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The Groupon craze continues

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How much Groupon (and Groupon competitors) can the market handle? That’s the thrust of Bee business writer Bethany Clough’s interesting piece today. The wild success of Groupon has sparked a number of competitors, including several local ones. (A new local outfit, DrawCrowds.com, just debuted, and it hopes to spread to other cities.) Does Groupon and its ilk pay off? It depends. From Bethany’s story:

A nationwide survey of small businesses by a professor at Rice University in Houston found that 66% of businesses contacted said their Groupon experience was profitable. But about one-third said the deals didn’t benefit their bottom line. Some said the bargain seekers never turned into regular customers, or even came back once to pay full price. And the steep discounts can be particularly hard for restaurants and retailers that have fixed expenses. Service-based businesses and others that see little increase in costs with more customers generally have an easier time, the study found.

The Fresno Philharmonic tried a Groupon offer for its recent Edgar Meyer concert, and the promotion resulted in sales to almost 400 new customers. I noticed yesterday that the Lively Arts Foundation is trying a similar promotion with its Saturday performance of “Best of the Bay 2.” (It’s a great deal: a 47% discount.)

To me, it’s as if Groupon and its competitors are filling the function of the half-price ticket booths and other discounting ticket operations that you see in bigger cities. In fact, I wouldn’t be surprised if an even more nimble competitor to Groupon emerged for performing arts organizations that could be more responsive to last-minute ticket inventories.

Of course, it will be interesting to talk to the folks at the Philharmonic down the road and see how many of those 400 new customers — who brought in relatively little revenue to the orchestra because of the big slice that Groupon takes as commission — become repeat customers.

When it comes to other kinds of business, however, especially restaurants, I’m a little more leery. Tower Dogs is offering a great deal on LivingSocial.com today, for example: Buy a $20 gift certificate for $10. In Bethany’s story, she recaps an incident in Portland in which a cafe owner sold nearly 1,000 Groupons and ended up using $8,000 of her personal savings to cover the extra payroll expense. Bethany writes:

The owner of Twee Boutique & Gallery in the Tower District said she tried Groupon, but wouldn’t do it again. The shop, which sells handmade clothing, jewelry and other items, sold 82 Groupons for $20 worth of merchandise for $10. “For every $20 of merchandise … I only got $4.75,” said owner Melanie Davis.

I’ve also noticed that some social-marketing sites are getting pretty sneaky when it comes to grabbing new customers. For example, yesterday a great deal was available on LivingSocial.com in which you could buy a $20 Amazon.com gift certificate for $10. The sneaky part, though, was that if you spread the link around and got three other friends to buy the same deal, then you got your gift certificate for free. Something about this really rubs me the wrong way. It’s like it’s just one step away from Amway-style multi-level marketing. Can you imagine if our email inboxes and Facebook accounts become littered with friends trying to get you to buy stuff so they’ll get a better deal? It could become really annoying.

Responses to "The Groupon craze continues"

Interesting points, Donald. One thing the Rice University study recommended businesses do to make Groupon deals successful was target the deal to merchandise they want to get rid of. Not merchandise (or tickets) that you need to make money on to make ends meet.

barryfalke says:

Donald:

Because I write with a level of ignorance, does the Fresno Philharmonic usually sell out those shows that they did a Groupon for? I ask because if the theatre is not fully full, how could the offer not have been a win for them. Their costs are the same I would imagine whether or not they have a full house or if it is half full.

It is all about knowing your business and being wise about the way you structure a deal. Today’s Living Social deal for Tower Dogs I feel is a very well structured deal because I don’t think that the food costs on a $20 order there would be above $10. In that case, if you are going to be open anyway and there is not really additional labor cost in that location it would seem to me to be a great deal for the business if they get even some people to try it out.

I am one that trusts that these business owners or leaders of organizations are smart enough to know what will break them and what wont. Groupon allows you to create the deal and as long as it is a least a 50% discount you can do it. Further, you can also work with them on setting maximum caps as long as it isn’t so low that it doesn’t make sense for them.

It is not for everyone for sure, but I think many can benefit from it.

Free Bee says:

Hey now, I just shared that Amazon deal so my friends could get $10 free dollars….. I would have sent that to them whether it affected me or not.

Afterall, I would want my friends to tell me if there was 10 free bucks to be had at Amazon.

Also, Donald, you’re right about the half-price ticket booths. These sites also take a page from Entertainment Booklets (pun not intended).

Stephanie says:

Finally people are recognizing this may not be the best thing for businesses. What customers fail to realize is that when they purchase Groupons the merchant is not getting all that money. Groupon gets half then charges the merchant credit card processing fees. Furthermore, Groupon receives all their money once the Credit Cards have been processed. Yet, they pay the merchant in 3installments over 60 days.

As a business owner. I really do want to use social media/buying as a way to promote my business. That is why we did Living Social(much more business friendly/much smaller scale).

