(In My Humble Opinion)
Why Groupon is Bad for Business
(and Bad for the Local Economy)
By Tony Miller
(The views expressed in this post are mostly opinions and theories based on evidence I have experienced)
Full Disclosure: Yes, I work for TallahasseeGrapevine.com and yes, we depend on business sponsors to survive. But I am a proponent that our sponsors do not use Grapevine as their sole form of marketing. I would love them to include us in their marketing budget, especially since we are growing bigger every day, but there are other forms of marketing that will also work for them depending on the industry they are in.
Okay, let's start this discussion. I say Discussion because these thoughts and theories are meant to spark a friendly debate and get the conversation started.
– Sincerely, Your Chum, Tony
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Groupon is an exciting craze right now. What consumer wouldn't want to get their favorite things for half the price? But let's pull back the curtain for a moment and see how this sausage is made.
First, you must understand how Groupon works. Groupon is based out of Chicago and there are no locally based sales reps here in Tallahassee. All sales are done over the telephone and internet. Groupon approaches local businesses, or vice versa, to participate in a daily deal. They agree to the terms such as limit of deals available, how many an individual can buy, and what the actual deal will be. Typically, it is 50% off a gift certificate for that business.
On the day of their deal, Groupon sends the offer via email to over 30,000 Tallahassee subscribers. If the subscriber decides to purchase they buy the gift card on the Groupon site and the payment goes to Groupon. Groupon then gets ½ of the ½ and mails a check to the business for their ½. Which means the business gets ¼ of the normal cost of the items sold. If the item sells for $20, the business gets $5.
The business justifies the expense as advertising that will get people into their location to try them out and hopefully, these people will come back and spend full price. One day. Or that they will spend more on that first visit than the amount they have in gift cards.
First let's do the math: Joe's Restaurant decides to offer $30 gift cards for $15 on a Groupon deal. They sell 1000 deals. Groupon collects $15,000 and Joe's Restaurant gets $7500 of that.
Normally the cost of a menu item is 35% of the listed price on the menu. (This is just for the ingredients and does not include salaries, utilities, etc.) So Joe just spent $10,500 on ingredients alone and got paid $7500. So he just spent $3000 for one day's worth of email “advertising”.
Groupon has 30,000 subscribers in Tallahassee (give or take). The average “open rate” on email marketing is 15 to 22%. But let's be generous and say Groupon's open rate is 30% (Open Rate means the amount of people that actually “open” the email instead of just deleting it.) So of those 30,000, only 10,000 opened the email. So Joe's “visibility” was only 10,000, not the 30,000 Groupon claims.
Of those 10,000, there were 1000 deals purchased. Joe had agreed that an individual can only purchase up to 3 Groupon deals each. Most meals at Joe's are between $8 and $15 each. So a person that purchased one deal could take a guest and not have to spend any cash except the tip. If they have a larger family, they more than likely would have planned ahead and purchased up to 3 of the deals. So the justification that they “might” spend more than the deal offers, is minimal at best. Most would not go more than $5 over the deal.
The last justification for participating is that they will keep coming back because “our food and atmosphere is so good.” There are 2 arguments for that: “The Surge” and “Consumer Cannibalism” or what I like to call “The Groupon Mentality” – “Why ever spend full price again?”
THE SURGE: Joe sold 1000 Groupon deals. The people that purchased them are excited and plan on going within the next couple of weeks. Since Joe has 30 tables, there is now a 1 hour wait for a table and the customer service suffers because of the crowd. The quality of the food suffers and the kitchen runs out of some key ingredients. Regular full price, cash paying customers are put off and do not want to wait the hour and do not appreciate the lack of service that they came to expect. Since most of the customers for the next 2 weeks are Groupon customers, Joe still has to pay his staff and all his normal overhead but is not taking in as much full price orders so his cash flow suffers.
The new customers that Groupon brought in are not exactly impressed but it is hard to explain that the food is normally better, the portions are normally bigger and the service is normally faster to each new customer as they leave.
CONSUMER CANNIBALISM: Joe sold 1000 Groupon deals. How many were to his regular cash paying customers that normally ate there once a month? What if they saw Joe's on Groupon and decided to get 3 because they eat there already. And then had their wife buy 3 more? Now they converted a full-price paying customer into a 75% off customer for the next 6 months.
I read and watched some news stories about Groupon. The reporters interviewed some Groupon customers and they all basically said the same thing: “I am never paying full price again.” In other words, they will only eat, shop, get their hair done, etc at a place that offers a Groupon deal.
Think about it, if there are at least 2 local restaurants offering Groupons every week, then a customer would not have to return to Joe's Restaurant for full price in the future. They will just go to the restaurants offered up on Groupon that previous week. There are a lot of great restaurants offered, with a variety of cuisines. Want Sushi? They had that Groupon last week. Want Italian? That Groupon was yesterday. You could literally have a wallet full of Groupons just waiting for a craving.
