Defensive Strategy

Gap’s Odd Groupon Offer

24 Aug 2010  

The big marketing story last week was that the Gap offered a hot deal on Groupon and a remarkable 441,000 people took it.  At one point Groupon was apparently selling more than 500 of the deals per minute.

Groupon is an on-line promotion site.  It is free to sign up and everyday Groupon sends out a deal via email.  The deal only becomes real if a certain number of people take it.  Groupon takes a portion of the revenue, frequently 50%.  The company offering the deal gets the rest of the revenue.

It isn’t hard to figure out why the Gap deal was such a big success.  It was a great offer.  Gap sold a $50 coupon for $25, a 50% savings.  Gap is a huge retailer with broad appeal; I suspect a large share of the people following Groupon participated in this offer.

The question to consider: why did Gap offer such a deal?

Financially, the offer has to be a disaster.  If Gap got Groupon’s usual deal, then the company sold $50 worth of merchandise for $12.50.  This isn’t a good way to make money.

Worse, Groupon buyers are presumably price sensitive, so they will use the coupon on merchandise that is on sale.

Of course, there are some benefits for Gap.  The offer generated big publicity.  The coupon might get people into Gap who would otherwise be shopping at other stores.  People might spend more than the Groupon coupon, improving the margin picture.  People also might lose the coupon or forget to redeem it.

Still, it is hard to imagine how this was a good move for Gap.

Indeed, I struggle to figure out why any established, successful company would want to use Groupon.  Driving sales through deep discounting does not build a strong brand or a good business.  Appealing to promotion buyers is dangerous.  Groupon surely provides excitement and some short-term revenue, but at a very high cost.

Groupon will work best for new companies and new products.  A new restaurant, for example, could offer a free entrée to get people in the door and drive trial.  But those types of deals probably don’t sell well on Groupon.

This is Groupon’s fundamental problem.  The best offers are deep discounts on well-known and well liked brands.  But well-known and well liked brands like the Gap shouldn’t be using Groupon.

7 Responses

  1. Brett says:

    Part of the argument assumes that Groupon is acting like a traditional coupon and therefore at first glance, it appears Gap is using a price segmentation strategy. However, Groupon is not like a traditional coupon at all, it hits a much different demographic. Whereas grocery store coupons hit the price sensitive, Groupon hits the “tech-savvy”.

    Gap, which has struggled as of late financially, may have been using Groupon to reach it’s original base of young, hip, tech-savvy buyers who have migrated away in the past few years. This may have been Gaps way of “buying them back”. (i.e., getting that specific demo back into the stores).

  2. Joe Mayer says:

    Gap guaranteed themselves $5M before anyone stepped into a store. And it is feasible that a portion don’t even get used. Even if a lot of people do cash them in, the exposure to 441,000 people, the affiliation with a trendy, fast growing company and the guarantee of revenue (without even purchasing any clothes) has to be good for something.

    Spot on regarding the startup and restaurants benefiting the most from the groupon model, but I think there is something to be said for generating a buzz and guaranteeing yourself something in a market decidedly lacking in guarantees.

    • Tim Calkins says:

      Joe—I totally agree that buzz is important. And cash is good, too. Groupon is probably a very good way for companies to generate cash quickly, though at a high cost.


  3. Aswath says:

    a) Gap would’ve gotten a way better than usual deal with Groupon.
    b) Gap’s margin is really really huge, So, I’d think Gap makes a profit even with a 60% discount (They regularly have 30% off sales). Their biggest cost is marketing and branding – which is taken care of with Groupon.
    c) Many people will end up spending more than the $50 at the shop.

    So, Gap probably did the smart thing.

    • Tim Calkins says:

      Aswath—I agree on all three points. There are certainly some positives for Gap. But I’m still not convinced it was a smart move; it was a huge bit of discounting.

      One way we will know for sure is if Gap makes similar offers over the next year or two.


  4. Many companies have “end of line” products they would like to shift. However, they fear discounting these products might negatively affect the perception of the product, or engender consumer behavior that starts anticipating such discounts. So they use channels that camouflage what is going on. A great example of this is

    • Tim Calkins says:

      Dino—You are absolutely right: companies frequently use different channels to move out old inventory without damaging the core business.

      Gap clearly wasn’t doing this, however, since the Groupon offer was valid on the latest merchandise.


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