Deal Sites and the truth behind them…

Contributed By Rohit Mittal




Recently a lot of websites like Snapdeal, Bagittoday, mydala etc have come up which offer deals on local businesses to the customers and by now, there are over 100 such websites. Most of these have been inspired by western sites like Groupon and have garnered a lot of media attention. They have been touted as a “win-win-win” model: customer gets the product or service at a discount, business gains publicity & new customers and the website gets a cut in the coupon price. However, even in US where the concept originated businesses have not had too good experience with the idea as the following post by Posies Cafe owner clearly shows. If you are a small business owner and seriously considering using one of those sites, first be clear on the amount you are willing to spend and what is it that you are expecting to gain out of such service. For a student/executive in Marketing, this demonstrates the stark difference between the promise and delivery of Return on Investment(ROI) in social media based promotions.

Post publish date: Sep 11, 2010

For months I’ve been thinking about whether or not to write a blog post about Groupon, and sharing the kind of experience it has been for the business. I’ve been weighing the possible repercussions of such a candid post as well, but after today, and having to decline a longtime customer’s Groupon for being past the expiration date, she asked that I share with everyone the reality of Groupon.
Today one of our most loyal customers, Lucinda, came in and asked if she could use her Groupon that had expired the day before. I felt terrible, but I had to say no. I knew she was upset, and I wanted to explain, but there was a line, and it would take longer than the few seconds we had together there to share why I couldn’t. She came up to me later when there wasn’t a line to tell me that she was really disappointed, that she had been a longtime supporter of Posies through the Mamananda Group, and that this experience made her never want to come back. I knew she felt my declining was personal. So I explained to Lucinda, and now to all of you, how Groupon works for the businesses, and why it has been the single worst decision I have ever made as a business owner thus far…
I heard about Groupon in January of this year from a friend, and after doing my research, I thought the idea was pretty clever. I, the business owner, would offer a discount to the consumers utilizing Groupon’s social network, and we would get noticed by many who may never have seen us otherwise. A great marketing opportunity and way to increase future foot traffic! I assumed Groupon would take a percentage, but that it wouldn’t be that huge… maybe 5-10%? I spoke with John, a Groupon rep, and we started formulating the idea. He didn’t have to sell me on the concept, I understood and thought it was genius. Then we talked pricing. We were going to offer a $6 for $13 (pay $6 and get $13 worth of product) because John told me people really respond to deals that are over 50% discount. It wasn’t starting off as that great of a deal for us, but we kept talking. Then we talked the percentage split. John told me that when the consumer pays less than $10, Groupon usually takes 100% of the money. What?! He reassured me that most customer buy more than the $13, and that we would never have to advertise again after taking advantage of their network. In my mind I thought “false. You can never stop advertising as a business,” but outloud I said, “Ok, let me think about it.”
I hung up and thought it over. I called him back and said we would have to get at least 50% to cover our costs of product… to this day I don’t know why I thought even 50% would be a good deal for us. Maybe because I thought since we were covering our food costs. What I didn’t think clearly enough about was that that margin we mark up is what covers all of our other costs… like staff, rent, utilities, etc. Our overhead is roughly $25,000/month, and this decision was about to make it so that we didn’t cover any of those other costs.
Against my husband’s advice, I decided to do it knowing how many other businesses I admired had utilized Groupon. We were featured on March 9th and sold nearly 1,000 Groupons. When I talked to Lucinda today, she asked if there was a cap on how many were sold to help protect the business from too much loss, and the simple answer is, no. When you sign up for Groupon, you are agreeing to sell as many as get sold… and why would Groupon want it any other way? They get half of the earnings.
We were bombarded the first weekend after our feature because our feature had come out a month late, and unfortunately coincided with the Kenton Library’s grand opening. Over the six months that the Groupon is valid, we met many, many wonderful new customers, and were so happy to have them join the Posies family. At the same time we met many, many terrible Groupon customers… customers that didn’t follow the Groupon rules and used multiple Groupons for single transactions, and argued with you about it with disgusted looks on their faces, or who tipped based on what they owed (10% of $0 is zero dollars, so tossing in a dime was them being generous). Or how about the lady that came in the day of Groupon (though you’re not technically allowed to use them until the day after) and asked for the Groupon discount without an actual Groupon in hand because she preferred to give us all $6 rather than half of it to Groupon. While the idea is noble, this causes mass confusion among the staff and makes it seem that without commitment, anyone should be able to get anything off of our menu for 50% off.
After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month. It was sickening, especially after our sales had been rising. Sure, maybe thinking of it as just marketing may seem justified, but anyone that knows me well knows that I would never pay more than $100 for advertising, much less $8,000, because I don’t believe that regular advertising had much return on investment at all. So the experience jaded me, and the interactions with the few bad Groupon customers we had jaded our staff. After all of this, I find myself not even willing to buy Groupons because I know how it could hurt a business (side note: service industry businesses do quite well with features like this because it is just the cost of time – you are not paying for a product for resale. Resale, in my opinion, get hit the hardest).
In short, to dear Lucinda and anyone else that comes in with a Groupon in hand, please know that our respectful decline of your coupon is not personal. It’s because we cannot afford to lose any more money on this terrible decision I made, and the only saving grace we had was an expiration date.

These deal sites work only for specific cases such as:

1) New businesses where you need to advertise anyway to get the word out,
2) High margin businesses where you can give away some profit
3) Businesses like dentists, where you’re almost guaranteed a revisit after that discounted teeth cleaning or the customer is mostly likely to come back and pay full price,
4) Venues like museums where most of the cost is fixed.
5) Very targeted discounts at time’s you’re normally slow, or for higher margin products that you’re able to pair up, as some have mentioned here.