This “Groupon Mentality” means they won't come back to Joe's until Joe offers another Groupon deal. It's unsustainable. Are these the customers Joe wants? They are not exactly loyalists.
I feel it is only a matter of time before business owners catch on. The only one prospering is Groupon as they “take advantage” ( ß my words) of local businesses. And Groupon cannot survive without local businesses participating. Slowly, one by one, hopefully after the first try, businesses will realize the true costs and not opt in again in the future.
Oh Yeah, THE LOCAL ECONOMY – Not only are the local small businesses losing money and functioning at a deficit, half of your purchase goes to Groupon in Chicago and stimulates THEIR Economy, not YOURS.
Joe's cost has become much more than just the $3000 loss. He lost cash paying customers during this time period as well as a few weeks of trying to play catch up with his normal overhead bills.
Paying $3000 to have his name in front of 10,000 local consumers in one day in one fleeting email (QUICK! Name yesterday's Groupon! How about last Wednesday's?! – unless you purchased it, you already forgot it.) … I think Joe could reach much more consumers for a lot less using other methods of advertising, give them a solid “call to action” to drive them to his location, and get the right customers in his doors - not those only looking for an unbelievable deal.
Here are some marketing ideas that will drive new customers to your door without you buying the farm.
- A good “call to action” marketing campaign – offering a discount or incentive is not a bad thing but do the math first. I will use our own Open Door Advertising gift bags as an example. They go out to 5000 local families each month. Even if you did a deep “Groupon” style discount at 50% off, at least you keep the full 50%. And since they use the certificate when it is convenient, and did not pay up front for it, they will not all show up at once. So for the few hundred dollars a month to be in the bags, you reach 40,000 local families a year.
- Don't “discount” but add a value. For example, instead of offering 25% off their meal, offer a free appetizer with their meal. This is just as inviting but less costly to the restaurant. If you own a store, offer a free gift with $50 purchase. It will give you a chance to get rid of those items you were about to put on the clearance rack.
- Offer such amazing service that people rave about you. Word of mouth is still the best form of marketing and this is one reason TallahasseeGrapevine.com has grown to have so many users.
There are some industries where Groupon would work. Memberships to country clubs, museums or gyms, for example, would work. Since a membership is for a year, a Groupon shopper would be hard pressed to not come back. And when they do come back, they normally spend money on concessions, a round of golf, etc.
But since they need an offer every weekday, Groupon cannot survive on these industries alone.
Okay, now discuss away below in the comments section. I encourage it. You don't have to keep reading but I am going to do a breakdown of another industry: The Local Salon (if interested, keep reading.)
Curl Up & Dye Salon decides to use Groupon to advertise. They have the ability to service 40 customers a day but currently tend to have approximately 25.
The offer is $50 in services (not products) for $25. They decide that Groupon can sell only 1 per customer and can only sell 500 deals.
Now this can only work if the employees are paid by the hour – if they lease their booths or get paid commission, it would never work in the salon's favor. Every stylist would have to agree to participate and most cannot afford to take a pay cut that huge, even if it is just for 2 weeks.
Okay… so back to the salon- Groupon sells 300 deals and collects $7500. They mail Curl Up & Dye Salon a check for $3750.
Remember, Curl Up normally had appointments booked for 25 regular customers each day. They had room for another 15 per day. Most of their regulars make their appointments a month out as they leave the salon.
Their Groupon hits on the 15th of the month. The regular appointments for the next 4 weeks are already scheduled. They are only open on weekdays so with 300 Groupon customers calling for an appointment, it will take 4 weeks to fit them all in. Unless they double-book, open on Saturdays, or book them a month or more out.
If they double book, service will suffer. Regular customers will be upset because of the wait or how long they are in the chair waiting for their stylist to return to them. The Groupon customers will not be impressed – and they don't care about the “but it's a Groupon influx” excuse.
If they open on Saturdays, now the owner has to pay the employees' overtime. Plus the employees are about to mutiny because they are giving up their Saturday.
If they book them a month out, the Groupon customers will be upset about the long wait to use their gift certificate. The cash paying regulars that normally book a month out as they leave today's appointment will be perturbed that their normal monthly styling is now pushed out to 6 weeks.
Let's do the math: The stylists make $20 an hour and the Groupon customers are paying $12.50 for their do's. Even if they spend more than the $50 gift card and it is $60 for the highlights, the extra $10 is barely helping them break even.
If the employees are salary plus commission, then forget it. They are in a hole.
Their hope was that these Groupon customers would become regulars, but think about it. If they were loyal to a salon, they would not have purchased your Groupon offer to begin with, they would have stuck with their current salon. And next week, The Tangled Tango Spa will offer a Groupon they just can't refuse.
Tags: Tallahassee Groupon Deals Opinions Editorials
