Is this a business killer?
First, it’s important to understand that this article is not actually focusing on Groupon specifically. Groupon just happens to be the most popular of the “daily deal” sites. Additionally, “The Dark Side of Groupon” is a better title than “The Dark Side of Daily Deal Sites.”
How These Sites Work
They offer a special deal which is generally a package with a discount of at least 50%. To the retailer they offer the opportunity to sell an amazing amount of goods or services within a short period of time. So far, so good, right?
Taking a quick look at Living Social (another daily deal site), I found the following offer for an Orlando carpet cleaner…
$39 for 3 Rooms of Carpet Cleaning, a $150 value.
They’ve already sold 82 in just a couple days. That’s about $3200 worth of sales in less than a week. Depending on the size of this business, that could be an amazing amount of work.
Of course, Living Social will take their cut. Surprisingly, this can be as much as 50%. Imagine that you’re this carpet cleaner – good news, you just got 82 new jobs, bad news; you’re doing them for $20 a pop.
Where’s the Value?
So why do daily deal sites work for those who are successful with them? The answer can be explained in two words – “repeat business.” This is the main selling point for using this kind of marketing tool. It can be very successful, but only if you have a few things together.
First, you need to have a plan to deal with the influx of business, and handle it well. Your goal is to get positive word of mouth and repeat business from these customers. You are likely losing money on each ‘deal’ sold, therefore the whole value is in referrals and repeat business.
Second, you need to make plans for how to convert these bargain hunters into lifelong customers. Some of this goes to service; however, making sure you have a solid plan to keep in touch with your clients – new and old – is key.
Third, have a second special offer for them, right after they take advantage of the first. This can take some of the bite out of the first package, and will certainly lead to more repeat business.
Fourth, you need a plan for getting referrals from these new customers. You could run a promo such as this –
“You were smart enough to take advantage of this special through Groupon, now we’re going to give you a chance to share the same discount with you friends/family. Just send them the code 123, and we’ll give them the same deal you got.”
Just use your imagination as to how you can turn each new customer into more referrals. Additionally, you will get more referrals if you have a customer list where you deliver good information on a regular basis. This helps with top of mind awareness about your business.
It would be surprising if a few businesses have not closed their doors as a result of running one of these daily deal coupon offers. I imagine it goes something like this…
1) The business gets 100’s of sales for an offer they don’t have the capacity to fill in a timely fashion
2) The employees get overworked and start providing poor customer service
3) Instead of 100’s of new customers the business has 100’s of new people who have had a negative experience and are telling other people
It would be hard for any business to recover from a scenario like this.
It’s Just Marketing
It’s important to understand that this is just another form of marketing. It’s a simple business truth, marketing is an investment. It’s either a good investment or bad investment, depending on how well it works.
It’s easy to look at the daily deal offers and get the idea that this is different because you get money up front. It is different, but you still need to evaluate it based on the potential ROI. The difference is due to it being “event based.” You can’t ease into a daily deal promotion. Once you start, you’re stuck with the results. That’s why I feel it requires a lot of planning to make sure it’s a success for you.
Regarding the investment, remember that the discount is part of your investment. The carpet cleaner mentioned above is providing $150 worth of carpet cleaning for $39. This means each package carries an investment of $111 in services.
Note About Usage
A certain percentage of people who buy gift certificates won’t use them. In other words, some of the people who buy the $39 package above will take no action, yet you’ll still receive the $20 (after fees) without having to do anything. Of course, these people won’t become repeat customers, so it’s hardly the best case scenario. This can, however, offset the fees.
With the information in this article, it’s easy to see how a daily deal for your business is likely to cost you $1000’s (as well as a large amount of time) in the short run with the goal of building repeat and referral business. This means the opportunity cost is represented by the other marketing efforts you could undertake using the same amount of time and money.
If you are considering using a daily deal site to promote your business, you’ll want to create a plan as discussed earlier. It’s also a great idea to contact other people in your industry who have used this tactic and see how it worked for them. If you don’t think your local competition would be honest with you, you could just check with people in other locations of comparable market size.
This strategy doesn’t need to be a business killer, however you should certainly consider it carefully.
UPDATE: I was speaking to a client about about this and he mentioned that he’d written an article all about these daily deal sites. It’s very interesting to get the perspective from a merchant who has used this promotional tool multiple times. Below is the link to his article.