Deal Or No Deal? What they don’t tell you about Groupon type deals

300SquareThis has been an exciting year and it has been quite a while since I put fingers to keys (used to say pen to paper in the old days) and I think I may have been waiting for something to stir my passion besides the terrible state of the restaurant industry. I do not wish to belabor the point except to say the dismal state of the industry has operators clutching at straws and throwing a fair amount of “Hail Mary” passes into the air…

Enter Groupon et al and all the promises of new customers, repeat business and full restaurants. Groupon and other local and international deal makers have proven to be wildly popular. What’s not to like? I can get a R500 massage for R199, I can get my hair done at a fraction of the price, learn to use all sorts of equipment and dine out at 60% off… Who wouldn’t like it?

Well apparently some of the merchants aren’t too enamored with it and before you sign on the dotted line there are some things you need to consider. How do I know this? Well my consultations with restaurants and small businesses throughout South Africa have highlighted this point time and again.

On the upside there is the marketing shpeeeeeel you will surely be dealt:

We bring a lot more customers to your door… You certainly do get to attract more customers who were never going to visit you at your current prices the only problem is will they return when the price is back to “normal”?

We will advertise your business for you… granted this is a BIG PLUS! They have huge resources and data bases that few restaurants/businesses could reach on their own. So if you are doing this as a brand building exercise and the costs are right… Go for it!

We will help you move stock… great, just make sure it is stock you were not moving already! And try to ensure that moving all that stock isn’t actually costing you money.

We will help you build relationships… well not with a one-time deal but what if you could structure a deal that was rewarding if customers came back a few times in order to get the benefit of the deal?

We generate revenue… if you have a low cost or fixed cost business, this would be ideal. Let’s say you owned a bowling alley with fixed costs and overheads and a product that was not being depleted (besides a little extra maintenance) this would be fantastic. Maybe a hotel room or conference venue that was standing empty BUT if you are reading this, you may own a restaurant with HIGH input costs and possibly even turnover clauses with both your landlord and your franchisee… now things get a little tricky to say the least.

So even the upside appears to have a downside and I haven’t even mentioned the real problems you may anticipate.

But before I mention them, the first thing you really need to understand is exactly how a discount affects your profitability! For the purposes of this exercise I use the example of a restaurant and will do a simple calculation; assuming you do R10 000 worth of sales at a 40% cost of sale (here’s where I hope you know your cost of sale) and you have other expenses (rent, staff, gas, electricity etc.) that comes to 45% that would effectively mean that for Every R10 000 in turnover you are paying out R8 500 and retaining R1 500 for yourself. If I am erring at all I am erring on the generous side, quite a number of restaurants are retaining a LOT LESS)

Now if you did R10 000 worth of sales at a 55% discount (Round about what they will explain to you “works” as a deal), you will only receive R5 500 (LESS any charges that they add and I have it on good authority that this is between 20 and 50% and there is a processing fee too.) and it will still cost you R4 000 to produce the food, your overheads “may” reduce fractionally (let’s say a generous 10%) to R4 950. So the deal still cost you R8 950 and you got back R3 500 (if you are lucky)

This little marketing exercise ONLY cost you R5 450 per R10 000 turnover. Now the deal is over and you are waiting for all those customers to come back and enjoy your faire at the “normal price”. (Don’t hold your breath) Let’s say they all come streaming back (yeah right) you need to understand that at your current retention of 15% you will need to do an ADDITIONAL R36 333 in sales to make back the money you paid out to run the deal. Mark my words, I am no accountant or rocket scientist, BUT basic mathematics seems to be at work here.

Aren’t you glad I got all the GOOD NEWS out of the way first? Now let’s take a look at some “challenges” (Us marketing people hate to say PROBLEMS) you may encounter.

Deals are simply not good for your brand image! Now that you have offered that deal at a discount price how are you going to convince everyone that the meal/product/service is still great value at the old price? Have you been fleecing them all along? Will you be fleecing them now?

Deals don’t generate repeat business! Chances are you will never see those “new” customers again unless they have another voucher in their hand. Research in the US shows that about 19% of voucher users may become repeat customers, that means it takes a long time to recoup that “marketing spend”

Deals attract bargain hunters! The majority of users of these programs are “deal seekers” and bargain shoppers and this means there is a low spend per head and little chance of return. Then there is the problem that the more people that redeem the voucher the more it costs you for your marketing exercise, so be sure to put a limit on how many vouchers can be sold.

Deals are not profitable! Don’t wish to belabor this point but please ensure you have a clear grasp of exactly what is at stake here.

Of course there is one other point that they may not mention and that is the point of “breakage” Nope, that’s not what your waiters drop, that’s the term used in loyalty programs for deals not redeemed. Let’s say they sell 500 deals on your behalf but only 400 people arrive to redeem within the allotted time… They collect the money and only pay over for the redeemed vouchers (less there more than tiny commission) to you. So, unclaimed vouchers are in fact more valuable to them than the claimed ones.

My good friend Nick from Global Wrapps Franchising took the trouble to write to me and point out the following positive aspects of these programs. (And for this I am eternally grateful)

  • Excellent method to create awareness of a new brand or new location or new product range.
  • The ability to target a specific market segment. Those with internet access and credit cards.
  • It is up to the store owners & staff, to create return customers, by providing excellent service and quality.
  • Voucher users are usually big talkers/Facebookers/tweeters who tell everybody about their great deal thus spreading brand awareness.
  • All advertising costs money and the mathematics applies to all advertising campaigns. Compare the cost to running a radio campaign, TV ad or billboard. We know print ads are a waste of money and time. And the result of these campaigns are very hard to measure.

