Groupon Deals Make Sense for Merchants

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Responding to a great article by Heidi Cohen on Groupon, in her article she stated Groupon was unprofitable for 1/3  of the merchants surveyed and that over 40% of them wouldn’t run a repeat offer according to researched done. Which means 2/3 actually made a profit from it and 60% would repeat offer, fair enough!

Heidi also talked about her friends experience with Groupon where they use them to treat themselves to services that they might not do at full price, often a girls’ day out and that it’s not traffic these businesses want.

So does all this make sense for businesses?  In my honest opinion, groupon or group deals do make sense for merchants.

Before I talk more, I want to share my experience using groupon clone sites. Last December I visited Singapore for the first time when I attended iStrategy conference. I wanted to save money, so I decided to get deals from groupon clone sites in Singapore so that I can buy my girlfriend a great (and cheap affordable) meal.

So I went for food which I won’t usually eat and pay. I bought two coupons and saved us 100% (50% off for a coupon). I paid SG30 (US23) for two great meals.

<———— YUM!

Summary of the day! Love it!!! Food was great, services was great! Everything was fantastic.

It was a good deal for me.

Aaron 1 – Merchant 0

Girl friend was happy (most important)

Aaron 2 – Merchant 0

Now the question is does it make sense for a merchant?

Saving cost on advertising

Merchants need to understand, that even though they don’t use sites such as groupons etc., they will still pay for advertising, whether it’s a magazine ad, local newspaper ad, etc., magazine ad and newspaper ad is quit costly, and it’s not guaranteed to bring in customers. Not to mention designing and ad which might add cost for them. Did it cost the company to put an ad on group deals? = $0

Aaron 2 – Merchant 1

Confirmed walk in customer

So with groupon, a company is actually getting confirmed walk in customers. Just like when I bought the deal in Singapore. I wouldn’t miss it for the world. Most deals have a number of customers so that the deal will fall through.  Some 100, etc.

Aaron 2 – Merchant 2

Reviews

BOY the meal was fantastic. I made sure that the plate was cleaned before I left the place. Love the place and I love the environment. I left that place satisfied, and I told my friends about that place and the food. I told them to try it when they were in Singapore because it’s really worth the price that they are getting. Word of mouth marketing.. checked!

Aaron 2 – Merchant – 3

Although some businesses might not see profit straight away from deals like this, it’s actually better to get customers in rather than customers who saw an ad from a magazine and wanted to try the food because they saw that the place had a promotion. Similar don’t you think so? Cost of  advertising + promotion.

Summary

I love deals. We all do just like Heidi mentioned in her article. One reason I love deals is because it allows me to try new stuff without paying the full amount. If I like it, I’ll continue to go there, buy there. If I don’t then I won’t go there anymore. Not a chance!

So despite some deals only getting one customer who would only try It once, if they had a great experience just like I did, they would recommend it to their friend. Posting it on their Facebook, twitter, foursquare, you name it. Deals like this are more about creating the conversation. Profits usually come in the long run, in my opinion. However, having said that, I would recommend that all businesses understand the nature of their business before going into group deals.

Have you purchased deals I like I did before? Would you go back?

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  • http://twitter.com/tsbandito Andrew N

    Groupon clearly helps the merchant in my experience (but making the girl in your life happy is ALWAYS a bonus).

    First, when I do buy, so far its often places I had been in the past, but really moved on from or ‘forgot’ about. A deal reminds me I like their stuff.

    Second, when I don’t buy, it still reminds me of things I like, and I usually bookmark their pages. I’ll explore later when I have time — a prime example is a boating class, that I wanted to talk to my father about. I didn’t buy the groupon, but it sparked an interest I would never have had.

    As you mentioned — it’s advertising. A good business will calculate the value lost against the gain in buzz, and execute.

  • http://HeidiCohen.com Heidi Cohen

    Aaron —

    I love how you framed your post like a scorecard. I also love the cafe’s name. Not sure that would entice me in.

    While I agree that the Groupon like deal got you to try a restaurant that you might not have, the coupon is a one-time promotion. The promotion is one tactic not a marketing strategy. On-going marketing is still required across a variety of platforms.

    More important is that the issue with focusing on the marketing side of a group coupon is that it overlooks the real challenge for small businesses. The cost to the business is more than the marketing. It’s a reduction in revenue without a reduction in expense. As a result, each sale has little or no money to cover other expenses. For some businesses, namely Posies’ Cafe, this can bring a profitable establishment to the brink of failure. This is why while the research shows that a significant percentage of businesses find the coupon offers useful, the downside is a big risk.

    While you enjoyed the meal, you’re similar to my friends since you don’t live in Singapore and won’t be a regular customers. As a result, the investment in terms of the reduced meal cost will not be recouped. Yes, you did refer the restaurant to friends visiting Singapore but that’s a very small number compared to your total social graph. Further, since you were on a budget, the chances are that you didn’t order additional food and drink that would have made the meal more profitable to the restaurant. (Note: This was the experience of Posies Cafe. In addition, the wait staff only got tipped on the amount spent not the amount served.=> lower tips.)

    Thank you for taking my post and continuing the conversation.

