Daily deal sites such as Groupon and Living Social have been getting some press lately about whether they provide a sufficient return on investment for business owners or not. With the coupon company taking a cut from the profits and the menu items offered at a lower price point, owners have become increasingly doubtful that this is an effective tactic for reaching new customers.
Inverted deals are similar to daily deal promotions, but the consumer does not need to purchase a coupon online. Under this system, consumers sign up for a deal via a mobile application and pay for it on location rather than in advance. Companies such as LevelUp or Mogl provide the platform for customers to find out about these deals as well as the means for businesses to track how well a promotion is working. It does not seem like such a small adjustment could have such a great impact on profits, but this type of deal provides a solution to the two main problems associated with daily deals.
Addressing the Problems
The first problem with daily deals is referred to as “price renormalization.” Price renormalization is the phenomenon in which consumers begin to perceive the value of a product based on its discounted price. By paying for a discounted product upfront, consumers are no longer willing to pay the regular full price for any given item. The reason that this is not a problem with inverted deals is that consumers are required to first think of the item or service in terms of the full price before the discount is applied. This makes it more likely that they will come in to a business and pay full price in the future.
The second problem is known as “benchmarking.” When a customer buys a coupon that has a value of 10 dollars he or she is likely to try to keep purchases under that amount, which means businesses are losing profits. With inverted deals, consumers make their purchasing decisions before the deal is applied and therefore do not have a fixed limit in mind.
It was with those solutions in mind that inverted deals were invented, and indeed they sound all very nice in theory. But do they really work? According to a recent article in QSR magazine, Sebastian’s Café of Boston tried out LevelUp’s services and found the following:
- On average, customers that use LevelUp return four times after trying the program.
- Consumers pay 22 percent more than the amount offered by the deal.
- Fifty-two percent of consumers that paid with LevelUp came back to pay full price within 30 days, compared with Groupon’s one percent.
Creating promotions that both attract new customers and provide a handsome return on investment can be a difficult task. Inverted deals could provide the right balance between value for the customer and value for the business owner in order to be a winning marketing tool.