A couple of weeks ago, I had a chat with a group of small business owners at an informal sharing session from various industries: F&B, Fashion, Tourism, Beauty and Fitness. As the conversation flitted from the various ‘pain points’ that each business owner had, to business related strategy such as marketing.. and suddenly, someone in the group mentioned GROUPON.
I love Groupon, Deals.com.sg, LiveOffCoupon and any other daily deals website that gives me a great deal.
It seems like Singaporeans can’t resist a discount, regardless if it’s an Omega Watch or a Justin Bieber action figure on sale. But as a business owner, should you or should you not use any of these daily deals website as part of a broader marketing strategy?
But first, some of the things you need to know about Groupon:
The Discount l Groupon encourages merchants to offer at least 40% discount, with the typical being 50%, to its customers. It’s possible to have a smaller discount on offer.
The payment l After handing out this painful discount of 50%, the merchant has to split the remaining revenue 50-50 with Groupon. What this means means that the net revenue that the merchant makes out of the total revenue offered is 25%. This is where things start to be tricky, as your markup has to be 400% or more lest you run a loss.
Terms of Payment l Groupon pays merchants in installments of 33% over a period of 60 daysi, with other competitors potentially paying. Remember this point, as we will come back to it later on.
Next, let’s proceed on to some of the problems associated with Groupon:
Bargain hunters only l Because of Groupon’s value proposition, they tend to attract mainly bargain hunters who are in it for a quick deal. These customers are very reluctant to pay a dollar more, and it is hard to encourage a re-purchase on regular prices as it doesn’t seem worth paying the full price anymore. They will either wait for your next offer, or simply proceed on to your competitor.
Turns off the regular customers l Don’t you hate it when you are a loyal customer of a particular Telco, and you see an advertisement that issues huge discounts for new customers only? While Telcos can get away with it due to switching cost and they know when customers are about to make a re-purchase decision hence the discount vouchers when a customer’s plan is about to expire, your business may not have similar consumer behaviour patterns.
Cash flow issues l Remember the terms of payment point that was covered above? Couple this with the huge quantity of orders that will come in as a result of a Groupon deal, and you have the perfect storm- while costs are accumulating, capital isn’t coming in fast enough for you to pay for these costs!
In our special report on “why small businesses fail”, we cover some of the major reasons why small businesses fail in this link (I’ll write the article later.. the idea is to get them to signup for our email database.)
Doesn’t make your business memorable l Speaking from experience, I’ve used these daily deals websites a number of times and bragged to my friends about what a great deal I’ve gotten from Groupon. Using a Groupon takes the spotlight away from your business; after all, it was Groupon who provided your customer with the coupon and the unbeatable deal.
It was Groupon that made your customers’ purchase exciting and fun, and not you. As a result, customers are more likely to brag about the groupon and not your business. They are Groupon’s customers and not yours.
To be fair to daily deal companies, they do bring some benefit to small businesses:
Awareness l Small businesses are often strapped for cash, and have a limited budget for advertising. After all, why spend money to acquire new customers via an advertising campaign that isn’t proven to bring in new customers when you can make a little money from a groupon deal?
The risk of an advertising campaign is higher than the risk of a groupon deal as in the latter, you only forfeit a chunk of your profits when you get a sale. After all, why spend money when you can make money?
It helps move inventory l A large, underused inventory can negatively affect a business because it represents cash and assets that you’re not using. Especially in today’s economy, your small business needs all the cash you can get your hands on. Standing inventory is your enemy.
A Groupon promotion to unload your excess is a great way to convert your products to cash. Particularly if you sell seasonal items or foods that expire, you can accept a more substantial cut into your profits to just get some sales going. You can afford to offer this type of sale to both your existing and new customers, since lower profits are better than no profits at all.
It can help during periods of low demand l As an entrepreneur myself, I know that there are periods of high demand, and periods of low demand. Roughing out those periods of low demand can be rough. When timed right, Groupon can help to bring in small amounts of profit during dry seasons.
So… should you use Groupon?
I have compiled a brief checklist of companies that should use Groupon. If you check any of the boxes you may want to consider using Groupon.
Criteria
High fixed costs, low variable costs
– because once fixed costs are covered, every additional customer is pure profit.
(Gyms, Yoga classes)
High perceived value, low production costs
( Cufflinks, Books etc)
Excess Inventory
(Food that is about to expire is a good example)
Excess spare capacity
-Generally, any business that has seasonal demand
(Photography business)
Target market is price conscious
The next natural question is: How should you effectively use Groupon in your small business?
Stay tuned for the next article where we share with you tips on how to use Groupon as part of a broader strategy to increase PROFITS!