Competing Locally – Why the Groupon Model is Bad Business

price competition Competing Locally   Why the Groupon Model is Bad Business

Local coupon websites are all the rage. Many businesses are hopping onto the Groupon & Living Social bandwagon, hoping to bring in new customers who wouldn’t normally visit their place of business. From the standpoint of broader business exposure, it’s a good idea. From a long term customer acquisition strategy, it’s a VERY BAD idea, and here’s why.

Most customers who utilize these “daily deal” websites are bargain shoppers. Their entire buying decision is based upon price, not quality or service. By offering an incredibly low price for a limited time, this “deal” will attract many new customers, but they will seldom become long-term customers or “raving fans.”

The reason for this long term buying behavior is two-fold:

1. You’re starting off on the wrong foot with a new customer

By offering an incredibly discounted price, the hope is that the new buyer will become a long term customer after trying your product or service, or the discounted product/service will be a loss leader (you’ll take a loss on this product or service but make it up on back-end products that you’ll additionally sell them).

It never works out this way. Bargain shoppers base their purchasing decision solely on price, so they will never be loyal customers. As long as you offer the best price, they’ll stick with you, but when the business down the street (or across the country) can beat your lowest price, they’re gone.

2. Competing on price is a losing battle

There will always be another business who will enter the market and try to undercut the current market rate to take away business, it’s the way of the market. Just think, if you offer a widget at the best price, but Wal-Mart decides to carry that widget at a lower price, how will you compete against them? The truth is you won’t compete with them on price because you can’t.

The solution is to always compete on quality, not price. When a business gets into a competition based upon providing the most valuable product or best service, everyone wins. The customer wins because he’s receiving a higher quality product or service. Your business wins because you’re not lowering your price (profit!) to compete with the guy next door.

If you must include a coupon in your marketing mix, don’t use a discount as the draw. Instead, include a value-add, something that will provide additional value to the customer, but won’t take away from your bottom line.

So, how is your business competing against the competition, price-based or value-based?

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