Will Groupon Hurt Your Business?

For the small service business, Groupon offers an amazing proposition: With no work on your part and no upfront cost, Groupon will bring you new clients.

Although I mention Groupon throughout the rest of the post, the same thinking applies to other Daily Deal promotions, including LivingSocial and Google Offers.

Across the Internet, massage therapists, hairstylists, accountants, personal trainers, acupuncturists, and all manner of consultants are asking whether Groupon really delivers. On the face of it, Groupon does just what they promise. You will indeed get an influx of new clients. The real questions are:

  1. What is the cost of delivering steeply discounted services?
  2. Can you really handle the stampede?
  3. Can you convert your new discount-seeking Groupon customers into return business?
  4. What are the intangible costs to your brand?
  5. What is the impact on the loyalty of your existing customers?

How much will it cost you?

You are very unlikely to directly make any money off an appointment where the client uses a Groupon.

A typical Groupon discount is 50%, and Groupon often keeps half of the payments for themselves. Note: Discounts and rates are often negotiable.

An example: If you charge $40 for a half-hour massage, your Groupon will be $20, and you will receive just $10 for the service. You are essentially offering a 75% discount.

Very few businesses could make money with that kind of a discount.

For more a more in depth analysis, check out Doing the Math on a Groupon Deal [nytimes].

Can you handle the stampede?

Rachel Brown, who runs a small bakery — Need a Cake — ran a Groupon offering a 75% discount on a dozen cupcakes. 8,500 vouchers (and 102,000 cupcakes) later she said that the Groupon deal “nearly ruined her”, and that it was the “worst decision she had ever made”.[nbnote]http://mashable.com/2011/11/23/groupon-cupcakes/[/nbnote]

These stories are becoming commonplace.

If you run a service business you have to worry about an additional thing: your appointment calendar. Groupon claims that 20% of your volume will be in the first month (see the picture below) — our experience with service businesses is that the initial volume is even higher.

Average Volume of Groupon Traffic

In addition to handling an increase in telephone calls and related administrative tasks (for instance, Groupon recommends you add a second phone line), there is a particular concern for the service business: What happens as your calendar fills up and clients need to wait months for an opening? This can negatively affect your new Groupon clients as well as your existing clients.

Note: Online scheduling can dramatically help handle the influx of new clients. Online scheduling lets clients book themselves online 24-hours a day.

Make sure you prepare for the hordes!

Can you convert?

So, how do you actually make money? Simple, you get Groupon clients to come back!

If you are able to convert some percent of your discounted clients into return business, and some of these returning clients become regulars, it might end up making business sense.

Each business will have different costs and a different lifetime value per customer. But whatever  the business, the key to whether running a Groupon is worth it comes down to your ability to convert Groupon customers into return business.

Some massage therapists who were happy with running their Groupon have reported 30% return visits — that might be worth it. But don’t assume that your conversion rates will be this high (see the section on how to convert, below).in

How to convert

The key to getting clients to come back is to ask them.

Unfortunately, as easy as this sounds, many small business owners and service providers just don’t feel comfortable selling in this way. In fact,  discomfort with this kind of direct sales is often exactly why the small business will opt for a Groupon: Groupon markets and sells for you.

Tip: At the end of their appointment, ask the client if they would like to schedule a follow-up appointment. A common technique is to offer a small discount — maybe 20% — if the client books their return appointment right away.

Intangible costs

When small businesses claim that Groupon destroyed their business, they are often referring to how it negatively affected their loyal customers and what it did to their brand.

Imagine that Rolex offered a 50% discount on their watches. What would that do to how people perceived their product? The same thing is at work with any small business that offers premium services.

Anytime you offer a discount, you need to think about what it might do to your brand.

Groupon is often visible to your existing customers. Your loyal customers might feel neglected, paying full price, while your new clients get a discount.

One of the main reasons I believe that Groupon is better suited for the new business is that they don’t yet have an established brand that might be damaged nor do they have a large number of existing customers that they might upset.

Conclusion

The great irony is that Groupon often appeals most to those businesses that struggle with marketing themselves. For your business to really benefit from a Groupon, you have to be able to remarket your services at a higher price to your new discount seeking customers.

In my opinion, Groupon is most appropriate for businesses that (1) are just starting out or dramatically need to increase the number of clients (2) are well prepared to handle the hordes (3) have a plan in place to convert new Groupon clients to return clients.

 

This entry was posted in Marketing and tagged , , , by Felix Livni. Bookmark the permalink.

About Felix Livni

Felix has 15 years experience working in high tech. He has worked at startups, built internet services at Google and Microsoft, and founded two software companies, one during the first dot-com boom. He has a background in mathematics, distributed systems, and people management. Felix's passions outside work include painting, cooking, and armchair theorizing with friends.

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