Does Groupon Erode Price And Is Groupon Right For Your Small Business?

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

Comments

[janyce granoff]

Mr.Lakhani has done it again. He clearly spells it all out for you.
Janyce Granoff

[Lesa Townsend]

I recently purchased a furnace inspection/cleaning via Groupon. The company was A+ rated and the service I received was great, but not outstanding. They never tried to sell me any other services, or even say "keep us in mind when you decide to replace that furnace."

This company missed several oppportunites to upsell me or even turn me into a regular customer. And is a good example of how not to use groupon to grow your business.

The points you make in your post are all great and should help business owners make more educated decisions about coupons in general. Thanks for the pointers.

[Jimmy Slagle]

Hey Dave,

As usual you bring up another interesting view of the "Group Coupon" concept.

I whole-heartedly agree with you on the idea of "Price Erosion" and the ultimate long-term challenges it presents to small business.

I will have to step back and think deeply about the "up-sell" process that you suggest.

One would think that would be standard practice (when using group coupons) and the mere fact that you have to bring it up... well frankly, it concerns me.

To suggest that enough small business owners in America don't default to that action (as a condition of utilizing the group coupon concept) baffles me.

It is no wonder the vast majority of small business surveyed, grade themselves a "D" when it comes to marketing and innovation.
(Source: Small Business Success Index, Feb. 2011 - Network Solutions)

Not surprisingly, as I type this, I would almost want to extend a word of caution concerning the up-sell process. If it is done haphazardly or aggressively it could cause some serious customer mistrust and backlash.

As part of our cure, for Marketing Deficit Disorder at http://30mavens.com, we have deeply embraced the group coupon concept and use it specifically for charitable fund raising and for the immediate liquidation of overstock items.

I hope you would agree that there are better, proven, and more profitable ways for business owners to get prospects in the door.

Respectfully yours,

Jimmy Slagle

[Lorraine Lane]

I got sucked into the Groupon fever and purchased a service as a gift to me. When I called yesterday to make the appointment, it was clear that there was no training of the staff. I had to keep asking her to repeat her questions and had to book my appointment a month away. There was no upselling. I am not sure this is going to be a pleasant experience! We'll see. I'll be waiting for the upsell!
How you present the upside and downside of Group coupons is very helpful as I coach small businesses and many think that Grouponing will bring them lots of customers.

[Tony Mariani]

Outstanding post Dave.

[Sam Moran]

Dave,

I respect your opinion on price erosion and disagree with it. The supply and demand of the market segment will eventually normalize the price. I agree with you that the real issue is the fact that most small business don’t have an strategy to maximize their revenue and client retention generated by the coupon. The use of a tool like Groupon or any other advertizing campaign must be part of an overall strategy to increase traffic and expand the clientele base. Coupons have been around for a long time there are just more accessible and using a different medium and Groupon has done a great job marketing their services.
Your example of how Breathe Wellness Spa uses and enhances their services is a great demonstration of a complete marketing strategy.

Respectfully yours,

Sam Moran
Mind Works Research Institute

[John H]

In many cases the retailer's margins are better than you would think because in some cases, the coupons expire before they are used.

[Kitty Barrow]

You are right on Dave. I had a similar experience to Lesa & Lorraine at a Day Spa. Being a sales coach, I followed up with them (instead of them following up with me as they should have) and discussed with them a possibly better plan of implementation if they choose to advertise this route again. It's too bad that Groupon doesn't offer a service to better train the businesses about what to do once the Grouponers walk through their door.

[Lorraine Grula]

Price erosion is a serious concern if coupons become common enough and extremely easy to get. I must agree with Dave's article as written and disagree with Mr. Moran on that point.

Most price-conscious consumers will not buy unless they have a coupon so effectively the bargain price becomes the standard price.

Price erosion problems greatly decreased the effectiveness of direct mail group coupons, (known in some areas as "Val-Pak")that was the snail mail precurser to Groupon.

Using upsells after an entry-level price inducement only makes good business sense but one must be careful not to resort to aggressive tactics customers find irritating.

Seems like making the price discount a rare rare is one of the best long term strategies.

[rodrigo]

Wonderful post with a lot of good insights. I've allways wondered about this groupon model... The future will be the commoditization of the model itself: people will raise their prices in order to give the 70% discount. The consumer WILL notice that they're being tricked. This will happen because business that doesn't play this game right will eventually get out of the biz game. Of course, there is also the upsell offer and even the product creation game (so biz owners have the proper product to offer to companies).

Cheers,
Rodrigo.

[Chester Hull]

Here's a new marketing idea! Let's give our product or service away for at least 50% off! THAT will make our cash registers ring! And all those people will like the deal so much that they'll tell their friends to pay full price! And we'll make up for any loss with volume. #marketingfail

[Darrin Walton]

Great job Dave in pointing out some of the finer points of these sites because as you said if you do not have an up-sell or at least some way to keep them continuing on you are just plain and simply heading down the wrong road.
One of the biggies is to make sure you can handle the influx because remember these are bargain hunters and want to use up this coupon fast. You have to ask yourself can I handle 200 people next week, what will the quality be like and most importantly can I make it memorable enough they will be raving fans?
My experience with these sites has been fantastic with a retention rate near 50% which is unbelievably good but the whole process was planed out not just dove into. There is a lot of prep to letting the prospects know that this is a special price that you are gifting them.
Anyway I ramble I just wanted to say thank for your insight it is always appreciated!

Warm regards,
Darrin
Warrior Fit

[Philip Graves]

I think you make some excellent points about the potential damage GroupOn can do, but I disagree that all of the aspects of the Breathe Wellness Spa approach are right.

