The Price Cut Game is a Race to the Bottom

I bought a Groupon for a facial last week for $50. I thought it was a great deal. Having worked in marketing strategy for large corporations for over 15 years, I started thinking about how this sort of discounting would mean for small businesses.

It is counterproductive. The way Groupon works is that they encourage deep discounts, often over 50% off listing price. Then, Groupon would split the proceeds with the merchant 50/50. This means that the spa would receive only $25 for the hour facial that I bought. Subtracting the salary of the esthetician and overhead, what is left for the spa would be quite meager. Why do small business still do this? An easy answer is that small businesses are attracted to the exposure that platforms such as Groupon and Living Social bring. However, does exposure translate to the right kind of customers?

In large corporations, we adopt a practice called customer segmentation. With complex analytics, we discover that about 80% of profits come from only 20% of our customers. So finding the right kind of customers is critical. What one would hope to achieve is to use a discounted price to get the customer to “try out” the product or service, and hopefully they like it so much that they would return. What most small business owners do not see is that the customers they attracted from platforms such as Groupon and Living Social are not the right kind of customers, i.e. they will not be returning customers. They only gain “deal seekers.” Once the deal is over, those customers will disappear. Moreover, the small business’ competitors can always cut the price even lower. The questions then becomes, “how low will you go?” It is a race to the bottom.

How, then, can small business gain repeating customers? The answer is two fold: keep promotion cost down, and offer distinguishable packages. There are a number of platforms that do not charge upfront advertising fees. I recently found an interesting platform called Gainko.com. Unlike other similar sites, it is free to list and even to own a virtual storefront. So far, it is completely free for small businesses. Small businesses should take advantage of all the freebies that current technology has to offer.

Offering distinguishable packages requires a bit more thinking. Most small businesses underestimate the power of bundling. When bundling, small businesses can increase the size of the profitable customer segments and less discounting is required. Additionally, superior customer service will give the business a leg up over their competitors. Whatever the business is, there will always be ways to distinguish its products and services in highlighting specific features that drew past customers. All the business has to do is looking into the past purchase behavior from them.

New School Technology for Old School Life Style

Most of us, my readers, aren’t old enough to remember this old school lifestyle: you walk into a local store, you are greeted by your name, you tell the store clerk what you need, they give them to you, you say, “thank you,” and you walk out of the store. Wait, what? You don’t have to pay for that? Oh, but you do. Your charges are put on your tab. The store’s people trust that you are good for it and will settle it with you later. Last time I saw this, it was in some old television show depicting a town in the old wild wild west.

Imagine that happening today. Huh? Which store would allow you to do that? As a customer, I wouldn’t even expect anyone to trust me. They simply don’t know me. However, there is a company here in San Francisco that is working on bringing this “put-it-on-my-tab” life style back. They are not necessarily trying to bring back the trust, but they are definitely working on building the relationship between the store and the customers. The company’s name is Square. They are revolutionizing the POS system. Instead of the store clerk writing my purchases on the blackboard in the back of the store, I would need to first download the “Pay with Square” iPhone app, sign up for an account, upload my picture, and I’m ready to go. The first time I use the Pay with Square app, the store takes my credit card, and the card is registered. For my subsequent “Pay with Square” usages, I can simply show up at the store, give them my name, and tell them what I want. The store clerk looks me up by my name on an iPad, sees my picture, and gives me the products. The store now knows me. This is CRM integrated POS system right on the iPad. Large companies spend an arm and a leg on CRM systems, which small businesses can’t afford. If you know your customers, it is easy for you to keep them. Keeping an old customer takes about 1/5 of the cost of acquiring a new one, based on past marketing research statistics. This is the value a Square POS system brings to a small business.

Square sure sounds like a market leader! Let’s talk about competition. Square produces two products, essentially: the CRM integrated POS system, as described above, and a simple POS system that takes card payments with an iPhone. The simple POS system was the first product they had developed. From whom was the simple POS system taking market share and how? POS system makers, merchant services, and a small business financial services software maker giant, Intuit. The Square mobile solution is simply cheaper and easier to set up. After a quick digging, there are at least two competitors with deep pockets: Intuit and NCR. NCR makes a portfolio of POS systems for many business sizes and segments. They have now launched a POS system called NCR Silver where small businesses can take credit card payments with iPhones and iPads while being on the road. (Think about paying your window-cleaning guy with a credit card with which you can build miles. You can’t build miles with a check.) Intuit has something similar called “gopayment.”

A once un-served market need, the need for small businesses to take payments easily and in a mobile fashion, is now being met by multiple companies. Who will win this competition and grab the lion share of the market? As we marketing strategists would say, “ the competition is won in the attribute space.” Whoever can offer the customers the POS features that the customers value the most will win this competition. Helping small businesses treat every customer like a valued frequent customer, Square might just be well on its way to achieve that.

At least, Howard Schultz thinks so. Pretty soon, we will be able to take Starbucks breaks without having to take our wallets or phones with us. How liberating is that?

p.s. I understand that many of you will argue that you wouldn’t want to give up your phone, and you can pay for your coffee with the Starbucks app. To answer the question of “whether the Square POS system is better than the existing one with the Starbucks app,” we need to look at the cost of maintaining the existing system versus implementing the Square system. Additionally, the payment-less and more streamlined service operation help Startbucks sell more coffee is not to be ignored, either. Regardless, using an iPad as a register is pretty darned cool, isn’t it?

IKEA’s smallest store banner ad

How many of you click on banner ads? I would argue that not many of us do. I know I don’t. One reason that I don’t want to click on it is simply because I don’t want to leave the current page that I am on. After all, I was there for a reason: I wanted to read something there. Earlier today, my mouse happened to glide over a small banner ad. It was interactive. When the mouse glided over, it showed me many small squares of pictures of furniture. My curiosity got the better of me: I looked. Mind you, I still didn’t have to leave the page I was on, but I got to browse what the company had to offer. It was an IKEA banner ad: 300×250 pixels, about 2800 products.

 

The genius of the ad is that it increases the click-through rates of the page where the ad is placed. Not only does it appeal to the customers who already like banner ads, it also captures the curiosity of the unlikely shoppers with the ad’s interesting interactive features that display the products right then and there. In a world where advertising ROI is everything, this just might be the advertising design of the future as far as banner ads are concerned.