Giddy About Groupon: Are Online Coupons a Good Way to Grow Business?

My brilliant wife and business partner Ellen Galvin is the author of this month's Buzz Bulletin about Groupon and the value of online coupons. You can read her article below and sign up here for our free monthly newsletter on how to build business with buzz.

From the July editon of the Buzz Bulletin:

On my desk is a coupon, or rather a “Groupon,” for a local restaurant that I purchased from Groupon.com. It entitles me to $25 worth of food, for which I paid only $12. The problem is, I ordered two of these Groupons and discovered after using the first one that I don’t like this restaurant very much. The food is mediocre and the atmosphere is worse. So why did I shell out $24 for not just one, but two, of these coupons in the first place? I guess the idea of a good deal was just too hard to resist. Plus, how could hundreds of other people in Portland be wrong?

For those of you who haven’t yet succumbed to the Groupon frenzy, this popular website offers heavily discounted deals from local businesses, like restaurants, gyms and spas (who would’ve guessed that there were so many people looking to save money on hair removal?). There is only one deal per day, and the deal only becomes available if a certain number of coupons are sold within a 24-hour period. Naturally, Groupon encourages its users to “tell their friends.” This has resulted in some pretty good word of mouth for Groupon (it is currently valued at more than $1 billion), and spawned dozens of competing daily deal sites like LivingSocial, Zozi, and YipIt.

But what kind of word of mouth does it generate for the businesses who are offering the discounts?

That’s the question I asked of our server recently, on a night that Patrick and I used a Groupon at the French restaurant Chez Machin. We figured that the 50% we saved off the price of dinner would pay for a few hours of our babysitter’s time. Although the restaurant isn’t far from our house, we had never tried it and we were delighted with the good food and friendly service. The Groupon strategy worked: it brought two new customers in the door of a local business (two new customers who talk and write about the businesses they like, I might add). Our server said that the online coupon had brought in several new faces that week, although it was still too early to tell if they’d become repeat customers.

On the flip side, getting too many customers in the door can backfire. In San Francisco, a bakery that specializes in mini cupcakes got more than it bargained for, selling 72,000 cupcake orders in a single 24-hour period (3,000 people purchased the coupon, which offered two-dozen cupcakes for $11 instead of the usual $24). Suddenly, frazzled bakers were shopping twice a day to replenish milk, butter and oil, and several employees threatened to quit. Customers were angry, too, especially those who make a sport of buying Groupons in batches and driving around town to cash them in. One customer who was disappointed at missing the cupcake deal said that he plans his dates around Groupons.

You don’t have to be in the food service business to jump on the “daily deal” phenomenon. Online deals include everything from rock climbing lessons to tax preparation services. So what’s the secret to making these sites work for you?

·         Understand the math

Groupon subscribers expect to see a discount of 50% or more. Of that, Groupon takes another 50%. Ask yourself whether you are getting the right customers through the door and whether they are worth the additional costs, like food, labor and extra equipment.

·         Narrow your targets

For owners of highly specialized businesses, in which the likelihood of getting incremental or repeat business is small, the challenge is to attract new customers without over-investing in them. For example, our client OCSC SAILING used Groupon to sell nearly 2,000 Introduction to Sailing Lessons. Instead of offering a discount applicable to any of its classes, it chose a manageable, two hour lesson tailored to newcomers (versus people who are already OCSC clients or part of the larger sailing community).

·         Be prepared

The cupcake example illustrates why it’s important to control the terms when working with Groupon. Set a limit for the number of coupons you wish to sell, and consider the other factors that could cause headaches for your business if you are not adequately prepared. Remember, it doesn’t take long for one cranky cupcake customer to circulate bad buzz through cyberspace. In addition, many business owners recommend having a separate phone number, email or website to deal with the barrage of questions from Groupon customers.

·         Use discounts with care

It’s easy to catch Groupon fever. It’s exciting to see hundreds of people snap up your offer as you envision hordes of new customers who’ll not only help you recoup your expenses but will also buy additional services. But are these people interested in what you have to offer, or are they just reacting to the thrill of the deal? Don’t expect to email them to find out, either. Groupon does not share addresses. Also, issue too many coupons and you’ll set yourself up as a permanent discounter. For example, do you buy anything at Macy’s that is full price? Enough said.

·         Underpromise and overdeliver

At the end of the day, discount sites like Groupon are running software programs that aggregate deals, send out e-mails and charge your credit cards. The real work begins when a customer walks into your business for the first time, holding a Groupon in his or her hand. You are responsible for making sure the experience is great from start to finish, and that’s where the real word of mouth starts.

So, did Chez Machin make any money on us that evening? Probably not, when you consider the cost of our crepes and the wages of its staff. Yet we would have been happy with the experience had we paid full price, which we will gladly do in the future. And, we’ve already recommended it to our friends.

As for that other restaurant, I’ll go back and order carefully just to use up the $12 Groupon that I already paid for. I’ll probably never return, but it’s been a good reminder that not even the hottest social media tools will help your business if you can’t get the fundamentals right.

Comments

[Rob L.]

Some great tips! I echo being prepared, giving the customer a wonderful experience, and setting a maximum. At It's Just Deals, we make it a point to discuss a maximum for all of our deals to avoid selling more than a business can handle. Selling too many usually leads to a bad experience for the customer, who may not come back to that business or purchase from us again.

[Patrick Galvin]

Hey Rob,

I'm glad to hear that you're conscious about how adept a business will be at coping with demands from coupon buyers. I bet there will be a shakeout in the coupon industry between those just trying to sell coupons vs. those who understand that satisfied customers are the key to ongoing success. Good luck with your efforts!

Best,
Patrick

[Peter Winkler]

Hi Patrick,

It shows again that you're ahead of the curve with your blog. 2 weeks after you published your blog article, the Chicago Tribune came up with their own take of the impact that Groupon has on businesses and that it's not always a positive outcome:

http://www.chicagotribune.com/business/ct-biz-0816-groupon-20100816,0,7228387.story

[Patrick Galvin]

Thanks for visiting, Peter! I appreciate the link to the Chicago Tribune story about Groupon. It's a well-written and researched piece that merchants should proceed with extreme caution before going with Groupon or others of its ilk.