The concept of creating excellent associations through a perfect experience and added sweeteners is excellent, and I whole-heartedly agree that a GroupOn offer should be a rare event (timed when demand is at a low) but I don't think constantly up-selling a customer is a smart move.

In my view the aim should be to generate trial, deliver an amazing experience and, as you so rightly say, avoid inadvertently giving the impression that such discounts are routine.

The problem with the up-selling is that it's stressful to the customer: the antithesis of the core brand's values. The first-time customer has no way of knowing whether or not any subsequent visit will be accompanied by such pressure.

Use GroupOn to generate trial and warm leads because you believe in your proposition at its regular price.

If GroupOn becomes synonymous with repeated discounts from the same provider, it's arguable that it should be avoided altogether: even if you only use it once you may end up being tarnished by association.

Great topic!

Philip Graves
author of Consumer.ology

[Dave Lakhani]

Lots of great comments, thank you for all the kind words. I'll be responding to most of them in this post and I'll mention yours by name.

Lesa - That's exactly the problem, business owners must find ways of creating value and experience to get you back at full price instead of having you wait for the next discount.

Jimmy - Most small businesses don't have real marketing or sales training or experience so they make a lot of mistakes as they learn. There may be better ways to get new business but I wouldn't say always. Done properly a sale or a discount or a groupon can be very effective and ultimately profitable. You have to go back to the process I laid out in the end to make it effective.

Lorraine L - I don't think there is anything wrong with buying group coupons as a consumer but often what you experience is the case after they have the first rush through the door. Hopefully your experience will be good and they won't have reached the bargain shopper total exhaustion stage!

Sam - The problem with supply and demand is that it is caused by humans not a mindless logical machine. Much of what we attribute to supply and demand and price has been proven again and again to be impacted by human bias and human psychology. Most recently that was demonstrated in the credit markets and the housing market. Unfortunately, people make decisions not markets and people are driven by emotion and their psychology and they are irrational. An overwhelming number of psychological studies around pricing reinforce that.

John H - Unless they get their product for free I have yet to see any case study or talk to any retailer who had enough of a lack of redemption to make it a break even possibility. It's possible theoretically but when you take into account refunds etc., those unredeemed coupons are often a wash.

Kitty - Groupon actually does send out a series of videos and has their salespeople discuss what to expect and even gives a small overview of what to do. They are currently working on developing more training for the business owner as they have more and more public rantings about what Groupon did to their business.

Chester - Funny!

Darrin - Great job on retention! And, I've watched your business grow as you use the programs, you are focused on doing things right, good work!

Phillip - I only slightly disagree with you. Upselling done wrong is stressful. Proper upselling and recommending is welcomed and wildly effective. But if you approach it like the proverbial used car salesperson and push, push, push, it doesn't work at all. Pressure sales in any form, upsell or not doesn't work that well anymore and buyer remorse is very high. Breathe always upsells whether they discount or no and no one complains because it is gentle and based on the focus and needs of the customer. I completely agree with your last paragraph. The problem becomes people believe that they are being overcharged in a category when they see the category discounting all the time and so the price expectation is lowered dramatically. We should do a teleseminar or something together sometime, drop me an email or give me a call and let's get something on the books!

[Dr. Letitia Wright]

I wonder if people are thinking more about the exposure they get because of how large the groupon list is. Perhaps they feel like its paying for just one touch to their potential clients and so they dont care if a sale was made

[Capt Rob Collins]

David, this would apply to Ladies Night events to where they let women in free and all the men have to pay more. I simply stopped going to places that do this. I have observed that many of the women don't buy anything and just move on to the next event. I don't see any quality women, just a bunch of users that want free things. I know you are married so this may not be an interest to you but when you are single, you really notice this.

[Covert Hypnosis]

Your book "Persuasion: The Art of Getting What You Want" has a great approach for discounting.

[Mitchell Dominguez]

Just an old fahrt traveling salesman checking in. What do I sell? "Peace Of Mind"..

David knows HOW 2 SELL GREATLY from way back when. You know, before the World Wide Web took off

My travels now have me in NYC. Why? That's where the $$$ is.

Discount selling as a prolonged strategy equals "The Death Of A Thousand Cuts". Old Chinese, I think, torture/justice technique.

Buy 2 copies of David's books one for highlighting and sidenotes. The other for your business library.

Wash ,Rinse, Repeat, you get sales, short term-long term.

Do ja know how Group-On sells the majority of their program?

6000 in house and outsourced tele-marketers, constantly calling businesses to sign up. Gee, how New Wave,how Social Media,how PPC,how really Old Fashioned.

For all you Very Small & Small Businesses, Group-On & Living Social will be the end of you unless you follow what David tells you strategy wise.

NO, I DO NOT GET AN AFFILIATE COMMISSION OR BONUSES FROM DAVID FOR TELLING YOU THIS! I'VE DONE WHAT HE SAYS OVER THE YEARS AND MADE MONEY,PERIOD-EXCLAMATION POINT.!

[gorras new york]

La mayor parte de lo que usted señala es asombrosamente legítimo y que me hace preguntarme por qué yo no había mirado esto con este punto de vista con anterioridad. Su artículo verdaderamente hizo encender la luz para mí en cuanto a este tema específico va. Pero en este momento no es en realidad una posición particular no estoy muy cómodo con y al mismo tiempo que tratar de conciliar eso con el tema central de la posición, me permito ver lo que todo el resto de sus lectores tienen que say.Nicely hecho.

[Roger]

Amazingly, populations separated by oceans and never in contact still managed to develop similar tools to clean, prepare, spin and weave this cloud-like plant.

[gollsamirita]

I surmise I have chosen an intelligent and mind blowing website with interesting material.
www.dealsextra.com.au/living-social.php