ClickZ reported on a denim jeans company that that sold 2,000 Groupons in the New York City area by 5 p.m., with seven hours still left in the campaign. They hailed it as a success.
The discount was set at 60 percent, which equated to $75 off the retail price. $75 X 2,000 = $150,000 in lost revenue. Tack on another $50,000, which is the amount Groupon made from the total sales, and the loss comes to $200,000.
As I pay more attention to this burgeoning industry, group coupon buying, the more push back I’m hearing from small businesses who decided that the deals offered by Groupon and similar services aren’t worth the effort.
In my last post on the topic, I talked about Posies Cafe in Boulder, CO. The owner, Jessie Burke, called it the “worst decision ever.”
New York smoothie shop Xoom used Groupon to sell 1,300 deals. Problem is, the “effort failed to produce repeat customers,” according to the owner Jennifer London.
Groupon founder and CEO, Andrew Mason, defended his company and the business model in a recent blog post.
“There have been a handful of stories lately documenting the struggles of cupcake shops running out of batter or sushi restaurants who don’t have enough rice to meet the demand brought on by their Groupon feature. We haven’t written about those stories here because it’s not a common experience – the vast majority of businesses we feature, while certainly busy, do just fine. 97% of the businesses we feature ask to be featured again, including many of the businesses mentioned in the stories.”
I think Mason did an eloquent job of addressing the issue, while at the same time making his case for Groupon.
Of the many readers who left comments in response to the post, this one stood out:
Andrew,
How do you know that Groupon is really good for small businesses?
While I appreciate your openness, the argument you’ve made here is largely anecdotal. Have you really looked at the profitability of running a Groupon for small businesses?
In my mind, there are two key questions that Groupon cannot answer (or has yet to):
1) How many new customers from a Groupon return to an small business for make a repeat purchase, and how often?
2) What is the profitability of those repeat purchases, ie. the lifetime value of a Groupon customer?
I suspect most small businesses run Groupons at breakeven or a loss on a unit basis, in order to bring new customers in the door.
Most small businesses lack the ability to answer these two questions for themselves, so we may even see a wave of small businesses go out of business in the next 6 months to a year, because they ran a Groupon.
Unless you can provide data to support these two critical questions, I have a tough time believing the blanket claim that Groupon is “great for small businesses.”
Alex
I think I’ve established the argument that group coupon buying deals are not great for every small business. What, then, should a small business who is considering using this tactic consider before biting the apple?
Create a customer retention strategy. The key to profitability is in getting these new customers to return. That is going to be an additional investment, so factor that in as well. At the very least, get the new customers email and mailing address, so you can follow-up. Once they walk out the door, they may never come back.
Determine how much money they can afford to lose. This is a form of advertising and it is a given that the deal will be a lost leader.
Have a product or service worth returning for. If your’s is a commodity product that customers could get just as easily in their own neighborhood, what would motivate them to return? Even if your business is unusual, once the customer has had the experience what guarantees they will want to experience it again?
This young business model is growing more quickly than the maturity needed to make it work effectively can keep up with, which explains the reason for “casualties” like Posies.
One question comes to mind: Should Groupon and others assume responsibility for helping businesses create an effective follow-up strategy?
Within the incredibly large amount of new customers that a Groupon can/will send into a business, there is certainly a decent number of consumers that become fans, ambassadors, and would-be repeat customers. It's enough to make the Groupon campaign worth it, however there must be a plan for follow-up and I think Groupon can offer some solutions for small businesses that don't have one of their own. Personally, I think mobile marketing is the answer here. Don't force an opt-in, just allow the consumers that would come back, have the ability to opt-in for future deals/reminders of the product they have come to love. This doesn't hinder the Groupon model because the opt in numbers wont be gigantic, so it would be beneficial to a small business to run another campaign down the road to communicate to the masses, but use their mobile marketing to separate the ambassadors from the crowd. I wouldn't go as far as saying that the Groupon model is broken, and that it can't work without a mobile element attached, but it certainly is a wonderful tool that Groupon could provide for small businesses that don't have their own follow-up strategy.
