August 25th, 2010

Training Consumers to be Cheapskates

By Kyle Morich

With the Economy sub-context vector in full effect these days, I’m certainly not above joining the public scramble for saving money.  Every morning, I wake up to my Inbox full of offers from ScoutMob, Groupon, Half-Off Depot, MyDailyThread, Gilt Groupe, Buy.com and several others.  Coupon usage went up 27% overall in 2009 alone, and as the economy continues to sputter, more and more coupon distributors keep popping up, urging small and large businesses alike to get with the program and start bringing customers through the door by offering steep discounts (50% or more) on their products and services.  My favorite service, ScoutMob, sends me 50% off coupons to my phone for restaurants and bars in my area, and it works — since I started using ScoutMob in March, at least 4 out of every 5 of my restaurant choices has been for a ScoutMob deal.  Getting quality food and drinks for half off is still a surprising and pleasant experience.  And I’ve tried new restaurants, places I would have never tried (or heard of) otherwise.  I habitually check my ScoutMob email this morning and almost always get the coupon, just in case.  So yeah, as a marketing effort, this must be a pretty solid effort, right?

Not really.

Don’t get me wrong – this is awesome for ScoutMob.  They’ve built a rabid fan base of users who rely on them for finding new restaurants, bars, and shops in their area.  But much like Facebook, ScoutMob’s revenue doesn’t come from its habitual users, but from businesses trying to leverage those users.  But for these businesses using ScoutMob (or Groupon, MyDailyThread, etc.), couponing in this economy is a bad deal, for two reasons.

First, these companies are creating short-term revenue from cherry-pickers, or consumers who relentlessly hunt for the best deal available.  The WSJ touched on this today — many businesses are seeing customers from across town who show up, take advantage of the (often unprofitable) coupon price, and never show up again.  Cherry pickers will never become habitual customers.  In a great study into a similar vein of discounting, grocery store frequent shopping programs, Rajiv Lal and David Bell from Harvard Business School showed that price cuts only changed the behavior of casual shoppers (cherry-pickers).  They swooped in, took advantage of the deal, and never returned.  What’s more, many retailers lost money because already loyal customers who would have shopped at the store anyway took advantage of the deal as well.

How many Grouponers or ScoutMobbers actually return to a business after they’ve used the deal?  I expect my answer to this question is similar to a lot of you out there — I only go back to the places I went to before I used the coupon.  The others?  I get my appetizer, beer, and sandwich for a great bargain, and never return.

The second problem this creates is more serious, and an issue that could extend far beyond this economic downturn.  Businesses are training customers to be cheap.  I mentioned that 4 out of 5 of my restaurant choices are ScoutMob-influenced.  What happens at that fifth restaurant, the one for which I have no coupon and pay full price?  I find myself upset at the bill.  I went to a new pub the other week with an old college friend and was shocked that my bill was thirty dollars.  I hadn’t paid that much for dinner in months.  As the recession rolls on and the economy sub-context remains elevated, consumers are getting more and more repetitions with these types of purchases.  As they take advantage of these price cuts and coupons, the brain is being rewired.  The reinforcement has changed.  Now, instead of the meal or experience being the reinforcement for my behavior, the price I pay is telling my brain that the decision was a good idea.  When these companies stop offering Groupons, or actually get a former ScoutMobber to return for a second visit, the full price is a punishment.

The marketplace is rough right now, and I don’t fault businesses trying new tactics to get stingy customers in the door.  But these retailers need to realize that their coupons and discounts are also changing consumer behavior, and the results may not be very good for business in the long run.

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