The Problem With Groupon-style Deals

Earlier this month a friend shared this story of a bakery owner who lost $8000 cash honoring an ill-advised experiment with Groupon.

Not surprisingly, their unfortunate experience isn’t an isolated incident. 

Did you happen to see this article from the Milwaukee Journal Sentinel?  I read it in a local paper.  It details a Milwaukee restaurant owner’s costly experience with Groupon.

Suzzette Metcalfe, owner of Milwaukee’s Pasta Tree restaurant, picked up some marketing advice at a recent restaurant industry seminar in Las Vegas: Do not do Groupon.

“But I’d already done it,” Metcalfe said.

As I read the article, I was struck by the similarity of Groupon-style offers to another promotion popular with consumers: the Going Out of Business Sale.

Both promotions attract the very same customers—and for the very same reason: a ridiculously low price.  Period.  End of story.

Of COURSE shoppers will flock to your 50-80% off sale!   Who wouldn’t take a deal like that?

Of COURSE shoppers will strip your business to the bone, if you give them permission to do so.  That’s just the nature of consumerism.

At first blush, the idea of attracting throngs to your business might seem enticing.  I can just hear the Groupon salesman singing his siren song. “Wouldn’t you love to have hundreds, even thousands of new customers come into your business?”

If you care about the health of your business, my friend, you’ll think twice before taking the bait.  Because the important question isn’t: Is This a Good Deal?

The real question is: Is This a Good Deal FOR YOU?!

Remember, consumers attracted to bottom-feeder prices don’t care a whit whether your store ever makes a profit, or even whether you stay in business.  There are other places to shop after you’ve closed up.

“The desire for instant gratification.”  It tops Roy Williams’ list of The Twelve Most Common Mistakes in Advertising.  The desire for instant gratification is what will drive most retailers to try a Groupon-style promotion.

And methinks it might also drive them out of business if they don’t stop to give it a second thought.

About Rod Schwartz

Rod Schwartz backed into a lifelong career in radio advertising in 1973 in Springfield, Illinois. He became sales manager for the Pullman Radio Group in 1979 and served in that position until 2006. He continues to serve clients in the region as the stations’ senior account executive. Since 1991, Rod and his family have operated Grace Broadcast Sales, providing short-form syndicated radio features to radio and TV stations across the U.S. and Canada. An avid photographer, Rod shares some of his favorite images of the Palouse at PalousePics.com.
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3 Responses to The Problem With Groupon-style Deals

  1. rodspots says:

    I’ve been getting some interesting feedback by email. This morning a GM for one of my radio station clients wrote to say that not only had Groupon and Living Social been taking away local business, but had actually hired away one of his salespeople.

    I nearly took advantage of a Groupon offer myself last week – from a hotel in a city we visit from time to time. $89 off a $139 “regular” rate made it $50. Presumably Groupon and the hotel split that, which means the hotel was willing to sell the room-night for $25, giving buyers a year to redeem the coupon. Among other things, this conveys to a consumer that there must be lots of room for negotiation in the hotel business.

    And from a fellow in Spokane: “I think this is a very good point, Rod. You hit the nail on the head I would say as far as the type of consumer Groupon attracts by and large. … As for my experience, I get the daily emails but have yet to take advantage of a deal. I think if a deal were to expose me to a new eclectic activity or entertainment that I was previously unaware of then it might have the potential to build a customer base, but, for examples, all the deals surrounding spas would only encourage me to visit once in order to take advantage of the deal.”

    He hit the nail on the head: he would “visit once in order to take advantage of the deal.” It’s all about the deal.

  2. Chris P. says:

    Hi Rodspots,

    Businesses create the parameters of their deals. Why would they offer something they can’t sustain?

    This seems more to be an issue with poor business planning on the part of participating businesses rather than an issue with Groupon or the Web sites themselves, which are just marketplaces for these businesses.

    I would politely suggest that if businesses are not able to sustain the short-term loss in sales or are not able to convert a percentage of Groupon customers into regular customers based on the quality of their service and price structure, their businesses are already on shaky grounds.

    I don’t believe Groupon-like sites can save businesses on the brink of collapse. I do believe these sites can offer vast new customer and advertising potential for solvent, stellar businesses.

    Groupon customers are not only “bottom feeding.” According to a recent survey of Groupon business partners, 92 percent said Groupon brought in quality customers. 89 percent said those customers were likely repeat customers. (http://www.grouponworks.co.uk/why-groupon/demographics)

    Just my two cents. I like ’em.

    Thanks for letting me ramble,
    Chris

    • rodspots says:

      No disagreement as to the attractiveness of these offers from a consumer’s point of view. But after four decades in the advertising business, I know that many (if not most) small business people, while being very good at whatever they do IN their business, need help when it comes to figuring out advertising and marketing. Add to the equation a salesman hungry to make the sale and not overly concerned about its effect on the merchant, and you have a recipe for disaster.

      In the intervening months since my original post, I’ve seen or heard of many other tales of woe from the client side. That Groupon survey you cite? I’d view it as I would a resume, a balance sheet without liabilities. 92 percent say they brought in (how many? 2? 3?) “quality customers” but these same respondents may also have been burned or gone upside down on their deal. “Likely repeat customers” is at best a guess; it sounds to me like wishful thinking. The jury’s out on that one.

      Meanwhile, last I saw Groupon is $100M in the red and competitors are crawling out of the woodwork like a colony of ants. Everybody has a “daily deal” – newspapers, radio stations, TV stations, web companies. Right now the novelty factor is still high and small businesspeople are known for having a soft spot for the “next new thing,” the magic marketing trick that’ll make them rich. I suspect that most merchants once burned will be loathe to try one of these a second time. But it’s a free country. If they want to try to build their businesses around deep discounts, have at it. Just know that all those “repeat customers” will just as quickly fly to the competitor who offers a deeper discount. That’s what happens when one makes PRICE the reason to do business.

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