Archive for August, 2010

Gap’s Odd Groupon Offer

August 24, 2010

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.

Learning from a 4-H Market Pig Auction

August 17, 2010

You can learn a lot about marketing at a 4-H market pig auction.

Last week I went to the Northwest Michigan Fair, a charming, old-time county fair, complete with the corn dogs, snow cones and “The World’s Biggest Alligator.”  My kids and I had a grand time inspecting farm animals and studying the newest Massey Ferguson tractors.  We also sat in on the 4-H market pig auction.

In the 4-H market pig program, kids purchase piglets, care for them for six months or so and then sell them off at the local county fair.  The Northwest Michigan Fair featured 4-H auctions for hogs, steer, lambs, ducks, chickens and rabbits.

The prices in the auction we watched last week were remarkable.  The hogs started at $2.10 per pound, with most selling for $2.80 or $2.90.  A few of the animals sold for well over $3.00 per pound.

Anyone who follows the price of hogs knows that $2.80 per pound is an amazing price; live hogs usually sell for less than $0.60 per pound.

It is all the more remarkable because the 4-H pigs aren’t actually better than other pigs, at least not notably so.  There is no promise of exceptional quality.

So what is going on?

The key point is simple: it isn’t about the hogs.  It also isn’t really about the kids.  The 4-H auction is all about relationships; buying a pig or a steer at the 4-H auction is a way for a local business to support the community and cement personal connections.  So local businesses show up and support friends and customers; last week I watched as Arbor Oil bought a hog, followed by Red Ginger Restaurant, Springfield Roofing and Northline Oilfield Services. 

It makes perfect sense.  When you buy a market pig you build a relationship and create loyalty.  It is tough to push back on the price of a new roof when the roofer just supported your kid at the local pig auction.  You don’t call Geico looking for a better deal when your local insurance agent bought your family’s pig.

Back when I was in 4-H, I sold lambs at the Erie County Fair.  I wasn’t a particularly good marketer at the time; I didn’t tell many people I was selling a lamb.  If I had a kid selling an animal in a 4-H auction today, I would spread the word; I would tell my insurance agent, accountant, electrician, plumber, car dealer, roofer and pediatrician.  They wouldn’t all show up but I’m certain a few of them would.  And if they bid and bought the animal I would be loyal for a very long time.

Here is a good piece of advice: if you ever hear that your customer’s kid is selling a hog at the local fair, go buy it.

The Uneven Recovery and P&G’s Branding Challenge

August 5, 2010

Procter & Gamble announced somewhat disappointing earning this week.  While fourth quarter revenue grew by +4.7% to $18.9 billion, profit fell from $2.5 billion to $2.2 billion, a decline of -11.3%.  The company’s stock fell by over $2 per share due to the news.

P&G executives explained that the weak results were due to an increase in price promotions and marketing spending.  Apparently, P&G spent heavily and protected share and revenue but at the expense of profit.

The Financial Times quoted P&G CEO Bob McDonald stating “Our new initiatives that are premium priced continue to do very well, and I would say that they appeal to the people with jobs.  At the same time we also see…consumers without jobs…trade down.  I frankly expect that to continue.”

P&G faces a very difficult branding question.  How should the company respond to an economy where some consumers are doing well but many more are struggling economically?

In recent years P&G has focused on big, premium brands, generally one main brand per category.  In the United States, for example, P&G has Crest in dental care, Tide in cleaning and Pampers in diapers.  This approach works well when most people can afford the premium brand and are willing to pay.

As the economy weakens, however, this strategy runs into problems; many people are no longer able to pay for the premium brand.  This raises big questions:

 -Should P&G simply give up the more price-sensitive buyers?  This would lead to significant share loss. 

-Should P&G increase spending and reduce promoted prices in a bid to hold onto share?  This approach hurts profits, as this week’s results demonstrated.

-Should P&G try to reach both groups of consumers with the same brand through the use of products like Bounty Basic?  This seems like an elegant approach but it might dilute the brands.  It certainly makes it easier for consumers to trade down.

-Should P&G promote multiple brands, each tailored to people at different economic levels?  This would be a big shift from P&G’s recent strategy.

These are difficult questions.  Importantly, none of the options is particularly appealing.  If the economy continues to struggle, P&G and other consumer products companies will face some tough choices.


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