Are Social Media Coupons Bad For Business?

For a while now, consumers have been questioning what monetary value social media offers to them. Geolocation services like FourSquare, GoWalla, Yelp, and (most recently) Facebook Places all ask consumers to check-in and disclose their location and buying habits but little has been given back to the consumers. To fill that desire, sites like Groupon have offered members the ability to purchase discounted coupons on the Web, leveraging the power of group buying. My experiences with Groupon have been outstanding and have found opportunities to visit local establishments and eat at half price.

Some, however, are questioning whether the value to the consumer is worth the outlay by the business. A number of reports have indicated that some businesses are losing money on their promotions due to their popularity. The most recent example is retailer The Gap, who sold more than 400,000 Groupons in a single offering, bringing in more than $11 million in sales. The problem arises from the fact that the Groupon offered $50 in merchandise for the cost of $25.

While it might be tempting to jump to the conclusion that engaging in this business lost The Gap $11 million (the revenue they didn’t collect), I think it’s a false conclusion. Keep in mind that The Gap has a markup on all their merchandise, just like every retailer. Yes…the coupon might have bit into their revenues, but not at the price tag of $11 million. For instance, assume that The Gap has a 25% markup on their products and the loss in revenue is cut in half. In addition, you’d have to add in that bump in store traffic that they received as a result of the coupon to determine whether more people visited the store as a result of the promotion. On top of that, we’d need to understand whether there was an increase in the average amount of sale to see whether people visited the store and only bought $50 worth of merchandise or whether bought more (that they might not have otherwise purchased) because the coupon drew them in. I don’t know about you, but it’s a rare situation when I leave The Gap having spent $50 or less.

My point is that the verdict on the value of social coupons and geolocation offers is still out, but there does appear to be a demand from online customers and I’m betting the retailers who participate are going to see a bump in traffic and sales.

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