Groupon seems like such a great idea. Until you read the fine print. Or start receiving their harassing calls. They will not take no for an answer. I have been harassed by no less than 3 of their sales people. They are rude, condescending & have no idea about the expenses involved in running a business.

If I were sell my products & services for 25% of the marked prices and wait 60 days to be paid. I would not be in business for long.

Heather P. says:

I am a notorious Groupon and Living Social user, but I purchase and pass around offers that seem applicable to my friends. I also only share through Facebook and Twitter rather than via e-mail as, yes, that could be annoying to my friends.

Businesses DO have to read the fine print on using these tactics for their marketing. These services are not really intended to give them a cash windfall or save an ailing business model. It is a small part of a greater strategic marketing plan and is probably best used for increasing customer base over time. Most people will not return for a second time at full price, but there may be a smattering who try the product or service and are happy with it and will become regulars– especially if the service is in their neighborhood.

FOR ARTS ORGANIZATIONS, you have to be very careful about when and how you discount. The social discount services can be a great tool to increase general awareness of the organization by a broader audience, and you may get a few more people in the doors to see what you’re doing. But will the 300 people you sold the discount to return at full price? Buy season tickets? Probably not.

But if you’ve budgeted well for the discount, getting 15 new season ticket buyers or 50 new single ticket purchasers at a second could be a good development. But was it worth the cost of the discount you gave to 300 others?

Also, arts orgs have to take into account how their full-price buyers feel when they see a discount sooooo publicly advertised. Will it encourage a habit of late buying in hopes that a discount will pop up? Not fun for an arts org! I like “ninja discounting”– offering discounts directly to an established group of people (Facebook fans, Twitter followers, newsletter subscribers, students, etc), usually for performance times that are off the beaten path or need a little boost (like opening weekend). Full price buyers don’t usually mind that since they didn’t want those tickets, anyway.

Starting a new theater troupe, of course I considered running a social discount for audience development purposes. But then I thought, “I only charge $10-$15 a ticket. . . what the hell would I be discounting?!”

Ultimately, arts organizations have to decide if the mass exposure is worth the returns of such deep discounts. If they’ve planned well for it and it is only one tactic in their strategic marketing plan, a few new regulars could make it worthwhile.

But discounting should never be your sole strategy for selling an arts experience. No one else will value your work if you don’t!

Donald Munro says:

Donald replies:

@Barry: You’re right that the Fresno Philharmonic doesn’t run full houses, so any extra revenue I’m sure is appreciated. More important to the Philharmonic, I’m told, is whether any of those new visitors can be enticed to return. If so, this would be a case in which Groupon would seem to be a positive marketing tool. As far as restaurants go, however, I’m still a lot more skeptical than you.

@Free Bee and Heather: Regarding the Amazon deal, sure, that was an amazing offer that I suspect won’t be repeated very often. (In that case, sure, tell all your friends. What makes me uneasy in general is the idea of becoming a passive partner in the marketing process. All of a sudden the dynamic changes from “I’m a friend passing along a tip” to “I’m a friend who stands to make a financial gain if you buy this product, too.” I can easily see the technique snowballing to the point that Facebook is littered with multiple offers from friends trading tips all over the place. Again, the Amazon deal was amazing. (And I suspect that someone — and I don’t think it was Amazon — absorbed much of the cost of that transaction; there’s a glut of easy investment money propping up some of these social-networking operations.) But I guess I can see the potential for abuse — and for flat-out annoying your friends.

@Heather: Thanks for your very astute observations from a performing-arts perspective. I agree that there’s a potential to alienate loyal (and full-price-paying) customers with too many gimmicky discounts. It’s one thing when you’re in New York, say, and hot shows that sell out have the luxury of not discounting at all. In that case, you pay full price for the peace of mind of knowing that you’ll actually get a seat. But in shows with more limited runs and a smaller pool of ticket buyers, the dynamic is different, and if everyone knows that all seats will eventually be discounted, then who is going to pay full-price?

scottydo says:

I think you guys are missing the point here.
First of all, Groupon and it’s ilk is advertising, advertising is not free.
Second, regardless if they pay the store back in 3 months or 1 day, you do get the money, sometimes to sit on for nothing in return for months, perhaps a year, and perhaps even, as I’m sure is often the case when someone forgets they bought the thing, it may never be redeemed, in which case you just made free money.
Third, if you sell 200 of these to brand new customers, chances are that some percentage, maybe only 5%, maybe 25%, maybe more, will come back and become regular customers.
Fourth, if you are smart about the discount you give, you will get these groupon users to spend more than the certificate is worth, say your average meal costs $20, you sell the groupon for $7.50, with a value of $15, you are almost guaranteed that your new customer is going to spend $5 above the value of the groupon. Maybe an ice cream cone at your place costs $4, you sell your groupon at a $5 value, the customer either buys a second one for another $3, or loses $1 to you right off the top, it’s all about being smart and savvy when selling these things.
In the end though it is advertising and ideally your business is good enough that you will make return customers out of your new groupon user, and also reward your long time customers with a nice discount.