I’m no fan of Groupon (as stated here previously), partly because of their say-one-thing-but-do-another approach, but mostly because of the financial downside their deals deliver for small business.
Well, it seems the folks at Groupon may have let their bravado outpace their potential. Having turned down a $6 billion buyout offer from Google, they just created their worst nightmare–Google as a competitor, announced yesterday. Given the latter’s access to maps, apps, and about a bazillion local business listings through everything from Adword accounts to Local Search, well…it’s not like they’ll have to do the Upstart Scramble to get off the ground.
At the core, however, this still presents the same problem, different day: Small business owners reliant on physical inventory can’t make the numbers work on these below-wholesale discount offers. The math simply isn’t there, even if you factor in volume.
Here’s the view from the retailer’s side: Hefty participation fees, cutting out their entire profit margin, digging into their own pockets to cover inbound freight, then paying sales tax on product sold at a loss. Translated: They end up with less in the bank than they had to begin with.
Worse yet (and, in actuality, the larger of the problems), customer retention on these deals registers in single digits. Low single digits. Sometimes, part of a single digit. Group discount companies love to talk about all the new consumers their online coupon will introduce to a business, yet one stark truth remains—shoppers driven primarily by a below-cost offers aren’t looking for new loyalty partners. They’re looking for a cheap price on a top drawer purchase. Period.
Next day, next offer, next business. Move along.
I fervently hope Google will recognize that unless deep discount hooks come with an extended positive back end for merchants, this will only do further damage to already teetering businesses, and by extension, their local economies. Brick and mortars need customers—not just today, but tomorrow, next week, and next month. If they’re going to risk participation in a financially crushing “deal,” they need a secondary element that delivers customer retention opportunity.
One time smash-n-grab offers don’t do the trick. Drop dead deals don’t pay the bills. And no brick and mortar can offer 50-60% off every day unless they’re already in the process of closing their doors.
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In general, I agree with your opinion of Groupon. However, if used and managed properly, and with realistic expectations, it can be a good promotional device.
Editor’s note: There is no indication of whether the author is a consumer or an actual business owner.
I understand entirely what you’re saying – its something that has bothered me as a consumer when using Groupon. I’ve seen a few businesses go down after offering a Groupon and whispers that the overwhelming results killed the business. But, there are a number of local businesses I’ve first heard of through a Groupon that I now visit regularly. Places I looked over before that now are regular visits. I guess I’m one of a few, but sometimes those few can make the difference. I like that Groupon introduces me to new places and I always buy more than the worth of the coupon.
Cinda, Thank you for blogging about this. I have been hearing horror stories from restaurant folks who have taken the bait. For any business, especially a restaurant, this is absolutely detrimental to business and cost prohibitive. We can’t afford two percent to walk out of the door, let alone 50%-75%. Please keep teaching small businesses and the public about our woes. I am looking forward to your visit to Pittsburgh.
I agree with what you said and you are right. We tried a partnership with one of our wholesalers using low prices and had many more customers for the one great deal. Did not see them again. Lost money, lost time and worked harder to wind up with less money. It was profitable only for the wholesaler we partnered with. Expensive lesson!! We were coached to raise our regular price to a highly inflated price then offer huge discount, we don’t use this practice and feel if we did we would lose 61 years worth of customers.I am in a business I love and am not planning on being the richest person in town. I make a good living, love my job and store, and have the best customers, who are like family to me.I would do nothing that would not be in theirs and my best interest. Keep up the good work and smart advice.
Cinda, this is so true. I bought into this thinking I would get new customers and we have kept very close track of how much they spend when they come in. The majority only spend the exact amount. Most do not tell you they have the coupon that is worth a particular dollar amount..so when we are suggestive selling to them we do not know that they are striving to get our best product at the lowest cost. Small business’s need help…not more people with their hands in our pockets.
This is completely market-driven. If the business thinks that it is in their interest to get their name out there via Groupon, and they can stomach the profit loss, then they participate. If not, they don’t. No one is forcing these companies to put their product up on the site. And if they really don’t create repeat customers, then the coupons will have little effect on competition. Three options: 1.) these coupons are not worth it for businesses and Groupon and Google’s version cease to exist 2.) small-business owners are too stupid to do research on the efficacy of participation 3.) they are good for everyone involved
Editor’s note: There is no indication of whether the author is a consumer or an actual business owner.
Truer words were never spoken. We tried Groupon and I will never do it again. We believed that we would be a feature and instead we showed up as a side feature with a competitor being the main feature. When you said promising one thing and delivering another you were right on. In fact, they followed us up with featuring another competitor who was strictly mail order. Brick and Mortar businesses can not afford them. We could have sold more to our existing account base with the same offer and rewarded them for their loyalty.
