The big marketing story last week was that the Gap offered a hot deal on Groupon and a remarkable 441,000 people took it. At one point Groupon was apparently selling more than 500 of the deals per minute.
Groupon is an on-line promotion site. It is free to sign up and everyday Groupon sends out a deal via email. The deal only becomes real if a certain number of people take it. Groupon takes a portion of the revenue, frequently 50%. The company offering the deal gets the rest of the revenue.
It isn’t hard to figure out why the Gap deal was such a big success. It was a great offer. Gap sold a $50 coupon for $25, a 50% savings. Gap is a huge retailer with broad appeal; I suspect a large share of the people following Groupon participated in this offer.
The question to consider: why did Gap offer such a deal?
Financially, the offer has to be a disaster. If Gap got Groupon’s usual deal, then the company sold $50 worth of merchandise for $12.50. This isn’t a good way to make money.
Worse, Groupon buyers are presumably price sensitive, so they will use the coupon on merchandise that is on sale.
Of course, there are some benefits for Gap. The offer generated big publicity. The coupon might get people into Gap who would otherwise be shopping at other stores. People might spend more than the Groupon coupon, improving the margin picture. People also might lose the coupon or forget to redeem it.
Still, it is hard to imagine how this was a good move for Gap.
Indeed, I struggle to figure out why any established, successful company would want to use Groupon. Driving sales through deep discounting does not build a strong brand or a good business. Appealing to promotion buyers is dangerous. Groupon surely provides excitement and some short-term revenue, but at a very high cost.
Groupon will work best for new companies and new products. A new restaurant, for example, could offer a free entrée to get people in the door and drive trial. But those types of deals probably don’t sell well on Groupon.
This is Groupon’s fundamental problem. The best offers are deep discounts on well-known and well liked brands. But well-known and well liked brands like the Gap shouldn’t be using Groupon.