There’s Nothing Wrong With Groupon

You may have heard of it: Groupon – the trend-setter that spends as well as it sells.  If you’ve never heard of it, Groupon is a company that offers daily “Deals” to you as a consumer, through an email notice.  Your email offer will feature the Special du Jour from a business in the area of your choice when you signed up or updated your Groupon preferences.  When you get the offer, the business selling the product or service is likely offering a 50%-or-more discount on their product/service with a host of “fine print” exceptions and rules for using the coupon.

When Groupon first appeared on the consumer horizon, back in November 2008, it was an instant coup for local retailers to enter an agreement that was sure to “get [them] more business” – to this day, this is the mantra of Groupon’s contract representatives.  The popularity of Groupon is waning slightly – over 33 million consumers (reported by businessinsider.com Aug 31, 2011) receive email offers daily from this social media marketing giant…and over 500 other companies have followed suit, like: LivingSocial, TravelZoo, and BuyWithMe, to name a few.

Typically, the Groupon/Business contract involves the qualification of the business to support the volume of business that Groupon is promising – either the availability of product or service in the sales of a number; the availability of a Groupon contract can also be based on the type of service product offered from certain businesses.

Wikipedia uses the example of a massage service discount offered through Groupon – a startling use of an example to [independent] massage service providers, but an enticing example to consumers.

Let’s explore the implications of a group coupon marketing plan component, specifically, Groupon’s critically-challenged “Ponzi-Scheme” way of doing business in relation to the affect it has had and can have on businesses, consumers, and employees of the businesses as outlined in Wikipedia’s example.

Things that work.  Businesses get their names out to a promised minimum number of Groupon email subscribers.  Businesses get a fulfillment rate of about 90% on Groupon Deals that are sold in a matter of days…and they get a large check for their share of Groupon’s sales of their product/service. Some customers return, and it is a great way to advertise in a blast format.

Things that don’t work.  Groupon does not determine how a Business is planned, and they have not thought out the implications or scenarios and how it impacts a business who ends up relying on this type of email marketing completely – and if they have, they are not revealing their analysis.  It is a simple idea that is an easy sell…and very profitable for Groupon.

Let’s look at a sample process (over-simplified) of a Groupon/Business contract:

  1. A day spa salt glow & massage package normally retails for $140,
  2. The day spa wants to offer a Groupon to potential, non-descript & -targeted customers to “get more business” or, at least, their name out into the community, introducing their day spa name to tens of thousands of email subscribers,
  3. Groupon’s terms for the agreement to promote the day spa and sell its salt glow/massage Deal include establishing a reduced price their customer will pay for the Deal, usually starting at 50% off the retail price.  This brings the Groupon customer’s cost down to $70,
  4. After the Groupon customer’s cost is established, Groupon requires 50% commission on each salt glow/massage sold, which in this case is $35/Deal sold,
  5. The day spa also agrees to sell a certain amount of Deals, usually a minimum is required of “500,”
  6. So the deals are sold for $70 (half off the business’ competitive, retail rate) and Groupon keeps half as sales commission, leaving $35 for 500 services.  A tidy sum for the business of $17,500, all collected and paid in just a few days or weeks,
  7. Now, when Groupon pays the business after they’ve collected all their customers’ money, the day spa needs to facilitate all 500 of those services over the next 6 months,
  8. Assuming that a healthy profit percentage of 12% ($16.80) is made by the day spa from the regular, non-Groupon  $140 salt glow/massage, let’s look at the cost of providing a single salt glow/massage service:  $123.20,
  9. How does a business survive when they are virtually paying customers to come in?  Receiving $35 for a service that costs $123.50 to facilitate normally leaves the amount they paid their customer to come in to be $88.50 – that’s an $88.50 loss.

Oh, wait a second:  I forgot to mention that the spa will likely reduce the cost of providing that single salt glow/massage service, which means the quality of the products and service included in the facilitation of the salt glow/massage will be reduced.

Unfortunately, the ideal introduction of the service and environment of the day spa to a community of consumers on Groupon’s email list is lost because the integrity of that service has gone down by the nature of spas tendencies to reduce the quality of the products & service associated with the low/negative ROI from the Groupon-priced salt glow/massage.

For me, the most important component that insures an excellent service is provided is the technician.  When you have a happy technician, s/he will give top-of-the-line service.  When you have a technician that is forced by the nature of their employ to accept a marketing or business plan cost (to the marketing cost of that single, discounted service) attached to their rate of pay – a negative number in the case of the Groupon marketing plan – then you may have a less-happy technician.

When you have a less-happy technician, you have lesser-quality performance, which does not adhere to the integrity the business wants to project with this wave of Groupon customers coming in and experiencing a service the business would like them to come back and experience in the future.

This is the key that Groupon doesn’t know or won’t tell you: they don’t care whether or not you manage your day spa to off-set the steep cost of doing business with them.

Many businesses that have suffered or gone out of business due to Groupon based their entire marketing plan (and success!) on the fact that the group coupon customers will be loyal and stay with them.

Businesses that do not have the resources to integrate Groupon as a small percentage of their marketing plan or business plan will be consumed by the fact that they will have nothing but Groupon fulfillment for the next 6-months, precluding (at specified times, if the business is smart) any regular priced business.

Another mistake spa businesses may make is that they underestimate the potential loss of the little money they’ve already been paid because of consumer fraud – complaints about service/technician availability, timeliness of the use of the coupon, and adhering the “fine print” are often sources of complaints that when Groupon get involved are 95% resolved in favor of the Groupon customer and end up costing the business even more money.  This is evident in the online reviews that you may have perused in response to service received during a poorly-managed Groupon experience or time frame.

Groupon does not have loyalty to the business to adhere to any policies the business might have – they are loyal to their customers’ claims and are often worried about an unsubscribe rather than a fraudulent transaction at the business with which they’ve contracted.  At its peak, a Groupon customer’s average yearly spending habit was $160.  That’s a lot of dough to lose from a “good subscriber.”

It is in the same companies that Groupon doesn’t seem to work (ones that provide (primarily) one-on-one-based services) that the cost of doing business with Groupon is passed on to negatively affect their employees’ pay rates.  This leads to employee turnover and, in my opinion, loss of the ideal introduction and substantiation of the product/service that the business wants to convey to their newly-found customer…and have them keep coming back to purchase at regular pricing.

Bottom Line: it is the business that fears eradication or losing their business in “hard economic times” – I am really done with hearing that “we are STILL in a recession.”  [making a] Living is difficult. period – we all do what we need to in order to survive as businesses.  For most of us, handing our complete integrity (and marketing plan success) to Groupon on a platter is NOT a wise business decision, because what they do with it is only worth 25% and gives businesses a 0.1 to 1% customer return rate.

If you are considering using Groupon or a similar group coupon service to promote your business, please be sure you can handle it financially.  The benefits can be awesome for coupons that draw in locals for services in a spa or clinic or private practice, when the business is ready to add a Groupon into their ‘big picture’ business plan…not depend on it.

Remember: there is nothing wrong with Groupon.  The source of conflict, and sometimes suffering and demise, comes from the inability of the business owner to realize or overestimate the impact of the cost of a group coupon marketing plan and weigh it against the long-term effects to support their business growth.