In just the last couple of years, you have no doubt become aware of the phenomenon of social couponing. Popularized by the Internet, social coupons involve promotional offers that are activated only when a sufficient number of customers agree to participate in the promotion. Groupon, Living Social, and Google Offers are among these sites.

Given the rapid growth and “buzz” for such sites, researchers have been studying both consumers’ attitudes and potential business strategies toward them. While I cannot tell you whether offering a “Groupon” is an appropriate tactic for your operation, I can point to some of the issues to consider, since social couponing has repealed neither the economics of couponing nor the basic psychological issues of consumer behavior.

In many ways, the issues surrounding social coupons are not substantially different from those connected with any discounting or price-related promotion. However, as detailed in a case study to be published by the Cornell Center for Hospitality Research, one tour operator found itself balancing several considerations.

As investigated by Cornell professor Chekitan Dev, the tour operator, Experience! The Finger Lakes, develops and hosts tours of wineries in the Finger Lakes region of New York State. In addition to its scenic beauty, the area’s growing number of wineries has attracted a growing tourist clientele. The tour operator created a series of packages that involve wine tastings and winery tours, among other activities. After substantial initial success, tours slowed in 2010. Intrigued at the possibility of increasing turnover, the tour operator approached Groupon to examine the possibilities for a promotion.
A key element in this social couponing model is that participating businesses usually offer a discount of 50 percent. The resulting calculations will be familiar to revenue managers and other marketers who are responsible for setting prices and determining promotions. The tour operator determined that a 50 percent discount would result in a loss for every coupon redeemed. To make the deal work at all, the tour operator needed both to increase value and cut costs.

Even with those problems resolved, the tour operator faced additional issues, including potentially unlimited sales of the discount coupon, setting an expiration date for any coupons sold, and even the cost of credit card processing, which would fall on the tour operator’s shoulders as an additional expense. The economics of the deal remained daunting, even though it was structured to avoid losing money. The fact was that each discount coupon represented considerable forgone revenue for the tour operator.

Another Cornell professor, Sheryl Kimes, collaborated with Utpal Dholakia, of Rice University, to determine the perceptions of 655 consumers who have used daily deal promotions for a restaurant. Two issues emerged. First, Kimes and Dholakia concluded that these consumers would be willing to try promotions even if the discounts were smaller than the typical 50 percent level. Second, although price was a factor in their decision to participate in coupon promotions (because the participants wanted a deal), the respondents’ chief motivation was that they were particularly interested in trying new products and experiences. In short, the actual discount level is not their primary focus.
Kimes and Dholakia also found evidence of one of the greatest pitfalls of offering discounts, coupons, or other deals that focus primarily on price, namely, cannibalization of existing business. Some 44 percent of the respondents who had used the coupon reported that they were frequent customers of the restaurant that was the basis of the study. Thus, this restaurant faced not only the forgone revenue connected with giving a discount to new customers, but also revenue that would otherwise have come from existing customers.

Thus, an important issue in creating coupon and discount offers is exactly what level of discount to offer. A study forthcoming in the Cornell Hospitality Quarterly explores two questions. First, does offering customers greater financial incentives mean that they will respond by spending more? And second, if not, what does encourage customers to spend more?

In this study, professor Eunju Suh, of Central Florida University, tested the effects on slot machine volume resulting from two different values of free-play coupons. Offers for $50 and $100 in free play were mailed to a group of frequent customers of a Las Vegas casino. Because of the nature of competition in Las Vegas, frequent casino patrons are accustomed to receiving free-play coupons of this type. As one might expect, far more of the $100 offers were redeemed than the $50 offers. However, there was no noticeable difference between the two groups in terms of how much they actually put into the machines (known as coin in).

One explanation for the outcome in professor Suh’s study is particular to casinos. The free-play coupon could be used as a substitute for the player’s stake, that is, the bankroll that the player might otherwise have used. Another possibility is that the extra $50 incentive embodied in the $100 coupon wasn’t sufficiently more to encourage additional play. This might seem surprising, but it turns out that researchers who have examined coupons for package goods have found something similar. Consumers can get to a point of indifference on coupon face value, so that increasing the coupon value doesn’t result in higher sales – even though it costs more money.

A critical consideration that applies to coupon deals, cash-back incentives, and discounts of any kind involves consumers’ benchmarks for “appropriate” pricing. The stated goal of the social coupons and other incentives is to attract new customers, of course, but even when the incentives accomplish that objective, they run the risk of setting an inappropriate benchmark price in the new customer’s mind. Those who purchase the proposed Finger Lakes winery tour for half price, for instance, might be resistant to paying the actual (and appropriate) price – even though they know that they’ve received a special deal from the social coupon. Hotel revenue managers constantly deal with this phenomenon as they adjust room rates to fill unsold inventory. Third-party channels that obscure the hotel’s name are one tactic in this regard, and rate fences also help to prevent consumers from mentally establishing inappropriate benchmark prices.

In the end, several researchers have pointed to the importance of avoiding a tight focus on price competition. Instead, promotions that add value (as well as considering price) can be more effective than simple discounts in encouraging additional business. Adding value, usually in the form of amenities, redirects some of the focus from price. The Finger Lakes tour company, for instance, created a different package for the coupon promotion by adding features to the original product. Professor Suh’s study found that the gamers responded more to a complimentary room and complimentary food and beverage than they did to the promotional coupon. Adding value is not a new idea, but it is a critical strategy to resist price-related promotions. Rather than offer steep discounts or incentives, hospitality operators can seek to enhance the value of a particular service to encourage customer purchases. Many hotels have offered, say, a free room upgrade for booking under specified circumstances. For the tour operator, the value added was discounts on wine purchases and a personalized tour of the wineries.

This type of strategy can be more effective than ever when it is supported by your firm’s database knowledge of your customers and markets. You can tightly target promotions where they will do the most good. Challenging though it may be, the trick is to find ways to separate regular customers, potential new customers, and deal seekers. Certainly, this involves appropriate rate fences and restrictions on deals and incentives. Even when competition is tight and incentives have become a way of life, operators must maintain their focus on analyzing the profitability of any proposed deal, and find ways to take away the focus on price.