a key point of contact, making it even easier to redeem! Just do that math and you’ll see the whole problem with Deals as they are coming out is making them work when people use them, and getting people to use them.

That’s why we all call it qualified traffic, right?

Try inventing a profitable deal model that works with redemption

Build in follow up and viral systems at the participating merchants, via online forms (restaurant has a computer to register you as a visitor, and you accrue rewards) and mobile who could be referring visitors to related businesses, as well as having others refer them within the “Deal Network”.

Create conversion systems small businesses can use, do some videos and “Khan Academy” those poor people into doing better. We all accept they are poor marketers, but just a few techniques and they could turn those visitors into longer term customers.

Most Deal companies I’ve spoken with have a positive view of consumers and merchants, trying to create rewards. We just all need to shift the model to one that works with consumption, not with leakage.

And that’s the problem with Deal businesses so far…no one has put in gaming mechanics and fun, where participation is rewarded and profitable…they sell cheap deals that can’t last in a model built on people not using them.

The current Deal model sort of flies in the face of the whole, “love your customer” routine? Yet someone out there will move beyond this leakage model and turn it into a new reality, because it’s more than just the Deal for people.

It’s about turning Deals into traffic, and yielding enough value for the customer, enough revenue for the merchant, AND enough revenue for the Deal business.

Deal companies have to take this insane online focus for conversion and start A/Bing where they send people….but that’s for another mobile article later on.

Deals should be a game without end…

(listen to Jesse Schell if you really want to know what’s going on…the whole marketing model is shifting and we’re still putting in old models…)

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