The Future of Online Coupons: Scarily Personalized Offers Based on Your History

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As big retailers fight over ways to integrate smartphone apps into their brick-and-mortar stores, smaller businesses are using technology to do battle over price by offering coupons and promotional deals via discount purveyors like Groupon and LivingSocial. But those discount services could find their business models up-ended if a new crop of search engines have their way.

Why coupons still suck
So-called "group buying" sites work because they can deliver a very valuable group of customers: a group that has already agreed to buy your product at a certain price. It's a relatively efficient way of making a "smarter" coupon. But there's one major problem: the coupons are publicized very inefficiently. The only people who see offers for Groupon are people who go to the site. Relative to the entire population of American consumers, this isn't a lot of people.

That's the reason that you don't see many big retailers using these coupon services: their TV ads and newpaper leaflets get much better penetration than the even the sweetest Groupon deal.

But if discount purveyors had some way of ensuring a massive, interested audience, then all that might change.

Search engines could be the disruptors
Several "inventory search engines" might change things dramatically. Milo.com is a search engine that has partnerships with Best Buy (BBY), Home Depot (HD) and Macy's (M), all of which allow consumers to search what's in stock at nearby stores so they can go buy it in person.

If Milo.com gets big, this would mean it has access to a very valuable demographic. According to Milo's CEO, Jack Abraham, they would have access to consumers who are actively comparing items, but may still be influenced one way or another by an added discount.

"Eventually where we're trying to go is personalized coupons," Abraham says. Using information you provide from the social graph, he says, "we could look at your past purchase history, the retailers you like, and your location in order to let an OEM 'bid' on you with a coupon." He compares the future system to Google's (GOOG) AdWords business, which decides which ads to serve based on small automatic "bids" from advertisers.

Say you're comparing two brands of TV on Milo or a similar service. The two you're considering are Sony and LG. Somewhere in your social graph (perhaps Mint.com or your Chase (JPM) credit card) there's evidence that you've bought a lot of Sony products in the last few years, and that you're in New York City. In the future, Milo's system would notify the manufacturers that a buyer is in contention, and the manufacturers could "bid" on you (using your past buying data as criteria) by delivering customized coupons. Sony offers you 10% off on the spot, but LG offers you 20%. You buy the LG. It's market-share growth by attrition.

"One-size-fits-all coupons just don't work that well," says Abraham. "If you segment the customer base, you have some very valuable customers that you can pinpoint." Home Depot, for example, might want to target contractors (who provide a majority of their business) to poach them from Lowe's (LOW). "In retail, new customer acquisition is the name of the game," Abraham says, "and large retailers have told us they're interested in this."

Yes, Google's there, too
Whisper "search" and Google appears -- this instance is no different. Google has begun making local store inventory available in its product searches, although its inventory system is not real-time, as Milo.com's is, which won't make it much good for hunting-down high-demand products on Dec. 24. Still, Google's system may improve, and it won't be the only player. Foursquare (and other location-based services) are another way that retailers could blast out hyper-targeted deals to huge swaths of the population.

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