Starting with Coca-Cola, coupons have served multiple purposes: To help consumer product manufacturers and retailers acquire new customers, increase the number of purchases of the same item, and incentivize customers to return. Specifically, manufacturers want consumers to switch to their product, while retailers want to increase shopping basket size and increase the number of trips to the store. Going forward, the digitization of coupons promises to make this a more seamless experience for the consumer and demonstrate ROI for manufacturers, in part by directly connecting to loyalty cards and credit cards. This digitization will also broaden the base of coupon users and deliver coupons that are relevant: Traditionally, couponers tend to be consumers with low opportunity costs of couponing relative to income. With direct targeting, coupon manufacturers will be able to offer coupons to other user groups. It will also affect the coupon mix and physical locales for redeeming coupons: As consumption patterns and retail spaces continue to change, the shift away from food and grocery coupons towards other categories will continue. Already, the share of food coupons has declined from 70% in 2008 to about 60% in 2012.
Couponing marketplaces are two sided markets which require significant investments to acquire large audiences. In these ‘winner take most’ situations the race to dominate local couponing has been won by Groupon. Livingsocial, once a major Groupon competitor, is struggling to survive, and other local coupon competitors such as BuyWithMe have been acquired or have folded. The rewards of scaling fast are tremendous: Even at this early stage in the digital transformation, and despite short operating histories, companies like Groupon and RetailMeNot are commanding market capitalizations worth billions of dollars.
So while it may appear that the couponing space is consolidating already, there are three reasons why early stage investors should pay close attention
- Couponing is still in its infancy: Relationships between consumers, manufacturers and retailers continue to migrate online, and existing players occupy only small segments of the couponing space.
- Value networks are continuing to change: RetailMeNot and Groupon have emerged out of nowhere to become public companies in less than five years, and the impact of players like Pinterest on the landscape is only beginning to be understood
- Plenty of exit opportunities exist: The viability of IPOs in the coupon space has been demonstrated, and public companies have proven to be active acquirers.
In couponing, RetailMeNot and Groupon are akin to the first wave of Web 1.0 portals. There are many opportunities of start-ups like Ibotta, Shopmium and Aisle50 to take the consumer experience to the next level and demonstrate ROI for consumer product manufacturers and retailers.
Disclosure: I was one of the first investors in BuyWithMe, an early Groupon competitor. I am an early investor in Aisle50, a leading provider of prepaid coupons for grocery stores and consumer products manufacturers.