Online coupon intermediaries: from novelty, to celebrity, to sizeable niche
Deloitte predicts that in 2012 the number of people signed up to receive online coupon newsletters may decline moderately, as may the number of online coupon intermediaries (companies that aggregate discounts from retailers and distribute them to potential consumers via e-mail). However, the total value of coupon deals enabled by intermediaries around the world should remain in the tens of billions of dollars, and the revenues to those intermediaries will likely remain in the billions – a small amount within the context of all consumer retail, but still a significant sum.
Everyone loves a discount… except for most retailers, who remain focused on their bottom lines176. The intermediated online coupon model has its appeal and its limitations: discounts drive consumer interest, but erode margins. And when an intermediary is paid a commission on every coupon sold, the profit hit is even greater. Also, offering discounts too frequently can lead existing customers to expect perpetual discounts – a perilous predicament for retailers.
For this reason there likely will never be many major retailers whose business model is predicated on continuously offering coupons via third-party intermediaries. While some retailers may take this approach occasionally, for most it is simply not sustainable. Long-term discounting is only possible for companies that have high nominal gross margins, and little or no direct competition (which makes direct comparison difficult). Service companies, such as those offering non-standard beauty treatments (e.g., teeth whitening), leisure experiences (e.g., hot air ballooning) and other relatively irregular services may fall into this category177.
In 2012, the majority of companies that hire intermediaries to offer discount coupons for their products and services are likely to be small businesses that lack the marketing capability to raise brand awareness on their own and have a hard time coping with the fire hose of demand that Internet aggregation can send their way178. Larger companies are likely to have their own distribution lists and will offer discounts directly to their own customers179, rather than using a third party – especially one that charges up to 50 percent commission180.
Although the online coupon business is relatively young, it may already be approaching maturity. There are already hundreds of millions of subscribers to online coupon newsletters. And in two of the largest markets, China and the US (which are also two of the world’s largest Internet markets), there are thousands of companies offering online coupons181. One reason the online coupon business has grown so quickly is that barriers to entry have been relatively low – requiring little more than a Web site, a sales force, and good copywriters. There are arguably few magic algorithms involved, although over time brand will become increasingly important.
One of the challenges of the online coupon model is that, unlike other online services such as search, it is not a self-service, largely automated business. An online intermediary needs writers to create advertising copy for the newsletter. Further, the sales model relies on a dedicated sales team, as well as a strong technology team. So as sales volume grows, the organization must grow as well.
The sector’s rapid evolution means that it is likely to lose hundreds of players (out of thousands) in 2012 as competition ramps up and margins decline182. Despite this gloomy forecast, additional companies are likely to enter the market, particularly in places such as emerging economies where Internet use and digitization are rapidly rising. Yet the overall number of intermediaries globally should decline.
Online coupons offered by intermediaries are not going to go away, much as discounting or paper coupons will never disappear. However, the notion of a growing market of consumers responding on a frequent basis to a daily stream of discounted products and services is unlikely to materialize.
The online coupon intermediary industry began as a novelty; as demand ramped up in 2011 it became a celebrity; and in 2012 it is likely to settle into a small niche, albeit one that can still generate billions of dollars in revenues globally. While it may not be the future of retail marketing, it is likely to remain an important component.
End-customers that use online coupons will continue to do so as long as there is a continued flow of offers that appeal to them. However, part of the appeal hinges on obtaining a significant perceived discount on products and services they wish to consume. A major challenge for online coupon intermediaries in 2012 will be to increase the quality and variety of offers available. Another key challenge could be how to increase interest from retailers who may have been less than happy with their first experience183. Although satisfying consumers and retailers is likely to become markedly harder in 2012, it won’t be impossible. But in order to succeed, online coupon intermediaries will likely need to rapidly evolve what they offer.
In the near-term, intermediaries may have to accept lower commissions on sales of coupons. This could entice more retailers to consider using their services, which in turn could increase the variety of offers available.
Intermediaries also should consider whether to focus on narrower categories of products and services across a wider geographic area, rather than just pushing deals within the subscriber’s local neighborhood. Intermediaries might then be able to sell more coupons based on their ability to offer an appealing, specialized range of products and services, instead of relying on size of discount as their major selling point.
In addition, the industry should address one of the major criticisms leveled against it – that of encouraging bargain hunters to make one-off purchases. One way to address this would be to offer coupons that focus on economies of scale (e.g., repeat visits to the same establishment), rather than just discounts on one-time visits or purchases.
By shifting the focus from discount size to value, utility or even rarity, online coupon intermediaries could change the perception of their offering from a last-ditch sales effort to a deliberate and innovative part of a company’s marketing strategy.
Deloitte Canada, as referenced in videos, podcasts, or online materials related to TMT Predictions 2012, refers to Deloitte & Touche LLP, the Canadian member firm of Deloitte Touche Tohmatsu Limited.
176In Luxury Sector, Discounting Can Be Dangerous, Bloomberg Business, 23 July 2009: http://www.businessweek.com/magazine/content/09_31/b4141049551979.htm
177For further information, see: Don’t be fooled by illusory numbers Financial Times, 11 January 2011: http://www.ft.com/cms/s/0/c52d7d8c-1dbd-11e0-aa88-00144feab49a,s01=1.html
178Groupon demand almost finishes cupcake-maker, The Telegraph, 22 November 2011: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8904653/Groupon-demand-almost-finishes-cupcake-maker.html
179According to Deloitte research undertaken in September 2011, with 2,000 respondents across the UK, 29 percent of respondents that spent less on grocery shopping for food and soft drinks, identified discount vouchers and coupons as being one of the reasons why they spent less in the last three months. For more information see Deloitte Multichannel Survey, Deloitte LLP, September 2011, http://www.deloitte.com/assets/Dcom-UnitedKingdom/Local%20Assets/ Documents/Industries/Consumer%20Business/uk-cb-the-deloitte-consumer-review.pdf.
180Commissions can be negotiated down from 50 percent to about 20 percent. Source: Groupon Competitors, Clones, And Cousins Are Growing Insanely Quickly, Business Insider, 6 July 2010: http://articles.businessinsider.com/2010-07-06/tech/30027016_1_daily-deal-cities-arps
181In China, there were at peak 6,000 online coupon intermediaries in 2011.See: China’s group-buying sites struggle to survive, People’s Daily Online, 23 November 2011: http://english.peopledaily.com.cn/90778/7653908.html. In the US, one aggregator tracks offers from over 750 intermediaries. Source: Complete Daily Deal Data, Yipit Website: http://yipit.com/data/
182To see the acceleration in daily deals offered in the US between November 2008 and March 2010, see: Decentralization of the Daily Deal Space, Yipit, 19 April 2011: http://blog.yipit.com/2010/04/19/decentralization-of-the-daily-deal-space/; Groupon ‘Clones’ Dish on Future of Online Deals in China, The Wall Street Journal, 1 November 2011: http://blogs.wsj.com/chinarealtime/2011/11/01/ groupon-clones-dish-on-future-of-online-deals-in-china/; Competition squeezes Chinese coupon Websites, Financial Times, 4 December 2011: http://www.ft.com/cms/s/0/0bf5ddb6-1cde-11e1-8daf-00144feabdc0.html#axzz1fviWCkKU China’s Most Audacious Groupon Clone on the Brink, 80% of Staff Fired, Do News: http://www.penn-olson.com/2011/09/28/groupon-china-clone-tuanbao/
183Coupon Sites Are a Great Deal, but Not Always to Merchants, The New York Times, 1 October 2011: http://www.nytimes.com/2011/10/02/business/dealsites-have-fading-allure-for-merchants.html