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Wednesday, September 28, 2011

Guest Commentary: Groupon or Groupoff

Groupon or Groupoff: The good and bad of daily deals
(This was originally written for Somerville Local First and has been reposted here with permission) 

By Kelsey Roth of The Management

When daily deal sites like Groupon and LivingSocial arrived on the scene, many small businesses were seduced by promises of thousands of new customers and untold riches. It also seemed like the perfect way to market locally. Daily deals can have a positive impact on a small business when done right, exposing it to new customers. Done poorly, they can quickly destroy a small business. There are good and bad aspects of using a daily deal for your business. If you decide you want to run one, some basic tips will help you get the most out of it.

The Good:
  • Exposure: Daily deals provide exposure. Your ‘deal’ is announced to thousands of targeted potential new customers. It may lead to increased hits to your web site, “likes” on Facebook and more followers on Twitter.
  • Increase customers during promotion: New customers will visit and hopefully you’ll be able to turn a percentage of them into loyal repeat customers.
  • Small infusion of cash: Some people have referred to daily deal companies as loan sharks. This moniker might seem harsh, but it isn’t entirely false. When a deal goes on sale, the host company, like Groupon, will pay out an agreed upon percentage of the initial sale. The terms vary depending on the host company. If your business is in need of a small infusion of cash quickly, a daily deal might be the answer.
The Bad:
  • Expensive: At first glance a daily deal might look like an inexpensive way to advertise with no upfront costs. The business owner receives about 50% (sometimes less) of the value from a daily deal. Sell a $100 meal for $50, and receive at most $25. The daily deal company gets the other half. Some small businesses have seen a daily deal cost them upwards of $40,000! That’s a lot of money to spend on one ad campaign with no guarantee of long-term benefits.
  • Questionable Customer Quality: Enter the Pareto Principle. In business terms, it states that 80% of a businesses’ profits come from 20% of its customers. The bread and butter of a small business is its loyal customers. While the daily deal is running, you risk replacing your valuable repeat customers with one-time-only coupon holders.
  • Too much of a good thing: Having lots of customers is good. But if your business is not prepared, it could be a disaster. Lack of proper staffing or running out of inventory could lead to a lot of unhappy customers. And since they are not loyal, they may be quick to talk badly about your business. That’s not what a business looking for new customers wants.
The Tips:
  • Understand the costs involved: When setting up your own daily deal, understand the cost. Determine your cost in reduced profits, increased labor, and additional inventory. A daily deal will be more profitable if you can price it lower than the average sale. For example, if a typical hair cut is $30, price your deal at $7 for $15 in services. That way you won’t lose as much per customer.
  • Think beyond the daily deal: A daily deal may help bring in new customers. Make sure to focus on turning those customers into repeat ones. Perhaps use a daily deal as part of a larger marketing campaign.
  • The Devil is in the details: Businesses get into trouble with daily deals by not understanding the fine print. When working with the sales associate, make sure you cover your bases in the disclaimer. If there is a loophole, people may try to exploit it. Make the length of the campaign as short as possible. The longer you draw it out, the longer you lose money. While the deal is active, clearly display the terms, conditions and expiration date to reduce confusion and arguments.
  • Be prepared: Make sure you are staffed properly to handle a flood of new customers, that you have enough inventory to handle the demand, and that you are financially prepared to lose money in sales in exchange for exposure.
  • Daily deals can be an effective tool for marketing your business. Realize that they are not right for every business, and try not to view them as a money-making venture. Most businesses lose money on daily deals, but the ones who use them successfully are those who take advantage of the exposure they get and develop a larger base of regular, loyal and satisfied customers.

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