Loyalty - the achilles heel of Groupon (and Facebook knows it)

If Google are willing to try and pay a reported $6bn for a company which is little more than two years old then it must be doing something interesting - and Groupon is certainly generating some interest.

Depending on how you look at it, Groupon is either the hottest trend since...er... the last one, or is simply a purveyor of local discount deals via email.

However, if "imitation is the sincerest form of flattery" then with both Google and Amazon looking to have a bit of the discount deals pie by each creating (or buying into) their own version, there must be something to it.

Group buying is nothing new, back in the (first) dot-com boom years there were a number of group buying start-ups, but these failed to gain traction despite significant above the line spend. One of the reasons for this is that these early pioneers focused on selling branded goods like a standard e-commerce site, but would lower the price based on the number of committed sales. In reality however, they would have bought the goods beforehand and so the "group discount" wasn't negotiated based on the group itself. Even if it was, mainstream retailers would already be buying significantly more volume of the same item and so beating their prices was hard.

So whats changed? Quite simply, relevance - based on location, timing and friends.

These offers are typically from local businesses, with subscribers selecting their chosen city to receive offers from. The offers are distributed via email and with most subscribers now having always on internet access via smart phones or tablets, the offers become timely, with users able to react quickly to get the deal. Finally, social media means both the offers and the offer provider and getting more visibility as subscribers quickly push them out to friends.

Current group buying leader Groupon describes their service as providing "valuable new customers, guaranteed". Going on to say:-

These subscribers are not looking for “the perfect deal.” They’re looking for the perfect excuse to try something new. We get them to your business, and you bring them back again and again.

Quite clearly, Groupon see themselves as an acquisition channel. A way for smaller brands or independent retailers to cut through the clutter of both digital and traditional marketing channels, many of which are inaccessible to smaller merchants, accessing customers directly with an attention grabbing offer.

The issue with this though is something which Groupon seem to know, but possibly don't recognise when they say "We get them in [..] you bring them back again and again". They may drive customer acquisition in the first instance, but it's clearly up to the merchant to get the customer to come back - and this requires a retention strategy, something Groupon is simply ignoring.

Facebook on the other hand is not known to miss a trick.

As reported in Forbes, they are testing a new feature called "Buy With Friends" which allows users to publish a purchase within their newsfeed and for friends to be able to click on this and purchase it themselves with a discount. The feature will let a user "unlock" a deal and then share that same deal or discount with other friends who can take advantage of the fact that it's already been unlocked. In tests, Facebook reported that more than 50% of people chose to share their purchase.

Currently it only works with in-app purchases using Facebook Credits, but it's easy to see how this could be expanded to real worlds goods and services.

As I discussed in a previous post, there is a trend now for retailers linking their e-commerce activities directly into Facebook, something we've discussed in more detail in a white paper called "The Future of Relationship Marketing". Joining the dots, if retailers linked their e-commerce into Facebook this would allow them (large and small) to both publicise purchases by existing customers and to push deals to prospects.

The combination of Facebook Places, Deals, "Like" and "Buy With Friends" provides a unique array of services to merchants with an pre-existing audience of 600m people. It won't take much for Facebook to combine these in a way which competes head-on with Groupon, but adds longer term value through the ability to track these interactions and build further contact - linking the initial acquisition to ongoing retention and loyalty.

You could argue that Groupon shouldn't be the only one worried here - every loyalty agency will (should) also be looking over their shoulder at the fast approaching Facebook juggernaut. The winners will be those embracing it to drive even greater value for their clients and customers.

ASDA launch a loyalty programme?

UK supermarket retailer ASDA has publicly stated a number of times that it doesn't believe in loyalty programmes. CEO Andy Bond famously said "You can't buy loyalty with plastic points" and their website actually has a page describing why they don't do "loyalty", saying:-

At Asda we reward all of our customers for their loyalty by charging low prices every day of the week, all year round.

ASDA has always prided itself on being an Every Day Low Price retailer. In a article last year, ASDA said:-

EDLP is very much at the heart of our pricing strategy. [The aim for 2010 is] sucking out the promotional money on offer from our suppliers [in order to] invest all of it in lowering prices across the board.

The problem with an EDLP strategy though is three-fold:-

1. Hard to prove - Will consumers really believe you when you state you have the lowest prices. With so many deals around, so many different brands within the same category and so much HiLo style pricing strategies even within EDLP retailers, consumer are confused about what a low price really is.
2. Lacks Engagement - Even if a customer sees initial savings on their first shop, this quickly becomes "normal" on subsequent shops meaning the whole EDLP strategy becomes forgotten. It may work initially for acquisition, but fails in the long term when it comes to retention.
3. Encourages dis-loyalty - When EDLP are mixed with sales promotion activities this actively creates dis-loyalty. It plays to a promotional audience who will shop around and only buy products on special offer. Long term, rather than EDLP locking consumers in with a trusted promise, the sales promotion activity simply dilutes it.

When reviewing various retail loyalty programmes a couple of years ago, COLLOQUY stated “A marketing strategy focused solely on sale prices and promotions not only faces diminishing returns, but can also actually breed disloyal customers [..] retail marketers have an opportunity to shift their focus from EDLP towards loyalty drivers that build true customer engagement, larger transactions and improved margins.”

Despite all this talk about not doing loyalty programmes and how an EDLP strategy in some way doesn't fit with loyalty, have ASDA in fact actually launched one?

ASDA had recently strengthened its Every Day Low Prices (EDLP) strategy with a Price Guarantee. Not just a "refund the difference" guarantee, but a 10% less guarantee.

They state "We'll guarantee your comparable grocery shopping is 10% cheaper at ASDA or we'll give you the difference".

As an example they say:-

Your comparable grocery shop is £110 at ASDA, £100 at Tesco, £111 at Morrisons, £125 at Sainsbury's and £130 at Waitrose. Tesco are cheapest. 10% cheaper than Tesco's £100 comparable grocery shop is £90. As such in total you'll receive a voucher for £20.00 to ensure your comparable grocery shop is 10% cheaper at ASDA.

This is a bold promise.

Of course there are those who point out potential issues with this such as the breadth of products covered. Whilst 15,000 products are compared, about 10% of products are deemed "unique to the retailer" and are not included.

However in a recent article in Which? where they tested this promise, it did deliver (even if 50% of products couldn't be compared with Morrisons). Although ASDA were the cheapest overall, they were not 10% cheaper and so they gave a refund.

What's different about this programme for ASDA though is that they now have the potential to both provide every day low prices and to build increased customer engagement - and here's why.

ASDA have made it really easy to check prices after a shop using their online website or in-store using their iPhone app and as part of this process the customer can register their email address.

And there we have it - they have created a loyalty programme.

They're connecting purchase data to customer data, creating the ability to run a loyalty programme. This isn't a points programme, it's a uniquely ASDA loyalty programme. But it is a loyalty programme.

There are even customer rewards in the form of the 10% money back and this bit is quite clever. Using this scheme ASDA don't need to be the overall lowest price all of the time, they just need to be low. Non-loyal customers pay the sticker price, but loyal customers can essentially be refunded (or rewarded) any difference. By flexing this margin they'll be able to manage short-term benefit versus long term engagement.

This ability to link transactional data to individual customers will also give ASDA increasing insight on their customer base and allow them to begin mining this data in ways which retailers like Tesco and Sainsburys now take for granted.

Finally, It creates a reason for customers to further interact with the retailer online and on the move, continually reinforcing the ASDA price promise.

There are many ways to improve this programme to make it work harder, but hats off to ASDA. I think they may have the start of an interesting and powerful EDLP loyalty scheme - even if they don't like the word loyalty.