“The most effective coupons aren’t the ones that save you money on things you’d buy anyway; they’re the ones that come from out of nowhere, giving you license to buy something you otherwise wouldn’t.”

–Matt Schwartz, writer for Wired, paraphrasing Groupon founder Andrew Mason’s view of coupons

Okay, okay, you’ve heard the news.  Google offered $6 billion to Groupon, which is something like 12 days old but has 5 billion customers.

Point of advice #1: if someone offers you $6B, take it (I’m kidding, of course—always double down and hold out for more)

Point of advice #2:  If you’re a marketer at a mass brand—and no one is offering you $6B so you can call in rich tomorrow— it’s worth your while to understand why Google is offering $6B for Groupon.

Here’s my shot at explaining the offer, having myself been baffled at its richness when I first heard the news.  It boils down to Groupon acting as a giant nutcracker, breaking open consumer routines and disrupting purchase intent like nothing before.

I’ll be the first to admit that’s a reach for a holiday metaphor—must be the eggnog talking.

Most of us know how Groupon works—consumers sign up to receive Groupon offers for their locality; they get a new offer each morning; if enough consumers raise their hand to take the offer, it “tips” and everyone who raised a hand gets the deal.  Straightforward (and clever) demand aggregation at work.

But there’s more to the story than simple demand aggregation.  Two articles I’d suggest reading–“Bargain Junkies are Beating Retailers at Their Own Game” appearing in Wired, and “Groupon’s $6 Billion Gambler”, appearing in the Wall Street Journal.  Among the more salient points:

• In the markets where it operates, Groupon does sleuthing for local merchants with high customer satisfaction.  It looks at consumer ratings on sites like Yelp or Yahoo to spot the diamonds out there.  In effect, Groupon is shortcutting search costs for consumers to find quality local vendors.
• Groupon dramatically reduces the “risk” for consumers to try something new—in addition to selecting merchants with strong consumer feedback, Groupon offers a full money refund for folks who aren’t satisfied with their deal.
• Consumers are getting a double dopamine hit from finding a great deal (half off!) AND “discovering” something new.  Never ignore the power of brain chemical releases.
• To boot, consumers get all of the “social proof” from the thousands of other folks who also raised their hand, going a long way to validating their interest in the Groupon deal (we know that validation plays a more important role in purchase than you’d expect)
• Finally, Groupon has built its model with some clever hooks in it, to give consumers extra incentive to engage—cleverly written offers from a staff of professional writers trained to write in that witty/sarcastic voice that drives most of our inner monologues (see this fun Atlantic article to figure out if you could make it as a Groupon writer); as well, Groupon offers a community for deal chasers to share retailing war stories on the back end.

What does all of this amount to?  Groupon and similar services have the potential to crack open consumer routines like never before.  From MLC’s quantitative work on loyalty last year, we know that a sizeable driver of brand loyalty is whether a brand becomes engrained in consumer routines.  Groupon makes those routines far more vulnerable to disruption.

Moreover, in a stroke, every day you’ve got consumers who are shortcutting the entire “consumer decision journey” (from awareness to evaluation to purchase) to jump immediately to trial a product provided by a local merchant.  With consumers in developed markets in balance-sheet-repair mode, money spent through Groupon is highly unlikely to be incremental “consumption” dollars that consumers would otherwise have saved.  No, this is coming at the expense of spend on purchases (many from large brands) that are engrained in consumer routines.  It’s a zero-sum situation for most consumers.  Some brands are going to lose.

As an example, for my birthday, instead of my wife buying me a Sony or Apple branded electronic device from Best Buy, through Groupon she got me a beer tasting class at a local Wine Academy I didn’t even know existed.  Groupon disrupted the purchase intent she had, which was tied to her gift buying routine for me that led naturally to a set of mass brands.

Now, you can argue about what percentage of consumers who visit a local merchant through a Groupon deal will stick and become loyal (as for me, I will be going back for more beer tasting).  But at the rate Groupon and other social buying sites are growing, I’d venture to say the end state will have consumers shifting a meaningful chunk of their shopping away from mass brands to local merchants.

Gloomy?  Yes, if you’re a mass brand marketer.  But knowing how Groupon works ought to give you ideas (and new motivation) to conduct smart experiments for your category in the broader area of social buying behavior.  The threat certainly doesn’t come from Groupon alone—its what Groupon reflects as to broader changes in consumer buying behavior.  There’s still time for mass brands to figure this out, but maybe not for long…

MLC members, we’re helping marketers figure this out in 2011 with one of our primary research initiatives focusing on disruptors of purchase intent.  Got some hypotheses?  Wanna swap notes? Care to share how you’ve responded successfully with your mass brand?  We’d love to talk.  Email me — pspenner@executiveboard.com.

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