brand loyalty

The dangers of Groupon for your brand - and its own

Last November, Google was trying to buy Groupon for $5.3 billion, in what would have been its largest acquisition yet. To everybody’s surprise, Groupon said No.

The deal-of-the-day site, which offers one deal per day in each of the markets it serves, was launched in 2008. By the time of Google’s attempts to buy it, it was operational in 150 markets in North America, and 100 markets in Europe. Its popularity and quick growth was mainly due to supposedly big rewards for the site users, who could get access to various services (such as massage, yoga courses, meals) and products at heavily discounted prices.  It was said to be the result of “buyer power” but obviously had more to do with sales promotions for the brands in question.

I also tried out Groupon on two occasions.

Once, I bought a coupon for a massage at what was presented as a Brussels-based beauty salon. The price I paid was 19 Euros, “instead of the usual price of 70 Euros” charged by the said salon.

When I arrived, I found out that the beauty salon was anything but beautiful itself... Just by looking at the shabby interior, I thought that I would have never been tempted to step in, let alone pay 70 Euros for an hour of massage, which is considered a price above the market in Belgium. But given the context, I was curious.

During the massage, the masseuse spent a lot of time telling me how much work she had to do after her service had been promoted on Groupon.

“And I earn nothing for working non-stop,” she kept exclaiming (the chat itself distracted somewhat from the experience).

An immigrant from Congo, she has 4 children to feed, and is prepared for a lot of work, “as long as there is work.”

The massage was okay. That is, okay for the price of 19 Euros. Unfortunately it also fixed in my mind that the reference price was 70 Euros - so I’ve never been back and the investment that the beauty salon made in sales promotions through Groupon must have delivered minimal, if any, results.

My second (and perhaps last) experience with Groupon took place this very morning, when I tried (and failed) to use a coupon that I had bought during the Christmas rush last December.

Priced only at 8 Euros, it would give me a possibility of printing an attractive looking photo album for the value of 26 Euros with a service called www.albumdigital.com.

In fact, I did want to make an album of my family’s photos and have it ready as a Christmas present.

But when I tried to use my 8-Euro Groupon coupon last December, I had to abandon this idea right away, mainly because it turned out that www.albumdigital.com only made its service available to Windows users. Being a Mac and Linux user myself, I found this slightly annoying, especially since my coupon said nothing about that.

I do have Windows on one of my computers, but oh boy, do I do everything possible to avoid using it.

So I did. Until this morning. Just because I noted down in my agenda that my lovely coupon was expiring today.

In fact, it was not even clear whether it would expire today, or on March 3rd. Look at these different dates that are totally confusing (the coupon is in French):

groupon coupon_expiry_dates

The first date (underlined in red) says that the coupon is valid until 03.03.2011. Whereas the second mention of validity refers to February 28th. In any case, I thought, it should work, because today IS February 28th.

Well, it didn’t.

After a rather excruciating experience of downloading the required software using my Windows computer and waiting, waiting, waiting while different windows kept popping up.

Finally, the software seemed ready to receive the photos of my kids. Although the software promised to organize them by date, this did not happen. I also had to click and click away to see which of my selected albums corresponded to which price, as this info was not organized properly.

albumdigital_prices

And yes, this painful process took a long time. Which means, that the value of the voucher was negative, at least for me, as I LOST a whole lot of time.

albumdigital_long_upload

And finally, after having uploaded everything, filling out a tedious form with my personal information for www.albumdigital.com, AND submitting my promotional code, I saw THIS:

groupon_code_not_valid1

I’ve written emails to both Albumdigital and Groupon, but the point is: even if I am ever reimbursed the rather minuscule price of 8 Euros that I paid to Groupon, it’s highly unlikely anyone will reimburse the value of the time I spent fighting with this technology.

