Couponing, Discounts, and Price Benchmarking: A Hospitality Industry Challenge
By Rohit Verma Executive Director, Cornell Center for Hospitality Research | December 04, 2011
Co-authored by Glenn Withiam, Executive Editor, Cornell Hospitality Quarterly
In just the last couple of years, the phenomenon of social couponing has attracted the attention of customers and businesses alike. Fostered by the internet, social coupons involve offers that are activated only when a sufficient number of customers agree to participate in the promotion. After two years of rapid growth, one social couponing firm, Groupon, attracted the attention of Google in 2010, with rumors of a possible purchase. That did not occur, and Google subsequently launched its own social couponing site, known as Google Offers. Yet another social couponing site, LivingSocial, has seen investments from Amazon.com, among other backers.
Given the rapid growth and "buzz" for such sites, researchers have been examining these sites both from the point of view of customers' attitudes and businesses' strategies. In this column we discuss some of these findings, with an eye to setting appropriate strategies, especially since social couponing has repealed neither the economics of couponing nor the basic psychological issues of consumer behavior.
In a case study, Cornell professor Chekitan Dev examines the situation of a tour operator that develops and hosts tours in the Finger Lakes region of New York State. Due to glacial action, the region's soils and topography permit the growing of wine grapes, which has attracted an increasing number of wineries. The tour operator, Experience! The Finger Lakes, has created a series of packages that involve wine tastings and winery tours, among other activities. As is the case with many businesses, growth slowed in 2010, just as Groupon opened a regional office in the vicinity and expanded its strategy of working with small businesses. Intrigued at the possibility of increasing turnover, the tour operator approached Groupon to examine the possibilities for a promotion. The motivation for creating a promotion was the hope that customers would repeat their purchase once they had an initial experience with the business.
Typical of a case study, Professor Dev outlines the economics of the potential coupon promotion-and asks the reader to analyze whether the tour operator should go through with the deal. Most critically, Groupon insists on steep discounts for its promotions, in this case, 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. Because the tour operator was selling packages, its cost of goods sold was high enough 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, the 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.