I read an article last week on the News Tribune’s website that talked about the rise and decline of coupon sensation, Groupon. The article begins:
Only a few months ago, Groupon was the Internet’s next great thing. Business media christened it the fastest growing company ever. Copycats proliferated. And investors salivated over the prospect of Groupon going public.
Today, the startup that pioneered online daily deals for coupons is an example of how fast an Internet darling can fall. Read Full Article
The article goes on to discuss how the company has been over reporting its revenue by almost half, and the fact that it is now questioning the viability of the business. There are many business lessons that can be learned from Groupon’s rise and steady decline. One in particular that I want to focus on is the importance of fully evaluating marketing opportunities as a potential fit for your business.
Groupon “was initially seen by small mom-and-pop shops as a way to drum up new business;” small businesses like yourself saw this as an opportunity to gain exposure and give prospective customers a “taste” of their product or service. However, Groupon is slowly loosing favor with this demographic. The article lists several challenges for participating businesses offering discounts through Groupon. Let’s evaluate these individually and what these lessons mean for your business.
- Challenge #1 – Capacity to Handle Increased Business:
The News Tribune shares the story of an Alexandria, VA woman who purchased a Groupon for a photo canvas. The merchant was not prepared to handle the influx of orders and consequently was delayed in completing the finished product creating a poor customer service experience for the customer and a bad reputation for the business.
When evaluating a marketing opportunity it is imperative that you take into consideration how much business the tactic could generate and evaluate your ability to handle the volume. If the tactic is wildly successful, beyond your normal capacity how will service your customers while still creating a positive customer experience? Do you have the time and or resources to handle instant exponential growth? Advice: Always have a backup plan, you never know when a marketing tactic will be wildly successful or when your business could experience “The Oprah Effect” so you have to be ready. Whether this means having vetted a resource who can handle some of the workload during peak times, or simply having the appropriate service level agreement (SLA) terms in place. Having a plan for a drastic increase in business is the key differentiators between overnight success and a customer service #fail.
- Challenge #2 – Failure to do the Math:
A consistently packed restaurant is normally a dream come true for a restaurant owner; but not when those customers are all losing them money. “Restaurants offering $50 of food [via Groupon] for just $25 only collect $12.50 – not even enough to cover the cost of the food.” And according to Paul Evans, a Kansas City marketing executive who advises clients against using Groupon. “Your restaurants are full packed with people who aren’t making you any money.”
Would I advise all clients to avoid Groupon and similar services? No, not at all. I believe that discounted services (even deeply discounted) can have a tremendously positive impact for small and large businesses alike. The key here is to DO THE MATH! The viability of any business opportunity or marketing tactic comes down to the numbers. Advice: When discounting your product or service the key is to get the customer to purchase enough to offset the discounted rate, or to become a repeat customer. How to do the calculation will vary from one business to the next but using the restaurant example, if the average patron only spends $50 or less in a single visit to the restaurant then they are likely to purchase as close to $50 as possible as to not have to pay extra; leaving the restaurant with only $12.50 in revenue (and the server likely with a poor tip). However, if the restaurant instead offered $25 worth of food for $12.50 they would make only $6.25 from the sale of the Groupon but because average tab at the restaurant is $50 the patron is likely to spend the other $25 out of pocket totaling $31.25. This amount is far more likely to at least cover the restaurants expenses than the original $12.50 received. The bottom line, offer discounts where appropriate but make sure they are beneficial for both your business and your customer.
The key take away from Groupon isn’t that offering products or services through deals sites is bad; rather it stresses the importance of evaluating the companies you do business with and the marketing tactics that you choose to deploy. It is essential that you do the math to determine the viability of the opportunity and to be prepared for the success of your marketing campaign.
Have you tried any marketing tactics that have been either wildly successful or disasters? Or have you offered a deal through Groupon or similar services? Share your experiences!
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