Although Groupon has skimmed a market opportunity with commercial aplomb, its longer-term future is, as far as I am concerned, anything but certain:

  • Those small-scale services and product providers who promote themselves through Groupon generally have very little understanding about brand-building themselves. They don’t understand why offering their often high-value services at low prices through Groupon positions them as “cheap” vis-a-vis their potential customers. Would I go back to the beauty salon and pay them 70 Euros for what cost me 19 Euros and was portrayed as a “fair price” (rather than a sales promotion gimmick)? Nope. And I can hardly imagine anyone doing it. At best I might move on to the next Groupon deep discounter. There might, of course, be some exceptions, such as discovering an amazing restaurant where a meal cost you next to nothing, and wanting to experience it again. But for services of average quality, repeat purchases with that provider are unlikely.
  • Associating itself with low-quality service providers, such as www.albumdigital.com, does nothing good to Groupon’s brand either. In my mind, I lost a lot of precious time on www.albumdigital.com which I discovered with Groupon’s help, and in my consumer mind, the brand of www.albumdigital.com is .... well, Groupon’s brand. Whether Groupon wants it or not.
  • What’s happening here in brand strategy terms is that Groupon constantly co-brands itself with each and every service provider that features in its daily deals. So, the aggregate consumer satisfaction with, and brand loyalty towards Groupon will be a sum of all experiences its customers have while they receive their massages and buy photo albums. Every real-world discounter which plans to stay in business over the long term, however, still offers some sort of quality guarantee - think Aldi in Germany and Colruyt in Belgium.

One of the reasons why Groupon has achieved such rapid market penetration is because the small businesses which promote themselves through it have very little knowledge of business development and brand strategy - especially online. Motivated by large-scale and quick exposure to potential customers, they sell their service often at a loss - remember that Groupon makes money by keeping half of the price advertised in daily deals. So, my masseuse actually sold her services at 8.5 Euros per hour!

They also position their fragile and often unknown brands in the consumer’s mind as worth much less than the price they usually charge - and possibly little more than a ripoff. Meanwhile Groupon is generating cash by cannibalizing its own brand - hardly a recipe for long-term value creation.

True luxury: inclusivity vs exclusivity

I've just come across a series of thought-provoking posts on springwise. Their common theme is brands trying to build loyalty with online tools. Whereas some of them do it in a democratic and "inclusive" way, others opt for "exclusivity". Let's see how this might result in their brand positioning. One article describes a hotel in NYC which has set up an online forum for its guests. The Pod Hotel offers budget accommodation for young travelers, and the forum is a brilliant solution to help them connect to each other in real life, and have fun together in NYC. It clearly addresses the pain particularly of those who travel alone and don't know anybody in New York City.

Snapshot of Pod's online forum for registered guests

This is a brilliant idea, and The Pod Hotel is surely on the good track of creating some valuable loyalty with this simple online solution.  My advice is that it should definitely do a bit more to make this feature known on its website. As it stands now, the site fails to communicate it. I don't know if it's a planned move or not. If yes, I suppose that the reason might be that the hotel works at capacity most of the time, in which case the forum is only there to trigger repeat visits rather than recruit first-time customers.

Another idea featured on the same site is an online social network launched by the airline KLM. The online network is not targeted at all KLM's customers, but only frequent flyers.

For the moment, KLM has set up two online communities -- one for China, and another one for Africa. Essentially, the main target is entrepreneurs who all share the same challenges working in emerging markets.  They can discuss issues of common interest and network online, which triggers encounters offline.

KLM even organizes offline networking events for the online community members both in China and throughout Africa.  KLM says that its online social community is "exclusive" and by invitation only.  My guess is that this exclusivity is tied to KLM's reward program which actually makes sense.

Think of it: the more you fly, the more chances you get to meet like-minded entrepreneurs. And the better you should get rewarded by an airline company for your loyalty.  So, this kind of "exclusivity" achieves both goals -- it rewards frequent flyers whilst giving them a possibility to socialize.

A snapshot of KLM's online community for frequent flyers

I also want to address another kind of "exclusivity" which rarely does anything good if a brand seeks positioning in the luxury or affordable luxury segments.