I am so glad to see this post. I have blogged similarly in the past. My friend is a fitness instructor. She ran a groupon special and her business began to take off. Suddenly, her classes were filled to capacity and word began to spread. It worked for her because she has the benefit of scale. That is, whether she’s teaching a class of 3 or a class of 50, she incurs the same costs.
But for retailers, restaurants and small handmade companies that make the products they sell (that is who I serve as founder and CEO of the INDIE Beauty Network), the story is different. They don’t have the same scale options and their bargaining and negotiating power is limited. They are easily taken in by the promise of more eyeballs or FaceBook LIKEs or whatever, often to their financial detriment. I’m glad to see this post, and thank you for sharing.
Can you give me an example of their “bait and switch?” Or maybe some documentation of where you are getting your numbers from?
I don’t own a small business, but I run a mall based national chain that had a Groupon last year, and I can assure you we kept quite a few of those customers. Businesses try anything they can to get the customer in the door – from there, it’s up to the employees and the product to keep the customer coming back.
I use Groupon myself, and have no complaints with them in the two or so years I have been getting their deals. I only buy for things I need or will use, and have found many great amazing local restaurants, as well as my massage therapist (who I go to monthly, and who loves all the new regulars she got through her Groupon add), all of which I continue to frequent because of the quality of their service and product.
Editor’s note: Michelle, my information comes from sources that I link to (see post above) or directly from small business owners who have used Groupon then reported back on their experience. While most are understandably hesitant to release financial data publicly, there are a number of pieces online about those who do. A couple of solid Google searches will turn them up.
FYI: Nowhere in my post do I use the term “bait and switch.”
Great article!
This is so true. We offer ideas, service and good pricing to clients then they walk out the door with the information and make their own reservations. Sometimes they save a little bit, but we provided the tools. Fact of the matter is we often meet or beat what they find online. We are professionals providing excellent and caring service. To stay open we cannot be a library service!
This is an interesting and complex topic. I’m reminded of your post about local not meaning the same as independent. I think we’ve got really fixated on deals lately. A deal is not necessarily the same as a sale or a good value. I put something on sale when I have overstock or it’s a seasonal item. That’s different than offering a deal or a coupon. Value has a lot of meanings… I think I’ll make a blog post about this when I get my thoughts in order. Thanks for the thought provoking post.
Leslie,
Your comments are quite “on spot” in my view. I think it would be great for you to elaborate on what value really is via a blog. As one who has been in the marketing arena for years, I see the pro’s and con’s of this entire “daily deal” collective buying model and the 100′s of spin offs that feel they offer a better deal by either taking less than Groupon, incorporating a downstream pay matrix up to 5 levels for referrals, and many more that arise from some very sharp minds.
This is bold but I believe true. As retention being a core area I have worked in for 30 years, I believe I have a great way for companies to do all this and cut out the middle man..and have a tremendous viral that will gain national appeal. As a consumer, and businessman, I want to enter this market now and let this idea take hold. I have no once written about this or sent a comment but want to take that bold step. Who would be good to go to that, should someone have an idea that is a real winner to product/service providers, regardless of industry, is trustworthy and could help push out such a program (assuming I’m sober and correct:))
I am in the midst of a groupon type offer (living social) – I did do the homework and offered a deal based on our average check that would give consumers a break and enable us to break even or better should the “new” customers adhere to the average – the offer is valid over 6 mos and the # of coupons was limited to a predetermined amount.
we are into the final few weeks and thus far the coupons have generated “some” new customers that have since been back. the back end allows for guest feedback and has been useful – we have generated a 90% thumbs up/ will return response.
So – with all that said – The average check is still the average and coupon customers with a few exceptions have contributed about 40-50% above the value offered.
It has not been detrimental to our business nor has it been overwhelming. It is a good (not necessarily great) way to reach potential new customers.
Do not be fooled – there is a cost as there is with any form of advertising. Living Social sent out 90,000 “solicited” emails with the offer as well as a brief description and LINK to our website. There is value to this alone (approx 1000 “visits” to our site) so with 1% just taking the time to look they now know about us and perhaps will visit. online marketing and social media are a large part of our business. I am certain that my business has benefited from this.
It is up to the individual business to do their homework based on worst/ best case scenario to be certain that they are not giving away the farm!
I cannot say for certain that i would or would not do it again but once the offer has ended I will be plugging away at another spreadsheet to determine the effectiveness overall.
Cheers,
Hope this post clears up the perception of these offers.
Brady Weiler
Pipestone Food Co. Ltd.
Wetaskiwin, Alberta
The success of one of these deals is heavily dependent on the type of business. The mark up on food and beverage is substantially higher than on product in a gift store. A monster 50% off deal in a gift setting will be a losing proposition where as a service orientated business that has little overhead or inventory or a restaurant , there is a possibility of breaking even or even coming ahead.
