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Social couponing is part of the e-commerce industry, but specifically addresses the marketing

aspects of e-commerce around promotions and discounts.

The history of social couponing dates to the 1990s.

1990s, printable coupons downloaded from the Internet

Dec 2008, Social eCouponing comes on the scene

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The customer in B2B model is the merchant

While there are a limited amount of ³national chain´ deals (e.g. Gap), customers are primarily

local retailers

Customers are segmented based on the value provided to the ultimate consumer

Restaurants ± all price ranges and cuisines, dine-in or dine-out, urban and suburban

Events - cultural events, sporting events, Broadway productions, and museums

Health & Beauty - spa treatments (manicures, pedicures, hair cuts/dyes/styles,

massages, facials, etc), eye exams, dental cleanings, acupuncture, teeth whitening,

laser hair removal

Represent the most amount of deals offered

Groupon and LivingSocial at 50% and 60%, respectively

Recreation - personal training, short-term gym memberships, gym classes, self

defense classes, outdoor activities, pottery painting, movie tickets

LivingSocial¶s escapes captures the largest possible deal price of $258

Services - anything and everything possible! From cCar care/car cleaning to tax

services; from bike repair to cooking classes; from dry cleaning to photography

Specialty Foods - bakeries, fine cheeses, and alcohol (where allowed by law)

Retail ± clothing, music, books

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The B2B business model of social couponing begins with when merchants sign up with a social couponing

company (like Groupon, Livingsocial) to offer a deal to a network of subscribers.

After designing the deal, the social couponing company features the deal on its website, sends out emails tosubscribers and uses social media sites such as Facebook to promote the deal.

Once the number of people signing up for the offer reaches critical mass, then the deal becomes available to all; if

the predetermined minimum is not met, no one gets the deal that day.

This reduces risk for retailers, who can treat the coupons as quantity discounts as well as sales

promotion tools.

Social couponing companies make money by keeping a certain percentage of the money paid for each daily deal purchased by the end user (typically half the money).

For example, an $80 massage could be purchased by the consumer for $40 and then the social

couponing company and the retailer would split the $40.

That is, the retailer gives a massage valued at $80 and gets approximately $20 from the social

couponing company for it.The end user (subscriber) redeems the coupon at the merchant store.

There are potential problems with the business model. For example, a successful deal could temporarily swamp asmall business with too many customers, risking a possibility that customers will be unsatisfied, or that there won't

be enough product to meet the demand.

Larger retailers (i.e. Gap, Barnes & Noble) are able to handle the large amount of coupons purchased ina national deal (445,000 coupons were purchased during the Gap offer)

A smaller business could become suddenly flooded with customers.

One coffee shop in Portland was swamped with a stampede of over 1000 customers on thefirst day, according to one report.

In response, social couponing companies state that 'deal' subscriptions should be capped in

advance to a reasonable number.

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The value social couponing sites is to:

Introduce and expose new potential customers to the business advertised on the

website as well as bring in some old customers that may have not solicited the business in a long time

Vast distribution network access a user base that the business wouldn¶t be

able to access on their own or as inexpensively as through other advertising

Acquire new customers

Allowing customers to buy something new and give the business the

opportunity to develop loyal customers

Target and access a specific user

Social couponing sites collect a lot of data on its user base¶sgeodemographics, psychographics, and purchasing behavior, allowing

merchants to access specific individuals in a geography

An alternative to traditional advertising

The difference: no up-front payment; pay for real results

Help businesses navigate the new world of social media and Internet marketing in an

approachable, creative way

Gives businesses access to copy writers, web developers, and other resources

that they¶d have to pay a lot for on their own to enhance the merchant brand

Validates these businesses as a cool part of their community

Use resources efficiently

Allows merchant to focus on their core competency as a business instead of

focusing on advertising and promotion6



Two general strategies that competitors can take:

Breadth strategy

Want to dominate the market and appeal to a large subscriber base. Groupon

and LivingSocial are two examples of daily deal websites across a variety of

geographies and industries. They do not discriminate as to the kinds of offers

featured on their website and appeal to a wide variety of users.

Depth strategy

Want to introduce a user base within a specific demographic or with a

particular preference to a specific daily deal website and grow subscriber base

for that specific demographic. Examples include individuals with celiac

disease viewing Gluten Free Deals or mothers searching for deals with Deal

Daisy.