    Happy marketing,
    Heidi Cohen

  • http://www.idealnetwork.com Joe

    Aaron, well done post, and I agree with your framework here. One of the greatest opportunities for merchants in group buying is knowing the exact dollar amount it cost them to acquire each new customer that walks in the door from a group buying promotion. That’s a very difficult number for local business to get to with more traditional forms of marketing.

    Full disclosure, I’m on the launch team of Ideal Network, and new daily deal site in Seattle, with expansion plans. We partner with local non-profits and 25% of every daily deal purchased becomes a contribution to the non profit of the customers choice. Then, after the deal, we spend a considerable amount of effort on promoting the merchants brand name in association with the community projects they helped to fund. I love what we’re creating! http://www.idealnetwork.com

  • http://askaaronlee.com Aaron Lee

    Hi Andrew,

    Indeed making the girl happy is always the bonus LoL! She read this blog post too.

    Its great to see that the deals that you buy often reminds you why you like their stuff. Sort of like a memory and experience for you. Great way to get people back in again don’t you think so.

    You should talk to your dad about the boating class, have fun with it. Its a great way to spend time especially with your family.

    I agree, a good business will calculate value lost against gain in buss.

    Aaron

  • http://askaaronlee.com Aaron Lee

    Hi Joe,

    I agree, to be able to know the exact dollar amount to acquire each customer is great. Perhaps companies that doesn’t make profits don’t know the amount i assume. That is just me assuming.

    Ideal network sounds like a great idea. Let me check it out after this.

    Aaron

  • http://askaaronlee.com Aaron Lee

    Hello Heidi,

    Happy to see you here, I actually wrote this blog post as a comment, then it became too long so I decided to put it on my blog. I agree that this is a tactic and not a marketing strategy but I feel the ability to know first hand the exact amount to acquire a customer is great although the revenue stream is reduced. On going buzz might help this (if there is any). Having said that, all marketing investment reduces the revenue and not the cost.

    LoL! You are right Heidi! We didn’t spend much on additional food. All we added were drinks.

    Anyway I still think there are different reasons to purchase from groupon sites. Like Andrew (comment below) who usually purchase from places that he has been in the past that he often forgot about, group buys often reminds him why he liked their stuff.

    Of course for me it was budget because I used most of them for the hotel LoL!

    Aaron

  • http://twitter.com/lifeforinstance Life, for instance

    Aaron, if people “use them[Groupons] to treat themselves to services that they might not do at full price” it seems to me that a business would benefit. If they wouldn’t have gone without the coupon, they would never experience the service. Having saved a lot of money, they’re bound to talk about it to friends and they may like it so much that they’ll go back. We love to brag about saving money just as much as we like saving it!
    Thanks for dicing this so well!

  • http://askaaronlee.com Aaron Lee

    Hello,

    Yes! a business would always benefit despite the decrease in revenue or no revenue at all in my opinion, its the final buzz that matters. Most people are afraid to pay an amount, and not feeling satisfied. Groupon deals helps them with this matter.

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  • iadvize

    I think groupon is a great platform to help get real life business some customers in the real world. As you stated being able to try something out for less than full retail price is a great opportunity both for the customer and the company

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  • http://www.socialmediawannabe.com Todd Lyden

    Aaron, you make some HUGE assumptions.
    On advertising costs- equating a print ad in a newspaper or perhaps a radio ad does not cost BEYOND the actual advertising.
    True, the company is getting the impression value, but they still have to PAY for the goods/services being given at HUGE discounts.
    I worked with a friend who has a retail business. Even counting the discount as part of advertising costs, she could not figure out how to meet Groupon’s insane rates.
    For example, let’s say she wants to offer a $10 off $20 gift certificate for ANY purchase in the store (similar to MANY groupon deals). Groupon on gives her $5 off the sale.
    Groupon pockets the $10. She in the mean time still has to be willing to part with $20 worth in merchandise. (she actually thought for a second, like many I bet, that she get’s $10 with the deal) NOPE
    Not hard to imagine WHY this has hurt so many retailers now right?
    Now the best thing that can happen for the retailer in terms of total cost is that the buyer never shows, because they have given over $20 in merchandise for $5. Granted in many cases, the customer would spend more, but the studies are showing that most deal taker are not returning customers or ones that the retailer is probably interested in keeping because a. they are regular customers and are just getting a discount or b. likely non-returning customers.

    You assume more word of mouth, why? Because they got a deal? makes no sense, either you are sharing type on line or not, and I’d wager that more often than not the same ones that take advantage of the deals are not mouthing off about it too much for the business.

    You say the profits come in the long run, but my friend’s case illustrates how it would hurt the short term too much.

  • http://www.facebook.com/profile.php?id=699633834 Athena Ortiz

    Hello Aaron.. Yes I have purchased a coupon much like the one you did. I would never have even heard of the restaurant if it werent for the site… I went, had a great, fantastic meal for mere pennies, and I will recommend it highly. I think this is a fantastic way for places to get the word out to those of us who normally wouldnt go out to eat. the only reason I went was for the incentive I got from them. NOW, when I do decide to go out again, you can bet that their restaurant will be on the top of my places to choose from.