Consumers are all on the Groupon and Living Social band wagon. If you haven't bought something through Groupon or Living Social chances are you've gotten one or many shares from your friends recommending you do.
But the question that is frequently asked is does Groupon erode price and is it good for my small business?
First of all, any continually aggressive coupon or discount program will erode your price over time to be sure. Secondly, Groupon and Living Social are the crack cocaine of advertising. You get tons of sales very quickly and a lot of new people coming in . . . but it isn't a model that is healthy long term when applied inefficiently.
The challenge with Groupon isn't that it offers a lot of good, cheap deals, the challenge is that they focus heavily in two main categories, restaurants and personal services (massage, teeth whitening, facials, gyms/personal training, etc.). When consumers see over and over again that a massage is available for $25 or teeth whitening is only $59 or four rooms of carpet cleaning is $65 pretty soon that becomes the perceived value of the product or service and if you don't meet the perceived value in the market business goes down.
The Problem With Discounting: Price Erosion and Value Perception
Discounting using a program like Groupon or Living Social is designed to bring new customers in who will then come back later and pay full price because they discovered your business. The problem is that many of the people (in most of the small businesses I've worked with or spoken to who did groupon it is around 40-50%) who purchase the groupon are already your good customers. So these are people you already spent marketing dollars to convert to a customer and now they are paying less too. The challenge of course is that when the discounts are grouped into small numbers of categories like personal services or restaurants, people become conditioned to just wait for the next discount whether it is from you or someone else in your category. To be sure groupon will expand its categories to reach more business and as they do, price perception and ultimately erosion will occur in those categories as well.
Here's another challenge. When people buy things like a Groupon they promptly forget for the most part that the money they spent is real. They buy it online, with a credit card and print out a "gift certificate or gift card." The result is that the perception of cost goes down which impacts future sales. The ultimate result is commoditization of the product or service and retailers have a difficult time competing on anything other than price.
Where Small Businesses Fail
Small businesses fail on three accounts when they use Groupon. First they rarely have an effective upsell process which mean that after they give up 75% of the price of their product or service (50% discount + 50% of the remainder to Groupon) many will have a hard time breaking even. An effective upsell is mandatory and training the staff properly to upsell is a requirement. Second, many small businesses don't create an experience that is overwhelmingly unforgettable so that people have to come back and have to tell their friends. Finally, most small businesses don't have an adequate follow up program once they get people in.
So What Does An Effective Program Look Like?
Breathe Wellness Spa does it right. They set up a great offer, the whole staff is trained in and on board with the upsell process. The person could get a massage or a facial and the moment they call to schedule they are offered a more detailed service (longer massage or upgraded facial). When they get to their appointment they are again offered upgraded services, a long massage if time is available for a small upgrade fee, they can add signature massage creams of their choice, they can add hot stones, and the list goes on. Once they arrive they are treated to unexpected gifts, wine or chocolate dipped fruit. They are given unexpected free upgrades to create an indelible experience. And it goes without saying the services delivered are perfect every time. The reality is that all of these have very low cost but high perceived value and maximize per client profitability. When the client leaves, they leave with an inducement to come back for a different service and they are rescheduled on the spot when possible. They are also added to an email list and marketed to regularly from then on.
So Should Small Business Use Groupon or Living Social?
The answer to that question is really based on your willingness to commit to a complete program that includes:
- Delivering an unforgettable customer experience
- Developing and implementing a profitable upsell program and training staff
- Ensuring that you have the staff, inventory, and availability to deliver
- Ensuring that you have the right margin to be able to accept the discount plus the cost of the service and the required cash to deliver on the discounts
- Developing and implementing a very aggressive follow up campaign to get full paying customers back in the door
- A willingness to get off the roller coaster and doing no more than one or two promotions per year.
If you are serious about setting up a profitable program and are unsure if you are doing it right or if it will be profitable, drop me an email or give me a ring, we can discuss it before you do your promotion.
If you're willing to do all those things a discounted promotion can work but remember, you are creating the commoditization of price in your category every time you participate. To learn how to sell more without discounting, grab a copy of my book How To Sell When Nobody's Buying - And How To Sell Even More When They Are