Bonuses and coupons: the market to shake up e-commerce – part 2/3
08. 06. 2011.
In 2011 Hungary has joined the ranks of countries where bonuses/coupons are sold online by the million, even though it is not yet clear what the legal status of the product being sold is. The intense interest in discounted products and services may create the illusion of being market leaders in several participants at the same time, which is reflected in companies’ business communications. Part Two of GKIeNET’s joint research with Corvinus University’s E-business Research Center reveals that in order to answer the Who is a market leader in what, one must first understand the underlying business model.
New services in e-commerce
Deals offered by bonus/coupon websites typically fall into one of nine categories: beauty, gastronomy, travel, entertainment, fun, wellness, sports, education, and health. With the exception of tourism, each category covers services that had previously been only advertised but not sold online. This means that the newly emerging online sales strategy is unique not only because the underlying business model is new, but because it made services marketable online that had not been traditionally offered over the internet. But what, in fact, is the product being brokered?
Not necessarily what it seems
When internet users first see a money-off coupon, they are not likely to be concerned with what they purchase. The majority of them know from recent internet shopping experience that if they are not completely satisfied, they have the option of canceling a transaction within eight days. In addition, negative reviews published on social media sites, forums and blogs can be so harmful to online merchants that they will do anything to avoid them and to please the customers. Before focusing our attention on the analysis of the business model, a crucial question needs to be addressed:
For purposes of invoicing and paying VAT, it is important to clarify whether a coupon as an instrument allowing the bearer to receive a discount is in fact:
- an advance
- a type of (personalized) marketing or advertising service
- or a non-cash form of payment.
Retailers operating in Hungary are using all three options, but several of them have asked the Ministry of National Economy to clarify which approach is correct. At the same time, internet retail tends not to wait for country-specific tax law findings, and seeing the low barrier to market entry, several companies have started selling coupons for deep discounts, partially or completely copying Groupon’s business model.
The secret of success
For the business model to work, retailers need to be persuaded to offer significant reductions that can be posted on bonus/coupon websites in the form of limited-time deals. Groupon’s success can be attributed to the fact that retailers pay substantial commission to the company on top of the discount of 50% or more off their products and services. Groupon offers a 50% commission on coupon sales, which means that retailers have to give up at least 75% of the full price.
Coupon websites in Hungary started off with the same business policy, but there have been considerable differences in commission rates. The majority continues to charge 50% of the sales price as commission fee (just like Groupon), but owing to the intense competition many offer services at lower commission fees. Via Groupon Stores, which is not available in Hungary, it is up to the stores to decide if they pay the company a commission of 10, 30 or 50 percent. The higher the commission, the more consumers will have access to the deals.
At the same time, there are relatively few products and services where businesses have a markup high enough to cover the promotion on top of the discount and still make profit. Consequently, businesses apply one of two strategies when deciding if the promotion is worthwhile.
The fist strategy considers the discounted products or services as advertisement. Businesses mark down their prices so much that they do not make a profit or even lose money, but in return they receive substantial advertising exposure for the duration of the sale thanks to the widespread bonus/coupon website, which would cost them way more than the rate of the discount.
When implementing the second strategy, businesses offer the expected minimum discount of 50% but still make a profit on the products and services they offer. This strategy is worthwhile if, despite the significant discount, the revenue generated by the increased number of customers is comparable to selling smaller quantities at higher prices.
Both strategies can potentially lead to success if the services offered please the customers and make them either return in the future or buy additional products or services when using the coupon. Bonus/coupon websites lead customers to the “front door” of the store, and it is the quality of service the seller provides that determines whether customers lured by coupons will return for future shopping.
The bottom line: Advertising exposure
The Groupon model has another key element, which is not about money, but about the service provided to the business offering a deal. On the one hand, the bargain can be accompanied by a description, which, if written by professional journalists or bloggers, will increase sales. On the other hand, it is an important question whether the coupon website advertises a bargain under its own name or with the brand name of the seller, offering a business partnership. If sellers receive these services as well, it is a win-win situation for all participants (customers, sellers and agents), which guarantees the sustainability of the business model.
In contrast to a traditional webstore, deals on bonus/coupon websites are available only for a few days. Advertising the actual deal is not enough to maintain consumer interest in the long run; brand marketing and the support of customer communities also play a crucial role. PR involves a bi-directional communication via online channels, for which Facebook provides the easiest platform. Many users are eager to be part of the “life” of the website offering their favorite services; Customers communicate with each other, and they can be in active contact with the site operator, as well. This development basically creates a “fan” base around the website, in which members shop not just because they see irresistible bargains, but also because they are emotionally attached to the site and expect it to deliver the best (reliable) deals.
The market where everyone is market leader
GKIeNET and Corvinus University’s BCE E-business Research Center conducted comprehensive interviews with the majority of the Hungarian bonus/coupon websites over the period of February-May 2010. During the interviews several businesses claimed to be “market leaders” in the market of bonus/coupon sites. We have no desire to doubt anyone’s statements, but we do have the intention to develop the basics of an assessment system. To this end, we have to evaluate the marketing activity of the bonus/coupon websites based on the number of advertised deals, the extent of the savings, the number of sold coupons as well as the revenues. The number of ‘likes’ on Facebook, the number of registered users (the potential recipients of newsletters), and ad spending are just as important, because they enable merchants to reach a broader public. The next part of our series sheds light on the results of these assessments.
GKIeNET, BCE E-business Research Center