Beware Social Gifting, The Latest Magical E-Retail Trend

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"Social gifting," the latest Internet shopping trend, is getting compared to Groupon for reasons both obvious and bad. The obvious: It's a buzzed about e-retail, marketing gimmick, which is getting a lot of Internet attention, especially today, as one popular social gifting company, Wrapp, opens up to U.S. markets. Like Groupon and its clones, this new Internet-meets-shopping set-up promises to bring marketing to retailers, discounted wares to consumers, and money to social gifting companies all without hurting anyone or anything in the process. The bad: That exact win-win-win situation, of course, didn't turn out that way, as many of those Groupon clones died, with queen bee Groupon having business sustainability issues of its own. So before retailers or consumers buy into this latest trend, here's some things to look out for.

The Marketing Lie

The way these services work, stores give away free gift cards worth $5 to $15 on Facebook drawing users into their stores. They see it as a small discount in exchange for marketing and sales. Stores believe (hope?) most social gift receivers will spend more money than allotted on the gift card. But the real draw is cheap marketing. "It could be a very powerful form of marketing (and) drive incremental value,"  Sucharita Mulpuru, an analyst with Forrester Research, told Reuters' Nivedita Bhattacharjee. This gets people through the door in a way that might be more powerful than Groupon's group discounts. "You’re tapping into the most efficient marketing which is friends of friends," Wrapp co-founder Hjalmar Winbladh told GigaOm's Ryan Kim. The whole gifting process happens on Facebook, meaning friends see when another friend has bought something at a certain store, sharing it on their Facebook feeds. If Facebook friend A shares they got a giftcard to store X from Facebook friend B, a Facebook user might deem that store worthy of its visit. Maybe.

The first part of this marketing scheme borrows its theory from Groupon, which did not prove that system works. Like our social gifting firms, Groupon and company lured retailers with the same marketing ploy: Offer discounts and customers will come and stay forever. For many retailers who used daily deals as a marketing tool, that just didn't happen, with people coming for the deal and never coming back again. Other data showed many businesses saw a decrease in online ratings after these deals. And for those who did get new business and enjoyed the process, the marketing draw only lasts for so long. "They send me e-mails, they call me, they call me again," Kiebpoli Calnek, who ran a Yelp deal told Bloomberg's Doug Macmillan. "I told them, 'I’m burnt out from this deal. I have 500 new clients. Why would I want to do another one?"

This scheme has a smidge more marketing potential, however, with its other marketing draw: Facebook. Unlike our Groupon types, these social gifting organizations get a Facebook in. "As marketers, we want to be where the consumers are, and they are all on Facebook," Bradford Robinson, gift card manager for Chili's Grill & Bar told Bhattacharjee. Facebook knows all about a consumer and the type of people buying things, which could prove useful for stores, maybe even useful enough to keep them giving away those free mini-gift cards.

The Hidden Costs

Businesses have lost money and cred drawing so many new people to their shops at one time. There was that bakery that lost almost $20,000 from a Groupon deal gone wrong, for example, when the shop didn't plan for the deluge of people and had to hire extra help. Social gifting doesn't pressure businesses in the exact same way as a daily deal, which puts a specific time limit on a certain activity. But, retailers stand to lose if they get overwhelmed by new customers. The social gifting site also takes a cut of the sale, which if it works anything like Groupon, acts as a sort of payback for a small loan. Entrepreneur Rocky Argawal explains what that's such a dangerous thing in Groupon's case over at TechCrunch. Wrapp says it doesn't charge until a transaction is made, however.

"It's a classic win-win situation," said Rob Carpenter the CEO of Friendgift, another social gifting site, said. It's actually a modern win-win-win and as we've seen with the Groupon craze, even for the pioneering companies, that doesn't always work out. 

This article is from the archive of our partner The Wire.