It would be good if Groupon et al did offer help in crafting a follow-up strategy, but that's not the business they are in. I think it's an opportunity for people like me to reach out to businesses and do it.
$75 X 2,000 = $150,000 isn't right. Normally groupon splits the coupon amount with the business. Sometimes less if the deals has credit card transactions being covered by the business.
So that should be ($75 X 2,000)/2 = $75000.
@JJ – Thanks for the clarification. I was never very good at math.
Your numbers are correct. previous poster is confused as to what you are calculating. You were calculating cost business lost. Sales of the coupon totalled 100000 groupon took 50k.
$75 dollars(60%) was subtracted from item as coupon
$50 is what each coupon was purchased for.
Therefore you calculating for loss is correct and JJ calculations are well…just wrong. I believe he thought 75 was the amount the coupon was purchased at.
Give yourself more credit…old guys are great at Math
I think it is the duty of the merchant to make sure its a good advertising/business decision for them. Regular ad agencies wouldn't care. What you do with your potential customers is your business…period. My business provides an opportunity for you to reach more people and get them in the door…period end of my services. Good luck to you after, I hope you capitalize on the increase of foot traffic.
@Kieran,
Just because you take a hard stance on where your services end, doesn't mean that other companies in a similar model have to do the same. In fact, I would argue that you've probably lost repeat business by not making sure that your client's do the right thing after utilizing your services. I had suggested in my first comment that Groupon take advantage of a different kind of technology and offer it as a service, but they (and you) could go only as far as making some "Post Service Recommendations." Although they may not be part of your service package, I hope you see the value in how it effects the success of the campaign in the business owners mind.
You bring up a good point in your post here, how is it that a small business decide that such an undertaking is right for them, having used Groupon before, I must say that I have never gone back to become a repeat customer, and I think that just stems from the fact that as consumers, we are looking to Groupon for the great deal of the day.
Whether old or new accounts, every business should give proper service to the clients. We can't avoid the common problem like slow systems that can potentially affect the volume of sales. Businessmen should find ways to improve their systems so the process of transaction will be faster to efficiently accommodate a growing clientele.
Integrating a blog into a website?
I recently created a website for my mother using Yahoo! Sitebuilder, and although I've had some trouble with it (I really know nothing about web design), I've managed to get it finished and published on the internet. My mom is a bit of a blogger and wants to put a blog on the site. I've been reading Blogging for Dummies, and none of it makes ANY sense. I activated 'WordPress' and 'Movable Type', but I really have no idea how to do anything on either of them! Basically, I need a step by step process of how to set up the blog, and integrate with my site. By that I mean, make it an actual page ON my site, not a page outside of my site. Keep it mind, I have no idea what CSS, or RSS means. Last but certainly not least, I installed 'Wordpress' onto my computer, and opened it as a zip file. After doing that, I extracted the files. According to Blogging for Dummies, I'm suppose to save the flie as something or other, but I don't even know how to do that! Please help!
I feel your pain.
It sounds to me like you need to hire a blog designer who has experience with WordPress. Short of that, I recommend WordPress For Dummies.
In the meantime, here are a couple of pointers. First of all, you didn't install WP on your computer, you downloaded the zip file and opened it. You need to ftp the files to a folder on your site. I recommend creating a folder called "blog," and uploading the files there.
If you have epanel access, hopefully, you have an installation application like Fanstatico to make it easy to set up.
When it comes to installing WordPress, it isn't a blog platform for the faint of heart.
I do this type of work if you'd like to discuss hiring me to assist you.
link:Just ignore the stuff about sessions, cookies, and SSL. The rest of this is correct. You sign up for A, give your credit card information to pay for A, and they trick you into buying B. You don't realize you are buying anything because you don't have to enter any information again. That's the way the scam works.