Undoubtedly nothing beats word of mouth advertising but Groupon style campaigns certainly have their place and that place is certainly ahead of print campaigns and for most small traders ahead of radio and TV.

Of course there are many instances where deals will work and I am not suggesting for a second that you dismiss them out of hand, but please go in with your eyes wide open not like Posie Bakery & Café in Portland Oregon (Visit http://posiescafe.com/wp/?p=316 for the details)

Groupon In Retrospect

Posted by Jessie on Sep 11, 2010 in Blog | 126 comments

Note: Unexpectedly, this blog post has spread through cyberspace like wildfire. And I will attempt to respond to each comment as it comes in, though it may take me a few days…

Before commenting on this blog post, please note that the purpose of this post was to explain to our loyal customers who visit our little cafe 1) why we would not be accepting Groupons after the expiration date, and 2) share with the consumer how Groupon works for the business, the actual percentage split between Groupon and the business, etc.

I take full responsibility for my decision, as you will read in the post below. Please do not attempt to interpret this post as me blaming Groupon or our customers for anything. I am merely sharing the experience. The decision to run a Groupon campaign was my own decision, and one I regret. Lesson learned.

And finally, our dear and loyal customer, Lucinda, was taken care of. She is the loyal customer that encouraged me to write this blog post, and for that I thank her.

For months I’ve been thinking about whether or not to write a blog post about Groupon, and sharing the kind of experience it has been for the business. I’ve been weighing the possible repercussions of such a candid post as well, but after today, and having to decline a longtime customer’s Groupon for being past the expiration date, she asked that I share with everyone the reality of Groupon.

Today one of our most loyal customers, Lucinda, came in and asked if she could use her Groupon that had expired the day before. I felt terrible, but I had to say no. I knew she was upset, and I wanted to explain, but there was a line, and it would take longer than the few seconds we had together there to share why I couldn’t. She came up to me later when there wasn’t a line to tell me that she was really disappointed, that she had been a longtime supporter of Posies through the Mamananda Group, and that this experience made her never want to come back. I knew she felt my declining was personal. So I explained to Lucinda, and now to all of you, how Groupon works for the businesses, and why it has been the single worst decision I have ever made as a business owner thus far…

I heard about Groupon in January of this year from a friend, and after doing my research, I thought the idea was pretty clever. I, the business owner, would offer a discount to the consumers utilizing Groupon’s social network, and we would get noticed by many who may never have seen us otherwise. A great marketing opportunity and way to increase future foot traffic! I assumed Groupon would take a percentage, but that it wouldn’t be that huge… maybe 5-10%? I spoke with John, a Groupon rep, and we started formulating the idea. He didn’t have to sell me on the concept, I understood and thought it was genius. Then we talked pricing. We were going to offer a $6 for $13 (pay $6 and get $13 worth of product) because John told me people really respond to deals that are over 50% discount. It wasn’t starting off as that great of a deal for us, but we kept talking. Then we talked the percentage split. John told me that when the consumer pays less than $10, Groupon usually takes 100% of the money. What?! He reassured me that most customers buy more than the $13, and that we would never have to advertise again after taking advantage of their network. In my mind I thought “false. You can never stop advertising as a business,” but out loud I said, “Ok, let me think about it.”

I hung up and thought it over. I called him back and said we would have to get at least 50% to cover our costs of product… to this day I don’t know why I thought even 50% would be a good deal for us. Maybe because I thought since we were covering our food costs. What I didn’t think clearly enough about was that that margin we mark-up is what covers all of our other costs… like staff, rent, utilities, etc. Our overhead is roughly $25,000/month, and this decision was about to make it so that we didn’t cover any of those other costs.

Against my husband’s advice, I decided to do it knowing how many other businesses I admired had utilized Groupon. We were featured on March 9th and sold nearly 1,000 Groupons. When I talked to Lucinda today, she asked if there was a cap on how many were sold to help protect the business from too much loss, and the simple answer is, no. When you sign up for Groupon, you are agreeing to sell as many as get sold… and why would Groupon want it any other way? They get half of the earnings.

We were bombarded the first weekend after our feature because our feature had come out a month late, and unfortunately coincided with the Kenton Library’s grand opening. Over the six months that the Groupon is valid, we met many, many wonderful new customers, and were so happy to have them join the Posies family. At the same time we met many, many terrible Groupon customers… customers that didn’t follow the Groupon rules and used multiple Groupons for single transactions, and argued with you about it with disgusted looks on their faces, or who tipped based on what they owed (10% of $0 is zero dollars, so tossing in a dime was them being generous). Or how about the lady that came in the day of Groupon (though you’re not technically allowed to use them until the day after) and asked for the Groupon discount without an actual Groupon in hand because she preferred to give us all $6 rather than half of it to Groupon. While the idea is noble, this causes mass confusion among the staff and makes it seem that without commitment, anyone should be able to get anything off of our menu for 50% off.

After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month. It was sickening, especially after our sales had been rising. Sure, maybe thinking of it as just marketing may seem justified, but anyone that knows me well knows that I would never pay more than $100 for advertising, much less $8,000, because I don’t believe that regular advertising had much return on investment at all. So the experience jaded me, and the interactions with the few bad Groupon customers we had jaded our staff. After all of this, I find myself not even willing to buy Groupons because I know how it could hurt a business (side note: service industry businesses do quite well with features like this because it is just the cost of time – you are not paying for a product for resale. Resale, in my opinion, get hit the hardest).

In short, to dear Lucinda and anyone else that comes in with a Groupon in hand, please know that our respectful decline of your coupon is not personal. It’s because we cannot afford to lose any more money on this terrible decision I made, and the only saving grace we had was an expiration date.

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