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As of 2/20/11, there are over 350 different businesses in more than 150 cities across the country withmore popping up every day

How did all these companies get here?

Low barriers to entry

Coding is difficult to keep proprietary

All distribute on the same platform

Fast to get off the ground

Needs for a sales force, physical assets, and access to channels can all be donethrough the internet or with other simple telecom services, keeping variable costs lowand only really needing to cover fixed costs.

Wide geographic markets

Boundaries are very hazy, if they exist at all thanks to the world wide web

Low switching costs

Makes new companies able to interest and steal end user attention away from bigger players

Little differentiation

All offer daily deals

Similar reputations and purposes

Differentiation has to be based on service and reputation

Don¶t want to compete on price for fear of cutting margins

We will focus our company analysis on Groupon, the first entrant into the electronic social couponingindustry, who has the greatest need to differentiate themselves to survive

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- The Groupon Works website serves as a marketing tool to explain Groupon¶s unique

merchant value proposition, its merchant partnership policies, and the potential economic

benefits for doing business with the Groupon.- Purpose of Groupon Works is to ³educate merchants so they have the most satisfying

Groupon experience possible with the highest return on investment.´ This unique service

provide merchants with support all the way from deal inception to on-going merchant

consultation after the lifecycle of the deal. No industry competitors offer similar online

merchant assistance programs.

- Groupon is also the only social couponing site to have has also created a Merchant

Advisory Board, a ³trusted panel of advisors [from] a variety of industries and locations.

These great businesses provide [Groupon] with feedback, insights and ideas on how to

make Groupon better.´

- Groupon also has a list of B2B savings for small business that they are able to offer

merchants, from Payment Processing to Business Resources, which helps ease the influx of

new business generated from the Groupon exposure.

- Groupon Merchants is Groupon¶s free mobile application targeted at the merchants. This

app allows merchants to manage coupon redemptions and track how much customers spend

when they use their Groupon at the merchant location. The goal is to ³make it dead simple

for merchants to redeem and track Groupons.´

http://www.groupon.com/blog/cities/mobile-redemption-tracking-apps-available-for-

download/

http://www.grouponworks.com/merchant-services/advisory-board

http://www. rouponworks.com/merchant-services10



- Café Asia, a trendy restaurant in Washington DC, agreed to a deal with Groupon to

gain exposure to new customers. The deal was for $40 worth of food and drink for

the discounted price of $20.- Café Asia set the minimum threshold required to tip the deal at 150 coupons, and

Groupon agreed to set the margins in favor of Café Asia at a 55/45% split, thus for

each Groupon purchased, Café Asia would earn $11 while Groupon would earn

slightly less at $9.

- Groupon waived the credit card fee. It's usually 2.5% of the deal revenue but

Groupon agreed will absorb all of it as it was their first time working with Café Asia

- Terms and Agreement: Café Asia agrees not to run the same or better deal on a

web-based group buying site 90 days before and 90 days after Groupon

runs the deal. This allows Groupon to keep the appeal of the website andmakes the Groupon Groupies feel pretty special!

- Groupon will issue Café Asia 3 equal amount checks after the feature has been

tallied. Groupon will mail the first one within one business

day, the second 30 days out and the final check 60 days out. Groupon are investor

owned and therefore use a series of checks as to not mistake us for a bank issuing

small business loans; i.e. Groupon is technically paying Café Asia before services

are rendered by the customers

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- The deal was live on Groupons website for 5 days, during which 2387 coupons

were purchased at $20 each

- The total revenue for Café Asia at the $11 split was $26,257, and for Groupon atthe $9 split was $21,438

- The average Café Asia check of a regular customer is $27.50, while the average

Café Asia check of a Groupon customer is $55

- 25% of the Groupons purchased will not be redeemed by customers, resulting in

$6564 in direct profit for Café Asia

- Primary value to Café Asia is that the Groupons stimulate additional spend per bill

and attracts new customers from the exact demographic the restaurant targets

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- Groupon¶s primary growth strategy is focused on global expansion

- Groupon adopted the well-worn mantra of ³if you can¶t beat them, then buy them,´ and in

January 2011 announced that it had acquired the local players in countries such as India,Israel, South Africa, Russia, Japan, and Singapore, bringing Groupon¶s international reach

to 35 countries.

