Is Groupon a Good Deal for Small Business?

It seems everyone is raving over this new merchandising phenomena called group coupon buying from sites like Groupon and its many clones. Groupon, considered by Forbes to be the fastest growing business ever, raised some $170 million in venture capital and is valued as in excess of $1 billion. Not bad for a company only about three years old. 

I can see the upside to using this approach. It's a promised land of new foot traffic through a retailer's door, and the approach has its share of advocates. But, is all that glitters gold? I think not. There is, in fact, a forboding underbelly of liability, and small businesses better be forewarned.

LOSE MONEY WITH EVERY SALE

In order to stimulate interest, businesses are told they have to discount goods and services by at least 50 percent. Even deeper discounts of up to 80 percent are encouraged. On top of that, the group buying site keeps as much as 50 percent (more perhaps?) of the amount the merchant brings in. 

You do the math. If you offer a deal of $20 for $40 worth of goods or services, then the group site keeps as much as 50 percent of the amount sold, does that make sense? 

Oh, but it's advertising. Right, I get that. And if you're advertising budget is big enough, or the margins on your products are high enough, it makes sense. You don't lose your shirt with every sale. But, not every small business is the Gap. Quite to the contrary, most of us work on minimal ad budgets and thin margins. 

One small business, Poises Cafe, lost so much money the owners had to dip into their personal savings to cover what they claim was an $8,000 loss! The owner called it a "terrible decision," one that was made at the objection of her husband. Consider not only the strain this placed on their business, but their personal lives as well. 

SMALL BUSINESSES OVERWHELMED BY DEAL BUYERS

Unless a deal can be capped, something a number of these deal sites are doing now, a small business takes a huge risk that they will be overwhelmed by deal buyers. Take the case of Philz Coffee in San Franciso. According to an article at Walletpop, the owner said, "I nowhere near projected the amount of people that showed up. We just weren't prepared for it." 

LOYAL TO THE DEAL, NOT THE BUSINESS

I've come to the conclusion that many deal buyers are more loyal to the deal site itself than to the businesses offering them. These sites can become addictive, almost like a candy machine handing out a free daily confection. 

The pay-off for most small businesses is in the repeat business that comes from acquiring these new customers. There are many who testify to the positive effect Groupon and sites like it have. But, still, I wonder if there is substantial evidence to prove that new customers return once the deal is gone. 

Not only that, many of the deal buyers are already customers. For example, I had a business lunch recently at a local Thai restaurant I had visited a few times. The appointment had been made weeks in advance. A couple of days prior to the meeting, I saw a group deal for 50 percent off at the restaurant. Naturally, I bought it. The net effect to the business was they lost half of what I would have paid them otherwise. 

DEVALUE THE BRAND    

The last liability I see is that group buying has the potential to not only devalue the goods and services being offered, but cheapens the brand itself. 

For example, a local specialty foods gift business, Classic Golden Pecans, says they won't use group buying deals because they sell gourmet products. The owners do not see that it is in their best interest to offer them at a reduced rate. 

ADVICE FOR SMALL BUSINESS

I'm not opposed to a small business trying this marketing approach. For many, it has proven lucrative. To a business owner considering it, I would say this:

Do your homework. Don't be allured by the fact that "everyone is doing it" or that a competitor may have tried it and succeeded. Count the cost. How deeply can you afford to discount? How many deals can you afford to offer? What's the worse case scenario? What's the price of success? 

Determine ways to get return customers. As I said, repeat business is the real key to success. How can you guarantee that someone who came in your store thanks to a great deal will return once that deal is gone? Better have some follow-up mechanism in place to stay top of mind with these folks, or offer such a great product or service that they would be crazy not to return. 

Decide on the value of your brand. Do you want to run the risk of being thought of as a discounter? Do you want discount-oriented customers? 

ARE THERE BETTER ALTERNATIVES?

I want to mention a possible alternative that, in my view, holds promise. It's a Boulder-based start-up called Loyal2.me, that offers a unique twist on customer loyalty programs. They refer to what they offer as as "Personal Loyalty Program." Instead of the customer being loyal to the business, the business is loyal to the customer. 

