Why Crack Is Bad For You

I remember a marketing prof in University describe discounts, coupons and related tactics as marketing “crack”. Once you feel the rush of that top line boost, it’s hard to get off it.

Ultimately, though, you succumb to your addition. Crack saps your profits and destroys your business in all kinds of direct (lower/negative margin) and indirect (consumers begin anticipating discounts and so you cannibalize your own reg-price sales) ways. Some take it to silly extremes.

This is most common with scalable product businesses and I’ve seen it happening in real time with Rao’s tomato sauce.

This stuff is awesome. But it costs between $8 and $10 a jar. Lunatic prices for tomato sauce, if you ask me, but wow is it good.

Now you might ask how I know it’s so good if I recoil from spending so much on a jar of preserved tomatoes, olive oil and seasoning? Well I never spend $8 because it often and erratically goes on sale.

We normally buy Rao’s for about $4 a jar (and sometimes maybe for $6), which has happened three times in the last 8 months, if I remember correctly. Each time it happens we buy more: the last haul was 6 jars. Enough, perhaps to last us until the next sale.

Anyway, what about the effects on businesses that don’t scale as well?

Well, today I learned about another possible downside to top-line boosting strategies. This paper comments on the reputational effects of daily deal sites like Groupon:

Our analysis shows that while the number of reviews increases signi cantly due to daily deals, average rating scores from reviewers who mention daily deals are 10% lower than scores of their peers on average.

Wow. The abstract doesn’t go into detail on what they think the causal mechanism is here (or of any possible measurement biases – pbbt, like they would do that), but can it be true that Groupon destroys business quality?

The typical Groupon business is small and local, which means they are probably disproportionately reliant on the skill of a single owner and/or one employee. They can’t expand easily and they probably have limited physical space in the store. These things probably spell disaster when a horde of new customers come all at once.

hat tip dr data

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