Are Groupon deals worth doing for your business?

We investigate whether group buying sites, such as Groupon, will bring you new customers, and at what price. Could the rapid growth damage your company's reputation?

It’s a compelling business proposition: run a discounted deal with a group buying website and potential customers in your local area get your deal delivered to their inbox. They’re also able to pass it onto their friends through social networking sites. If sufficient numbers sign up to the deal, you get an influx of new customers, many of whom convert into repeat business, and a surge in hits to your website, increasing your company’s brand awareness.

A win-win situation. At least, that’s what group buying sites, such as Groupon, LivingSocial and Keynoir, would have businesses believe.

It’s certainly a fast-growth market. In 2010, the number of searches for online vouchers increased by 47%, according to Experian Hitwise. Meanwhile, visits to Groupon UK increased by an exponential 540% between September 2010 and March 2011 alone. And it’s an increasingly crowded – and highly competitive – marketplace. The biggest and most well-known players are Groupon and LivingSocial, both of whom brought their business model from the US to the UK. Then there’s smaller players, such as KGBdeals, Wowcher, Crowdity, Groupola and Keynoir.

Tempting new customers

So what can these sites offer the small business owner? The Groupon website claims that it gives “small independent retailers the opportunity to meet a mass market”. It’s a big claim. But certainly businesses that have run offers on these sites cite customer acquisition as one of their key aims.

“We use group buying sites to get volume clients,” says Nicky Noble, who co-founded Scin, a beauty and spa business, with her sister in 2005. “So when we opened our Great Portland Street branch in 2009, we had nine treatment rooms to fill in central London. This was a good way to market our services across London, fill the salon and get repeat business.”

Noble deals principally with Keynoir, LivingSocial and Wahanda, a specialist deals site for the health and beauty industry (her biggest volume deal sold 1,300 vouchers on Wahanda). She says she’ll only do business with sites that release the cash from the deal upfront (ten to 15 days after the deal has expired); others only release the money once all the customer vouchers have been redeemed. “Some people never redeem their vouchers, so it you don’t get paid until redemption, you lose this pure profit,” cautions Noble.

Similarly, Dean Knight, owner of Rodizio Preto, a small chain of Brazilian restaurants, ran an online deal to promote the opening of his new restaurant in Putney last year. Through Groupon, he sold nearly 5,000 vouchers. “On the day we opened and for three months thereafter, we were full to the brim every night,” says Knight. “If locals passing didn’t know about the online deal, they would have thought, ‘I must try that restaurant’, because there was such a buzz about the place.”

For a niche, seasonal business, like Picnic2U (www.picnic2u.co.uk), which delivers ready-to-go and bespoke picnics throughout London, using group buying websites has been a great way of raising brand awareness. The company saw a big spike in web traffic during and following its recent offers on LivingSocial and Keynoir and although it is too early to evaluate success (because it is still fulfilling orders), founder Buzzy Randall says the offers have “definitely been good for our profile… I just hope that people like the product and come back to us.”

But will they come back?

Which brings us to the thorny issue of whether group buying site customers are just up for a cheap deal or really do convert into long-term customers. While she hasn’t done a detailed analysis, Noble reckons that 20-30% of deal customers have converted to regular clients, plus her staff do lots of upselling of products and other treatments to deal customers. Meanwhile, Knight estimates that around 10% of his Groupon customers have become regulars, which “isn’t a bad return,” he says.

That said, Knight is very clear that for him these kinds of deals are “a promotional tool, not a profit-making scheme.” For his first “experimental” Groupon offer at his restaurant in Victoria, he offered a £20 set menu for £8 and sold nearly 3,000 vouchers on which Groupon took a 30% cut. “It wasn’t a money-making venture, but we noticed two things: firstly, we filled the restaurant, which created a buzz and made it more attractive to passing footfall; and secondly, aside from the Groupon sales, our sales increased by 20% during the offer period and by 30% thereafter. So these offers can have long-term benefits.”

And can you cope?

One of the biggest risks for small businesses entering into these deals is being prepared for – and coping with – demand. And demand can be unpredictable. Rodizio Preto’s Knight learned that lesson the hard way with his first deal, which sold 3,000 vouchers versus the 300-500 predicted by Groupon. “People were calling to book before they even had their vouchers,” says Knight. “I hadn’t prepared our reception staff well enough and I had to bring in extra staff to man the restaurant. By the time I ran the Putney offer six months later, I knew better what to expect.”

You have to be organised, concurs Scin’s Noble. She splits deal customers between her two London salons and limits deal treatments to two a day (vouchers are usually valid for three months). “We have to ensure we’re still able to accommodate our existing clientele which is paying full price,” she says.

Risk versus reward

For Noble’s business, group buying sites are now an established form of marketing. She acknowledges there is a small risk of damaging or cheapening her brand through these deals, but says that they have become so commonplace in her industry that this risk is outweighed by keeping her treatment rooms full.

When they work well, these deals can be fairly straightforward to set up and can have a positive long-term effect on business, whether in terms of customer conversion or increased brand awareness. Indeed James Murray, marketing research analyst at Experian Hitwise, says that even after an initial spike in web traffic during a promotion, residual traffic can be as much as 25% higher for weeks afterwards because of raised brand awareness.

Knight says that it took “virtually nil of my time to set up”, while Picnic2u’s Randall says running a deal is “efficient, easy and gives you a quick result.”

Of course every business has to weigh up the pros and cons of running an online deal and should thoroughly research the providers and their terms and conditions before signing up. But with increasing awareness of these sites among a deal-hungry public, for many businesses it’s certainly an area worth exploring.

The final word goes to Randall. “I hadn’t even heard of LivingSocial or Keynoir before we ran these offers. But when I looked into it, I realised how massive this online offers area is and thought, ‘let’s give it a go’… There is a risk, as there is with anything, but if you’re a small business entertaining the idea, you should go for it.”

Top tips for using group buying sites

  • Get the detail right. Most group buying sites will help you design an offer and deal with the copy that goes on their website. “Make sure you go through the terms and conditions of the offer with a fine-tooth comb and be careful you don’t give away more than you’re prepared to,” advises Scin’s Noble.
  • Make sure you know who the offer is going to. Many of the sites are organised by city, so that consumers receive deals in their local area, and customers can be further segmented by postcode. If you’re looking to attract local customers, it’s important you don’t stretch the net too far.
  • Be smart about which of your products and/or services you want to run deals on. Noble says she would only do deals where there were clear opportunities for upselling. “You can’t upsell a Brazilian,” she points out.
  • Make sure you’re onsite on the day of the deal. Sounds obvious, but if you can track the deal hour by hour on the group buying site, you’ll be better prepared to cope with demand.
  • Shop around for the sites offering the best deals and exposure in an increasingly competitive market. A 30% cut for the group buying site seems to be the industry average, but this may decrease as the market evolves.
  • Be aware of the potential pitfalls and don’t believe all the hype. “Don’t let the sites bully you,” advises Noble. “Some of them can be quite aggressive in trying to get you to take a deal. They’ll promise everything – 300 new clients and a wad of cash – but they don’t tell you about the downside. Make sure you know what you want to achieve out of a deal.”
  • Finally, don’t forget about fulfillment. Again, it sounds obvious, but it can be easy to lose sight of all the hard work that follows in the excitement of the deal. You have to honour every treatment, meal or experience sold or you risk upsetting customers and damaging your brand.

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