Raw deal: Why Groupon might be bad for business

July 1, 2011

When Fan Bi wanted to get the word out about his new company, Blank Label, he instantly thought of popular daily-deal sites like Groupon and LivingSocial. By offering a healthy discount for custom-designed dress shirts, “it wouldn’t cost us anything up-front, and we’d get all these new customers,” Bi remembers. “It sounded like a no-brainer.”

So he signed up with the deal site BuyWithMe, offering $100 gift certificates for $50. Only thing is, the discount worked a little too well. Almost 250 customers snapped them up, and after the deal site took its cut, “we were losing around six dollars a shirt,” he says. “If we’re losing money on every single order, it’s not even worth doing.”

It’s a common refrain from merchants who are testing out the increasingly popular daily-deal sites. For customers, as long as you actually cash in the coupon, it’s often a terrific bargain; for business owners, it can be a riskier gamble than they realize.

According to a new study by researchers at Houston’s Rice University, such promotions lost money for more than a quarter of businesses surveyed, and less than half said they would run such a deal again. “Consumers are getting a heavily subsidized product or service, so for them it’s a great deal,” says Utpal Dholakia, a Rice management professor and author of the report. “But businesses are hoping that those buyers will come back again and again, and by and large, they’re not achieving that goal.”

Indeed, for business owners, there are a number of potential mines that could blow up in your face. If the discount is too deep; if the deal site’s take is too large; if the duration is too long; or if those new customers never come back to pay usual retail prices, then you could be seriously endangering your bottom line.

That’s what Olivia Trevino found out. When Trevino offered Groupon discounts for electrolysis treatments at her Seattle skin-care shop, the hundreds who signed up made her think twice about ever doing a daily deal again. “I can’t just give stuff away,” says Trevino, whose commission-based staff started to grumble about the swarming hordes of bargain-lovers. “I have to pay my staff, and make a little money myself. How am I supposed to pay my bills and my rent?”

To be sure, there are strategies you can employ to make sure you’re not sunk by an overly popular promotion. A few tips from the experts:

Use sparingly
A special deal should be just that: Special. If you’re offering promotions all the time, then even your regular customers will stop patronizing you unless there’s a huge discount being offered.

Comparison shop
In a white-hot field where Groupon is filing for an IPO with a potential value over $15 billion, there are plenty of competitors willing to fight for your business. From LivingSocial to Tippr to Google Offers, shop around to see who will let you hold onto the biggest cut of revenue.

Budget for the worst
It’s difficult to gauge in advance how popular a deal will turn out to be. So “hope for the best, but prepare for the worst,” says Blank Label’s Bi. If that worst-case scenario could represent a fatal blow to your company’s balance sheet, then don’t be afraid to walk away.

Consider alternatives
If you’re earmarking a certain amount of money for a daily-deal promotion, think about what else you could be spending that money on. “It’s always seductive to go for the cool new thing,” says Mark Chussil, a Portland consultant with Advanced Competitive Strategies who has run business simulations about whether daily deals make sense. “But you could also buy traditional advertising, or issue your own coupons, or start your own loyalty programs. Think through those options first.”

Beware the sales pitch
Daily-deal sites may try to convince you to take losses now, in exchange for all the publicity and the prospect of a wider customer base. But remember that dyed-in-the-wool bargain hunters are unlikely to be open to paying full price. For Blank Label, only 14 percent of dealhunters became repeat customers – less than a quarter of what they were hoping for. Says Bi: “There’s such a crazy proliferation of daily deals now, that no one ever wants to buy anything at full price anymore. Even me.”

5 comments

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Posted by TIME BOMB DEALS » Blog Archive » Raw deal: Why Groupon might be bad for business | Report as abusive

The key to making these daily deals work is proper deal structuring and engaging the customer when they arrive. The deal needs to be priced to encourage up-sell and avoid overcrowding and stock-outs.

Our Austin SEO services has several clients who have done successful Groupon and LivingSocial deals. They welcomed the new customer, asked what products and services they liked best, and got them signed up on their email list for a newsletter and future deal offers.

The cost to a business of doing Groupon or one of the other daily deals is not out of line with the cost of alternative ways to acquire new customers. The challenge is to make the most of this opportunity.

Posted by Austin_SEO | Report as abusive

Simply limit the number of special packages you put on offer. This means you’re putting a cap on new leads (so everyone can get served on time) minimising your $ commitment to the coupon site and allowing yourself to test the waters and see if it works.

Posted by TamirBerkman | Report as abusive

Groupon generates repeat customers for Groupon. After a customer uses Groupon why stop if you can get the same products else where for a steep discount. I’d only recommend social coupons for new businesses looking to jump start there publicity. What ever you feel customer retention will be, half it! If only Groupon knew you can’t get something for nothing.

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If you’re going to pay for advertising anyway, find a way to structure a Groupon, Living Social, etc to fit your business. From experience, Groupon does not always allow for deals that lend to customer over-spending. Living Social is slightly more flexible, although they don’t like to put a cap on the number purchased. Bottom line is: make the experience memorable and get your Groupon/Living Social customers on your mailing list, Facebook fan page, etc and you will get repeat the repeat business that makes these deals worthwhile.

Posted by TheCocoaQueen | Report as abusive

This sort of business is risk and as it’s been said there’s no loyalty involved.
I never use it, not to mention that most services or products are never the same compared to what they offer in the regular price.

Cheers / Atenciosamente;
Dr. Fabio Corsini Motta – ABQ:0486
http://www.ipquiropraxia.com.br/quiropra xia.html

Posted by quiropraxia | Report as abusive

[…] biggest problems for deal sites has been the lack of profitability from such deals. According to a study conducted at Rice University, the promotions offered by deal sites resulted in more than a quarter of participating businesses […]

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