Even taking into account repeat business, a gift or specialty store would be working from a deficit and there are far better and less expensive ways to drive business for them.
Several of our business members have tried Groupon, Living Social and other similar programs. Some were happy with the results, others were not.
Businesses looking into this type of advertising need to research the options and negotiate the price and commission fees. They also should offer something that will not end up costing them. For restaurants, definitely exclude drinks. For retail, exclude any merchandise that’s already on sale or any particular lines that have low profit margin.
Group on, etc., sales reps will try to get businesses to offer the lowest deals possible, so they can sell tons of certificates. But it’s up to the biz owner to really see what is in his/her best interest. Done right, these types of deals can be an effective marketing tool. But signing blindly to what the sales reps propose can end up being a disaster.
I definately agree with everything you’ve said here. With the exception of one valid point. Let me share a story. I’ve had my brick and mortar open now for about 5 months. I started from the ground up, no franchise, 6 months of previous web exposure (no sales from the internet, basically my website was a portfolio of my work). My location is awesome, there’s a coffee shop a few doors away and a major intersection a stone’s throw from my door. I’m not tucked into a stripmall, I’m on the street.
The most difficult part of starting a small business is getting your name out there. Growing up in the punk scene of the early nineties, I learned guerilla marketting early. Stickers, flyers, etc. The idea is to get one or two words into whatever person’s head that passed that sticker or flyer. And with the advent of the information super highway, they take that word home, plug it into a search engine and voila! You’ve just grabbed someone’s attention. The same can be said for word of mouth and that’s how I approached things at first. I beat the pavement like a pan handler, every business within a one or two mile radius was sure to have my business card and a personal introduction from me. I got a lot of business this way.
But once you’ve been around a little while, interest fades if there isn’t an impending holiday (I’m a florist) and I didn’t start out with a wire service. So you weigh the options of print marketing after you’ve done all your own SEO work online. You start getting approached by sales people from the phone book, from voucher deal sites (Groupon itself wouldn’t host a deal for me, why? Because I didn’t have enough Yelp! reviews. Marinate on that for a minute.) and one in particular had by far the most aggressive salesman but the most honest one as well. He broke the numbers down for me 100% and said “Can you really afford to do this?” A 50% deal doesn’t just eliminate your profit, the deal site generally takes another 40% as their cut. Oh, and in the case of one that I dealt with they spread your check over a period of 90 days (a tactic Groupon is known for). So if you sell only a hand full of deals (which is what generally happens with a tiny shop like mine because people don’t know who you are; then you end up with your first check as less than 10 dollars while you’re handing out 30 in merchandise. Sounds pretty lame, doesn’t it?
It is. However there IS an upside and there IS an ROI, to my* tale anyway. So I sold a handful of deals, right? But the web traffic I received from people snooping the deal? ARE YOU KIDDING? My daily numbers jumped 200% and have continued to climb. Am I getting more customers? Not necessarily, but my brand name is getting out there. And I did make a really awesome business contact from the deal, another female owned business whose focus is grass roots networking.
So yes, you can pooh-pooh deals sites all you like. Because they aren’t** profitable. However, for someone like me it was a LOT cheaper than buying advertising.
I am a consumer, not a business owner, but I do often use “deal sites.” While I understand that some people will take advantage of the deal I don’t think most people do that. I always end up spending more than the certificate is worth. An example is that I bought a Town Pool (a small, regional deal site in Nantucket) for a $25 gift certificate to a new restaurant. I probably would never have noticed this new restaurant otherwise, but m husband and I had an amazing meal and ended up spending $150! Probably not what we had planned to do, but it was so good we couldn’t help ourselves. Since then we have recommended the restaurant to lots of friends looking for places to dine on Nantucket while on vacation and we know we will return next summer when we return to Nantucket.
Another benefit I see for business owners is the exposure. Another deal site posted a deal fior a chocolate shop near my home that I didn’t know existed. I didn’t purchase the deal as it was for a birthday party and was not a fit for my needs, I now know they exist and plan to visit them for chocolate and other sweets. Without the email from the deal site I would never have known they were in my backyard.
I feel that when properly negotiated the deals can be beneficial for all.
When we launched our Groupon 5,553 unique visitors perused our site (average is about 100). In addition, we put a limit on the number sold, and did a price deal instead of a percentage to limit loss. Did we lose some money in the process – yes. What did we gain? Thousands of people now know we are relocated on 6th Ave and are aware of the services we offer. In addition, people who did not buy the Groupon came in and purchased, and other Groupon buyers came in with friends who bought items without the coupon. We did a $20 for $40 deal and most customers are spending well over the $40. Our traffic is up; and I’d say it was well worth the marketing cost. – Tacoma Custom Jewelry