The Gray Hair Speaketh

Advice that is largely Unsolicited..

GroupOn, Living Social, Snap Deal etc. – Is Deep Discounting the last resort of the failed salesman?!

For those who follow this blog, it is no secret that Group Buying, especially in the shape that it has taken in recent months, is my favorite whipping boy!!

I attended a talk by Prof. Nirmalya Kumar a couple of weeks back, and he was talking about how CMOs and CEOs need to worry not just about the short term, but also about the long term. He gave an example about how Coke could get away with absolutely no marketing spend for a year, and it may not impact its sales for the year. And yet, what does it do for Coke, in the longer term?

So a CEO / CMO has to take into account not just the next quarter’s results, but also the long legacy of the brand!

So what happens when such brands get lured by the GroupOns and the SnapDeals of the world? When a brand starts selling for 10% of its price, or even 50% of its price, no matter what justification marketers give internally to justify these moves, there are two consequences in the eyes of the consumer:

– that if they can sell for 10% of the price, they have been taking 90% too much from us, all these years!

– that I will wait for these discounts, and not buy at the full price at all!

Is this doing good for a brand?

Yes, the justification is that, instead of putting expensive advertising, I divert those marketing dollars into deep discounts, and get people to buy. To experience my product. And get a better and immediately measurable ROI on my “marketing” money! Sounds like a perfect plan, something that the CFO may like for the short term.

But who carries the responsibility for the brand, in the long term??

The moves would have been fine, during recessionary times. When you have capacity and the consumer offtake has reduced drastically. And you still want to keep your factories busy. At that time, a deep discount strategy is good.

But in India, at this time, it is a booming economy. Brands who are getting their act half right have cash registering ringing away to glory, and those who are doing better, are putting up new factories to cope with the demands!

In such times, who wants to sell cheap? Who wants to give those deep, deep discounts?

Only those who have no means to sell it right. Yes, I think that Deep Discounts are the last resort for the failed salesmen! When they can do no better, they discount. Well, if you give it away for free, you are sure to “sell” well (I heard an interesting rejoinder to this also, in fact, in reference to a specific community in India, and it said “if you give it free to them, they will ask for money to take it”!). And the reason for the inability to sell well, is their lack of understanding of how a consumer’s buying process has changed. If all that a marketer can do, is to blast advertising into the face of the customer, and the customer refuses to acknowledge these and purchase his brand, it is the marketer’s fault that he has not changed his ways. To the tunes of the new consumer buying decision journey (I cover some of that in this presentation).

If you do not get your marketing and sales right, you go and sell off cheap. Even in boom times! Report good numbers, get your bonuses, and walk away. And leave the brand bleeding in the long term.

No can do. If I hold shares in companies that are doing this, I would sell those shares, and get out. As I’m sure the future isn’t bright!!

January 26, 2011 Posted by | Uncategorized | , , , , | 1 Comment

Group Buying: Thoughts About The Business Model

What is your reaction when you see a physical product offered at an unbelievable low price??

Like a two-wheeler at 50% of its price? Or a TV at 40% of its selling price? Or even gold – at 30% discount??!

My own first reaction (tampered as it is by standard thought process on gross margins available, etc.) is that it cannot happen! Or that maybe it’s a scam. It is not the real thing. It is second-hand. It is fake gold, etc. etc. etc.

And then you look deeper. And get a bigger understanding of the process.

Every advertiser is looking for that eternal ROI. How many crores spent on making the VW Vento ad speak to Times of India readers? How many increased walk-ins to the showrooms? How many cars sold?

And calculations of that kind!

So when a group buying company suggests to you that:

–          you spend money on expensive advertising (hoarding, print, TV etc.)?

–          you want to drive footfalls and sales

–          what if that is assured to you anway

–          and you cut to the chase

So that, essentially is the model for group buying!

Divert the money out of advertising.

Put the same budget in offering exciting discounts.

Use the group buying vehicle to reach the customers who want your product.

There.. the ROI is in for the budget allocated.

But.. is it really that simple?

If its not that new mousetrap, but rather the unbelievably cheap mousetrap, there are good chances that you’d have a queue outside your door, and you can sell as much as you want.

But the questions then, are:

  1. Did you advertise only to reach those few buyers who would walk-in or purchase? If that was your intention, then some means of targeted direct marketing / telemarketing would have been better options, than mass media advertising, right?
  2. Your purpose of advertising was to also reach those were not going to walk-in today or purchase in the near future. People who may still register your brand somewhere in their heads, and think about you, as and when they get to a point of purchasing your product category. Or to create a general brand hype / visibility etc. Just cutting to the chase and getting those 40 walk-ins, gives you ROI, but does it give you that visibility at all?
  3. Will the buyer perceive that maybe your product is actually worth 50% of your selling price, and the rest of your normal mark up, is your huge profit. And which you should not be earning, really? Could that actually cause more harm than good, in the long run?
  4. Also where do you create your market for tomorrow? If you have not pushed the brand out as much, and have resorted largely to the short cut, discount driven, group buying options, the rest of the world has not been impacted by your brand. And you have left tomorrow’s market open for your competitor to lap up?!

At a time when brand managers are pushed to deliver ROI and a group buying option appears to get them there, there will be temptation to pick it up. And sell at less than cost, by explaining the difference to the marketing budget account. But I wonder if this is sustainable in the long run.

So is all group buying bad for brands? Certainly not.

Where you have perishable inventory, group buying is a beauty. Airline seats, hotel room nights, even food products approaching ‘best by’ dates. Better sold at cheap than not sold at all. And good for the buyers too. Perfect win-win.

Or for categories like services. Where each new service customer is not draining away real cost, but only utilizing the excess capacity that is anyway, idle. Theatre seats, saloon chairs, gym memberships are the examples I refer here.

What I have concern about, are physical product areas, where attempts are made to sell cheaper than cost price – by a lot – and which can over time, potentially do more harm than good, to the concerned brands.

What do you think? Love to read alternate opinions on this.. please comment below!

October 12, 2010 Posted by | Ecommerce | , , , , , | 14 Comments