I've come across many brands, especially various online shops, which try to create an aura of exclusivity out of .... well, pretty much nothing.  I find it amusing when some freshly launched site writes  me to become their member "by invitation only"and start shopping there.

In this respect, the example mentioned on springwise is Claseo, a recently launched "luxury" label. Unfortunately, it's not possible to have any idea about how luxurious its designs are because you can't enter their site. The reason is that the site is "exclusive" and by invitation only.

Snapshot of the invitation-only site of Claseo

I think it's counterproductive to seek positioning as a luxury brand through such self-limiting "exclusivity".  Whereas this might be feasible in instances when brand equity is already at its peak, this move is rarely a good solution for a start-up.  This is particularly true for web start-ups.  Building a user base is of ultimate importance for them, and certainly a key to creating a strong brand.  I have written and spoken about this on several occasions.

Looking at three examples above, the "inclusivity" of the budget hotel in New York in fact makes it truly exclusive. By solving the real need of its customers -- a simple human desire to socialize -- the hotel succeeds in occupying a very lucrative segment of affordable luxury.  The same refers to KLM's online social network for frequent flyers, which helps entrepreneurs connect and socialize in real life.

Funky brands are smart because they understand what true luxury is, and although it may sound counter-intuitive, in many cases being inclusive and democratic, rather than "exclusive", is what really helps build a great brand!

Diffusion brands vs parent brands

A significant advantage that successful luxury brands have, is that they have a good chance to launch diffision brands. Diffusion brands are a form of a line extension, discussed before.  They are “step-down line extensions of existing  luxury brands, normally less expensive than the  main-line merchandise.” ((How Young Adult Consumers Evaluate Diffusion Brands: Effects of Brand Loyalty and Status Consumption, Ian Phau Edith Cheong , Journal of International Consumer Marketing, 21:109–123, 2009))  They are often called second lines, subbrands and endorsed brands. Think of them as “children” of their more established “parent brands”.

Armani dot com screenshot

Examples of diffusion brands abound in the fashion world, for instance. Armani launched  Armani Exchange, Calvin Klein introduced CK, and Prada started a diffusion brand with a whole new name: Miu Miu. In all of these cases, the important condition for introducing diffusion brands was very high brand loyalty and brand recognition of parent brands. In other words, unless the brand equity of your parent brand is high, it might not be even a good idea to start considering diffusion brand launches.

There are several observations that I want to make in relations to diffusion brands:

  1. By launching a diffusion brand, a parent luxury brand de facto enters a whole new world of new luxury (also referred to as mass luxury and affordable luxury). I wrote on this subject before. New luxury is where many funky or funky-to-be brands develop.  If done properly, the new luxury positioning can bring enormous benefits to both: a child brand and the parent.
  2. Diffusion brands are a good way to target consumers who are usually much younger than the main target market of parent brands. They can tap well into the trend of status consumption, “The motivational process by which individuals strive to improve their status through the conspicuous consumption of consumer products that confer and symbolize status both for the individual and surrounding significant others.” ((Status consumption in consumer behavior: scale development and validation, Eastman, J. K., Goldsmith, R. E., and Flynn, L. R.  Journal of Marketing Theory and Practice. Summer 1999, 41–52.))
  3. Empirical research demonstrates ((Phau, Cheung, Journal of International Consumer Marketing, 21:109–123, 2009)) that diffusion brands have the same quality and status perception among younger target market as parent brands. This is a great way to appeal to a younger audience, and chances are that it will later on develop preferences for the parent brand as well.
  4. Importantly, the success of diffusion brands is often determined by a brand naming strategy. To put it simply, if a child brand bears the name of the parent (like Armani Exchange has a name of the parent brand, Armani), the benefits reaped from the existing status of a parent brand are almost immediate. If, however, a child brand is given a totally new name (Miu Miu vs Prada), such benefits are much less apparent. ((ibid.))

Armani Exchange screenshot

Diffusion brands are not a phenomenon characteristic exclusively for luxury products and services. On the contrary, they frequently occur in a very vast and complex area of brand architecture.