- This combination of organic growth and acquisition allows Groupon to ³capitalize on

already strong local merchant relationships in these new territories by folding smaller,

existing competitors into their own model, as well as gaining instant access to their

preexisting customer bases.´

- These acquisitions allow the company to eliminate much of the time and effort required to

grow a native Groupon site in new territories.

- Over time, these acquisitions will be rebranded and redesigned to merge within Groupon¶scurrent template to create consistency in the look and feel of the company¶s brand image.

http://socialmediaworld.com/?p=1155

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- One threat that Groupon must not lose sight of is the increasing market share of their

number one competitor, LivingSocial. ³Currently, for every $10 of deals sold on either

[site], $4 of them take place at LivingSocial. If both companies continue to grow at their current rates, LivingSocial¶s portion of sales will overtake Groupon¶s in January 2012."

- Groupon¶s current expansion strategy focuses primarily on international markets and

mobile technologies.

- In order to maintain and grow its market share, Groupon will need to find ways to increase

merchant lock-in, expand its customer base, and offer a differentiated business model to

engage both merchants and subscribers to interact with one another and continue to

outperform the competition.

http://socialmediaobservatory.com/tag/ben-horowitz/

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1. Over saturation ± low barriers to entry/low start up costs has led to 100+

clones. Groupon needs to be able to differentiate themselves and develop strategies that

have a high barrier to imitation.

2. Identify new markets ± Over saturation in the B2C side leads to finding new markets

where Groupon can make an impact. Offering direct B2B discount services will grow the

pie.

3. Retaining customer loyalty ± Currently, there is little incentive to stay with one social

couponing site after the deal is over. Groupon must look for ways to increase lock-in and

switching costs for merchants. This will help Groupon maintain the merchant's loyalty and

future business opportunities.

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- The first recommendation is to utilize extensive network of subscribers to generate new

deals and reverse auction to network of merchants

- Reverse auctioning through Groupon process:1. A subscriber submits a deal idea to Groupon through a page on the website and

selects specific parameter for the deal, such a maximum willingness to pay,

preferred merchant locations, and validity period

2. The proposed deal will then be posted on a ³Proposed Deal´ tab on the site and

become available to Groupon¶s network of subscribers who can view the deal,

however the maximum willingness to pay selected by the initiating user will not

be visible

3. Groupon¶s network of users are able to expresses their interest in the deal by

defining specific parameters, such as maximum willingness to pay4. This auction becomes live once the subscriber interest point reaches critical mass

pre-determined by Groupon

5. Groupon network of established and reputable merchants will use a reverse

auction to bid against each other by listing the price each would be willing to sell

the deal

This will be a public reverse auction and bid price will be visible to all

participating merchants

6. The auction is live for a specified period of time and a merchants wins when it¶s

bid matches the lowest maximum price subscribers are willing to pay

7. The interested subscribers who elected to participate in the proposed deal can then

redeem the voucher as they would any other Groupon coupon

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- Reverse auctioning permits Groupon to develop a new business model in an already heavily

saturated market.

- Benefits of the reverse auction are abundant for Groupon, the merchant, and the user.- This modified product/service offering will appeal to the existing user base because it is

designed and validated by the actual network of subscribers.

- Subscribers are driving the deal negotiations and no sales representatives are needed to

negotiate the deal with the merchant, allowing lower operational costs for Groupon, which

would allow the merchants to retain a larger share of deal price, for example a 70:30 split in

favor of the merchant.

- Doing so makes this type of offer more appealing to the merchant since they are able to

gain a higher share of the deal compared to a traditional Groupon deal.

- Groupon is able to enhance the level of engagement where merchants and users interactwith one another, making the website a truly ³social´ experience = differentiate themselves

from the competition.

- Merchants will learn which deals appeal directly to the subscribers, learn more about their

customers interests and preferences, identify new customers and target them in the future.

- Benefits for the user include creating a sense of ownership of deal generation and bringing

together a network of users together to create a truly social experience.

- Users are also empowered to generate deals that appeal to their specific needs and interests

while guaranteeing the lowest price for coupon.

