Mind Your Own Business: A Groupon success story
Barely a year ago the daily deal market was the hottest ticket in town. Google offered to acquire Groupon for $5.3 billion and that market became flooded with competitors from LivingSocial to tons of copycat sites – all offering a daily deal. Success for both vendors and merchandisers alike was considered a done deal.
So what happened? There’s been much written lately about these deals, and almost none of it good news for merchants. Here are a few of the many valid reasons why merchants have turned cold on the daily deal market.
- Merchants continue to lose money on fixed cost deals like meals and massages (most merchants retain only 25% of the actual cost of the product or service after discounting sharply to both the deal vendor and the deal customer.)
- Coupons have not proven to lead to new customer acquisition– a key metric to daily deals being profitable over the long term.
- Price ‘normalization’ sets in – customers expectations are set at the discounted rate.
- With so many available deals, coupon fatigue is becoming a factor as customers try to ensure they are getting the absolute best deal available.
- Coupons are not really ‘limited’: while individual coupons will expire, the market knows that another deal will come around and consumers will wait for the next deal.
- Coupon users tend to be difficult and demanding customers, putting some merchants reputations at stake.
These points were debated and discussed at the Gravity Summit a few weeks back. The one question that hung in the air with no response was “What are the merchants expectations and have the daily deal vendors been helpful in managing and advising their customers on how to be successful?”
According to Sue Cushing, Owner and instructor at Your Element Yoga the responsibility lies with the merchants themselves. “Merchants must have an absolute clear understanding of their business model and what a daily deal means to the product/service they are offering.”
When Groupon contacted Cushing in March of 2011 she was unfamiliar with the daily deal model. Given that her studio was 1.5 years old, she wanted to get the word out – and to get more people in. With this as her primary rationale, Cushing decided to move forward with a Groupon. (Increasing revenue was secondary.)
As a yoga studio, Cushing’s business model is conducive to a daily deal – there’s a set number of students that need to attend each class in order for YEY to break even, anyone who attends beyond that is considered incremental revenue. Compare this scenario to a salon who is offering 50% off a massage. The salon will likely only retain 25% of the full cost of the massage, and the masseuse cannot make up that money as she can only serve one client per hour. This holds true for restaurants as well. (For solid advice on how to prepare your restaurant and staff for daily deals customer, this post is excellent.)
The second advantage for a yoga studio is that new students have to fill out a liability form, and the vast majority of them (80%) include an email address giving Cushing the opportunity to follow-up with them as she works to convert them to full paying customers.
YEY’s first Groupon was set up as unlimited yoga classes in a 30 day period that could be used in a 6 month window. The value was $150 and the cost was $50. The Groupon was open for 2 days and YEY sold 135; half to existing customers and the other half to new clients.
15% of the new customers returned as clients at the regular price.
As Cushing considered a second Groupon she was hesitant because “you don’t want to condition your customers to wait for a deal” and while she wanted to expand the time that new customers had to evaluate the studio and for her to establish relationships with them, her timeframe to determine conversion rates would grow from 30 days to 3 months.
Nonetheless, YEY launched their second Groupon this September offering either 10 or 15 classes to be used within a 90 day timeframe. The results were beyond expectations, with YEY selling 325 Groupons and tripling the revenue over their first daily deal. While it is too soon to count conversions, if YEY can maintain 30 out of the 90 new clients it will have been well worthwhile, ensuring full, but not over crowded classes.
As the Daily Deals vendors look to improve their revenues and business models, new companies are launching “inverted deals” and customer rewards/loyalty programs, that seem promising for merchants with both increased revenue and higher customer retention.
Whether your company decides to pursue a daily deal, an inverted deal, or a customer loyalty program, remember to mind your own business.
Namaste.
Photographs of Sue Cushing by Sara Colket Photography with permission
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