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Newspapers Jump on Coupon Biz
The coupon craze, loss leaders and the hidden costs

Couponing service sites like Groupon and Living Social are the rage. Or are they? The temptation to throw all of your margin and take a loss is nothing new for small businesses. It's called a "loss leader". So before I tear into the big guns, let's review what a loss leader is and how it's supposed to work.
 
Definition: Loss Leader - A product or service sold at a substantial discount in order to generate additional sales.
 
One use of a loss leader is to draw customers into a store where they are likely to buy other goods. The merchant expects a typical customer will purchase other items at the same time as the loss leader and the profit made on these items will be such that an overall profit is generated.
 
Characteristics of Loss Leaders
  • A loss leader may be placed in an inconvenient part of the store, so that purchasers must walk past other goods which have higher profit margins.
  • A loss leader is usually a product that customers purchase frequently¡ªthus they are aware of its usual price and that a lower price is a bargain.
  • Loss leaders are often scarce, to discourage stockpiling. The seller must use this technique regularly if he expects his customers to come back.
  • The retailer will often limit how much a customer can buy.
  • Some loss leader items are perishable, and thus can't be stockpiled
Other than getting a sale, the loss leader strategy can also be also used for:
  • Getting rid of unwanted merchandise: If you have a storeroom full of old merchandise that isn't moving or you otherwise want to get rid of, a loss leader can move it.
  • Attracting new customers: As indicated, new customers can be made aware of your business by using the loss leader strategy. For example, the owner of the electronics shop could buy a lot of cell phone covers, discount them, and thereby attract the always-desirable younger shopper with disposable income.
  • Building your brand: If you would like to be known as the "low-cost leader", then a loss leader strategy will help associate your franchise with that slogan. When McDonald's starts advertising $1 meals, you can bet it is employing the loss leader strategy to build its brand (and get people in the door to boot.)
  • Build repeat customers: People like a bargain. If they find that you are offering one, then they will likely come back again, looking for another one.
The loss leader is a time-honored business strategy that works. Use it to build your customer base and your reputation but use it with caution when considering a coupon service!! 
 
Loss Leaders and Coupon Websites
 
Rice University just published a study of businesses that used Groupon and found:
 
"Groupon promotions were profitable for 66 percent of the businesses surveyed for the study, but they were unprofitable for 32 percent. More than 40 percent of the respondents indicated they would not run such a promotion again."

Consider that 2 out of 5 businesses would only use the service once and then quit, what does that say about the service? Our own anecdotal experience has seen coupon services erode buisness profitability and, in a few cases. lead to their eventual demise. The emerging factor we are watching is the quality of the audience that purchases "deals" online and what their expectations are. And we started looking for alternatives.
 
A Local Flair with Deal Saver
 
McClatchy, the California based publishing giant has plans to introduce Deal Saver in all 29 of it's U.S. markets where it owns daily newspapers by the end of 2011. The value of this offering over those from Groupon and Living Social is the pre-existing connection the newspapers have with the markets they serve and, more importantly, they more than likely have a strong, local online presence which is backed up by their print product. And while print is in decline, a huge percentage of online users also read newspapers.

"The benefit we feel we bring to the table is all the print and online promotion," said Gary Smith, vice president of classified advertising and interactive media for one of the papers that is launching the service.  The company also hopes its existing relationships with local advertisers will enable it to offer a wider array of deals than other group-buying sites.
 
While there is no doubt that Deal Saver faces strong competition from a established and well-funded competitors, and Groupon and LivingSocial have built up enormous subscriber bases and have plenty of capital to expand their businesses, there is an opening.
"I think a lot of merchants are learning about the hidden costs of deep discounting, and so I don't expect the current trend of 50 percent off to continue indefinitely," Frank said.
 
Unlike Groupon, Deal Saver won't require a certain number of buyers to sign up before a deal becomes official. Revenue from a deal will be split evenly between the newspaper and the advertiser.

"We don't want the deal chasers," Halferty said. "We want the higher net-worth people that the businesses covet that will spend in excess of the voucher amount and return without the voucher."
 
For info about Deal Saver as structured for the Idaho market - click here
 
Boise, Idaho Market Details
 
Deal Saver and a featured deal will be promoted on page 3 of the newspaper on weekends.
 
New local Twitter account:
http://twitter.com//boisedealsaver

Twitter account added to the main social media page:
http://www.idahostatesman.com/1542
 
 
If you have any questions or ideas, please feel free to comment or contact me via email bly clicking here.

 
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