(Visit the site to read more about it. The value proposition is unique...and it won't run a business onto financial rocky shoals either.)

If you are a small business in need of sound advice on how to navigate the sometimes unchartered waters of the social media sea, please contact me. 

Comments

[Michael Favia]

Hey Paul. As a developer of a number of these types of sites I can tell you that the margins are decreasing as the market floods with new competition. Like most things the early adopters pay a price for the privilege of scarcity and exclusivity. These days though the take on the daily deal space is fast approaching 30% not 50%. Its an efficient tool if it doesn't succumb to a poor signal/noise ratio. Your points on loyalty and devaluing the brand are valid though. Which is why I tend to suggest it to young businesses looking to introduce themselves to a new local market.

[Paul Chaney]

Thanks for the heads up on the decrease in the percentage. I think the fervor over the approach will run its course and die out, only to be replaced by the next "big" thing, whatever that is. (Always something.)

It's good to hear from you. I wondered what happened with you since the BSG days.

[Kerry DesHotels]

Well thought out and presented Paul. There are certainly pitfalls to these discount programs, disguised as loyalty programs, that most small businesses don't think out to the end.
There are other loyalty programs, based on payment for performance, relying on the use of "Complimentary Currency" that do not require discounting, which might better fit most locally-owned business, worth checking into. One worth mentioning is Business Express, located in Lafayette, which helps keep money in the Acadiana economy by enabling local business to do business with each other.
The principle is that a business's biggest advantage is the markup on its product or service. If a business can leverage it's purchases based on it's cost-of-goods it can save a tremendous amount of money.
Labled Mutal Credit Alliances, they charge a small fee (10%) for the business service; which includes doing all the advertising (printed directories and email announcements), managing the website, processing all transactions, posting monthly statements, issuing credit lines, and hosting periodic get togethers for members to network and get to know each other.
They utilize a principle called "Re-directional" Marketing, where customers are re-directed, from making purchases at competing businesses, to the participating businesses instead. So the new profit, brought to the member businesses, is at the expense of competing businesses that do not participate in the "Local Currency" program.
It is easy to become part of, and easy to bow out of if the participant does not feel the program is right for them.
Interested business owners can go to www.businessexpress.com for details and contact information.

[Jonathan Trenn]

Groupon type of services DO make sense in many cases with several caveats. Michael Favia is right - newer establishments should benefit. That's especially true if the coupon company takes a smaller percentage.

A real problem here is the lack of strategy. It's a new concept that's strictly a tactic with unknown potential results. There is a clear lack of input from, quite frankly, intermediaries, would can help craft a strategy here. Hence, you've got this chaos.

[Paul Chaney]

@Kerry - thanks for the heads up on Business Express. I assume most cities offer a similar service?

@Jonathan - I think you are exactly right. It's a tactic that needs to be aligned as part of an overall marketing strategy, or not as the case may be.

Also, a word regarding the degree of discounts. In the city where I live, Lafayette, we have Bargain Bee and Seize the Deal. Living Social is making its way here as well (It's in a nearby town and I think they've just hired a salesperson for this area.)

In each case, the discounts are still 50% or higher so far. I'm sure there will be a glut in the market and competition will lower the percentages. It's just not happened here as of yet. That's probably true in a lot of other smaller markets.

[Michael Lunsford]

Very good article on coupons. I don't have a study handy, but I've personally witnessed people paying the least for a service demanding the most while folks paying the most for the same service demanding the least. That's certainly something else to consider if you're looking into doing any kind of discount program.

[Paul Chaney]

Thanks for the input Michael. Yes, that inverse relationship between the price paid vs. the expectation of service can definitely be inverse. Yet another reason to be wary of social media "snake oil."

[Melissa Ward]

Excellent thoughts Paul. I shared a similar opinion when Fox 23 called me for a local report on Groupon. I think it's great for a new business, but they must be aware of the pricing and supply/demand pitfalls. Excellent summary of it all!

[Paul Chaney]

Thanks Melissa. Gotta look out for the small business owner.

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