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.