Is Groupon dangerous for business?
by Geeta Nadkarni on Nov 10 at 6:00 am
Groupon! Living Social! Tuango! Kijijideals! Group buying deals definitely attract customers. But how many will actually buy a follow-up product or service at full price?
A few years ago, I was walking down the street one summer afternoon, when a random dude walked up to me. Brandishing a fistful of gift certificates, he explained to me that I could get $300 worth of spa services for just $49.00 (plus tax). The deal that I ended up purchasing included a haircut, a manicure, an exfoliation treatment and one other service that I didn’t use (and can’t even recall).
As a consumer, I was stoked (this was 7 years ago, before online group buying was commonplace). Talk about Christmas in July! Id NEVER pay $300 for these services. But at $57, the price was right.
Sound familiar?
It was basically the old-school, face-to-face version of Groupon or Living Social.
Seven years later, ask me how many of those companies I’ve visited since?
None. Not a single one. And I was never even tempted.
And that brings me to today’s question:
How likely are you to gain loyal clients from a promotions platform that’s based on discounts?
By the way, if you have no idea how group buying works, read this article I wrote for the Montreal Gazette about various local businesses and their honest take on how group buying affected their business.
Meanwhile, back to our question: are price sensitive customers worth the cost of acquisition? I think it depends. One of the main things it depends on is how well you treat those coupon clients. If you dont give them exceptional service, chances are youll never see them again. I say this from experience because at each salon I visited with my coupon, I really felt as if I was getting cut-rate service because I was a cut-rate client. The whole experience left me with a nasty taste in my mouth. Certainly not what one would expect from a spa experience!
The success of your deal also depends on the kind of product or service you offer. A great example of a Living Social deal that is sure to drum up long term customers was the $99 laser hair removal coupon that all my girlfriends were buzzing about (that I talk about in that Gazette article). The nature of the service requires women to come back for multiple sessions, and chances are theyll want to de-fuzz other parts of their anatomy. Therefore there’s a very likely return on investment. It’s up to the business to figure out a way to entice the customer to purchase more services right away (eg: a limited time offer).
A deal like this would probably also work well for restaurants where patrons would likely spend more than the face value of the coupon even at the first encounter (and hopefully return soon). But margins would have to be healthy. Ditto for a manicure deal like Rouge Nail Bar recently offered. These services are a perfect fit because the call-back is sort of built into the service.
Your success with promotions platforms really depends on how you feel about loss leaders.
Loss leaders are services or products you provide at a loss to yourself in order to get new customers to sample your wares. Generally speaking, I think loss leaders are extremely tricky. You have to really know what you’re doing in order to manipulate them to your advantage. And you have to have some money to spend; think of it as your advertising budget. Never launch a loss leader without having a clear chart that will help you measure your spending per new client as well as your returns. And most importantly, make sure you and your staff have a clear, easy-to-understand plan for pulling those bargain-happy customers into your client base when they show up for their service.
A mistake that I find many businesses make when using group buying is that they look at it as a way to generate income. After all, you’re making a small portion of the sales, so you’re literally getting paid to advertise. Be careful to track what a deal is costing you in materials, labour, time and training.
A coupon deal comes with lots of factors that aren’t in the fine print. For example, you will probably have to hire extra staff to deal with the sudden deluge of calls or drop-ins once the coupon is published. Customers will have questions, so you’d best train your staff to have all the answers. And ask yourself: If you sell hundreds of no-profit deals, will you be able to make ends meet when you’re honouring them over the next few months?
Seriously considering using group buying as a way to increase your customer base? Read this excellent article from the New York Times that dissects the math of using promotions platforms like Groupon and Living Social.
Have you used a coupon deal for your small business? Has it worked for you? Share your story and help other small business owners make better decisions.
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