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Our 2nd recommendation is that Groupon create a platform for Business to Business social

couponing. This would mean that Groupon would utilize current merchants and recruit new

merchants to offer deals that are aimed at businesses. If Groupon pursues this new channel, it

will engage in a new segment of the couponing industry, namely the merchant to merchant

side. As an example: currently Groupon has many merchants that are Spas. Spas might like to

receive a coupon deal on wholesale beauty products to use for their business. Groupon could

recruit a wholesale beauty supplier merchant to offer a deal to other merchants. We predict

that the B2B deals will be higher priced deals, with an average $100 spend (Source: Boss

Rocket discussion). Consequently, around 5% of businesses subscribed to the site will buy the

deal (Source: Boss Rocket discussion). Information from B2B website, Boss Rocket, reveals

that only 7 other sites exist that specialize in B2B couponing.

Other examples of B2B couponing include hotels offering conferencing space. Manycompanies hold off-site meetings. Consequently, conferencing space at a discount would be

appealing to many businesses. Furthermore, just like the B2C Groupon offering, where Gap

offered a Groupon, large companies, like Kinko¶s, a printing service company, might like to

participate in a B2B couponing offer.

Currently in the B2C Groupon offering, the decision maker that agrees to have their company

offer a Groupon is marketing and PR. Groupon would need to establish a relationship with

procurement in order to successfully execute the merchant to merchant deals.

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The benefits to Groupon

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Our 3rd recommendation addresses merchant lock-in. Currently, there is little incentive for a

merchant to only do business with one social couponing company.

Our recommendation is to provide merchants with 3 levels, a good, better, and best option, thatis customized to the individual merchant.

Good- the good option is what Groupon is currently doing. Merchants engage with Groupon

for a one time deal offering, and the revenue split is 50/50 by both parties.

Better- In the better option, Groupon and the merchant commit to offering 3 deals over several

months. It can either be the same deal, 3 times, or a different deal, each featuring a different

aspect of the merchant¶s product offerings. At this level, revenue split is 55/45, in favor of the

merchant.

Best-Finally, in the best option, Groupon and the merchant offer 5 deals, and the revenue split

again increases in favor of the merchant, to a 60/40% split.

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Important that Groupon works closely with the merchant to customize the offerings to meet the

needs and expectations of the merchant.

So it becomes a partnership with mutual benefit for both sides, rather than a one timetransaction.

This in turn creates lock-in with merchants for more than one deal, which we hope will

promote merchant loyalty onve merchants experience Groupon¶s great customer service.

The merchants now have an incentive to do more deals with Groupon because the more they

do, the greater the portion of the revenue they receive. They also increase the exposure and

awareness of their company to Groupon¶s subscriber network.

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1. Groupon and Café Asia offer a promotion valued at $40, and sold to consumers for $20

2. Of this $20 in deal revenue, Café Asia gets 55% share or $11 (while Groupon collects the

$9 balance)3. 75% of the deals sold are redeemed at a average bill value of $55, which represents a bill

upsell of $15 (Bill Value ± Deal Value)

4. The redeemed Groupons are subject to the 80% costs; on a $55 bill this is $44

5. 25% of the deals sold are not redeemed; this is ³free´ revenue as it is not subject to the

80% costs

6. Applying the redemption (and non-redemption) percentages to the revenues and costs

yields per deal cost of $33 (.75 x Costs of Bill Value) but only $22.25 in deal revenue (.75

x(Café Asia share + Bill Upsell) + .25 x (Café Asia Share)

7. The per deal shortfall then is $10.75 ( Revenue ± Cost)

8. This calculation is a simplification that does not illustrate the effect of cannibalization;

however, for example with a cannibalization of 10%, (that is 10% of existing customers

who would have paid full price to patronize Café Asia, instead used a Groupon), the

estimated shortfall is a bit higher at $11.99

9. We arrive at this value by noting that the difference between revenues from groupon vs

revenues from an average bill is $16.50 ($11- $27.50); take that deal value loss x

cannibalization (.1) x redemption (.75). This contributes $1.24 to the shortfall = $11.99

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Merchants like Café Asia assume that their participation in Groupon is a break even

proposition; versus gains and losses

Assuming 10% cannibalization, we came up with the following break even requirements interms of the % of Groupon redeemers who must rebuy, and the average # of rebuys required

before Café Asia recovers its deal losses

It¶s important to note that break even is not necessarily a clear outcome; in other words it

takes substantial conversion of deal users to the customer base ± for ex. if 50% return they

would need to make 6 purchases at the average bill price, $27.50

Calculations do not consider word of mouth, for example those who may be enticed to

patronize Café Asia for the first time at full price, by a satisfied Groupon customer

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