March 16, 2011
Recently, I attended the Brandhackers meetup on the Deal-a-Day model pioneered by Woot and made famous by Groupon. The clamor around Groupon-ing has reached a crescendo, not least based on the crowded meetup room and the web chatter generated by Groupon???s Super Bowl commercial. Yet merchants remain unclear on whether to Groupon or not. They are right to be wary, as the following stats demonstrate*:
- Of merchants participating in Groupon and like promotions, only about 66% have a profitable outcome.
- The 34% of merchants running unprofitable promotions reported both significantly lower rates of spending by Groupon users and a repeat purchase rate of only 13%.
- There is abundant research that indicates that price promotions do in fact erode brand equity and have a negative impact on long-term growth.
- Given the above facts, it is no coincidence that Groupon is widely cited as rejecting seven willing merchants for each merchant who is accepted.
In light of these rather sobering stats, here???s a checklist every merchant should consider before talking to a daily deal or group coupon service.
- Am I in the right category? Daily deals generally perform well in categories with high margins, where the cost of goods for each new customer is low i.e. the incremental cost of each sale is low. This explains why most deals tend to be in the restaurant-bar and spa-salon categories. Redemption rates are fairly high at 90%, coming in marginally higher than gift card redemption, so merchants who rely on low coupon redemption to turn a profit are in for a surprise. In fact, as much as 30% of coupons are redeemed in the first 90 days of an offer, with 20-25% redeemed in the first month. The remainder tend to come in just before the expiration date**.
- Will it help me acquire new customers? One of the biggest sell points by daily deal services is that they attract new customers. However, a word of caution ??? it???s also possible that the deal attracts existing customers and cannibalizes sales that would otherwise have been made at full price, as US Toy discovered after offering a discount on Groupon.
- Will customers buy more than the minimum redemption limit? Most deals bank on customers buying more than the minimum redemption limit on the coupon, to make the deal profitable for the merchant. Unfortunately, it???s also hard to gauge in advance how much customers will spend and that???s why 1. and 2. are so important.
- What is the list size of the group coupon website? Often the size of the email list determines if a merchant will break even. Email conversion rates for email blasts are usually 1% or lower, making list size an important criteria. So even though there are literally dozens of group coupon sites, merchants should probably stick with the bigger ones unless they are targeting a niche audience such as cigar smokers (e.g. CigarMonster) or golf players (e.g. 14 Stix) only.
- Do I have excess capacity that can handle a surge in foot traffic? Lastly, it???s pointless to run a deal if the merchant cannot accommodate a sudden surge in traffic. Or worse, delivers bad customer service that upsets all customers ??? deal or not.
While group coupon services position deals as ???free??? for merchants, consider the hidden costs above. My last bit of advice to merchants and small business owners? Consider daily deals as just another advertising cost ??? it???s possible you???ll turn a profit but if you don???t at least your marketing budget will cover the shortfall.
If you???ve worked your way through this checklist already and have some experiences to share ??? we???d love to hear from you!
Originally written for the Seedwalker blog
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