The Dangers Of Advertising Through A Group-Buy Daily Deals Site

by Elizabeth Lipsz

If you are considering advertising through group-buy promotions, make sure this strategy works for you. This type of marketing has made a big impact on the service and retail industries in North America. Here is some advice from a retailer who has been there and done that!

Group-buy companies look for deep discounts and will push a retailer to discount more than 50% on their offer. The marketing fees are typically 50% of the revenue earned and their payment terms might be as long as 90 days after the sale date. The marketing company will also sweeten the offer by saying that 20% of the coupon-buyers will never get around to redeeming their coupons. In reality, this can be very unpredictable and in our experience the non-redemptions were closer to 10%.

Assess your cost structure

If you are a service business with high labor or material costs, this type of marketing may not be not for you (e.g., spas, nail-bars, laser hair removal service-providers and even some restaurants). On the other hand, products and services with low unit costs and the potential for upgrades will do much better (e.g., restaurants with a bar will do much better than restaurants without, gyms and yoga studios will do better as well because of the low marginal cost of each additional client who shows up to a class).

Designing the deal

Group-buy companies promise lots of exposure to new clients and the possibility of making money on upgrades. The reality is quite the opposite. The profile of the typical coupon-buyer is that they are cheap and they move from deal-to-deal. Most clients will not upgrade their services nor will they buy products.
When designing your offer, resist the pressure to discount more than 50%. Be sure to negotiate the marketing fee and push to get it down to 35% or 40%. There are other factors to consider:

• the maximum number of coupons to be sold
• the number of coupons a single customer can buy
• the size of groups you are willing to accept at any one time (if applicable)

The more restrictions you put in place, the less successful the sale but you, as the retailer, will be better protected.

The bigger the sale, the more you will inundated with calls and demands for reservations after the promotion. The typical coupon-customer has gained experience with these promotions and is now more critical of retailers if expectations are not met. Remember that the coupon-buyer expects maximum value and superior customer service at the lowest possible price.

After the sale, the retailer will be faced with balancing the needs of regular clients as well as meeting the demands of the coupon-clients. It is a very fine balance. A retailer who accepts too many coupon-clients at any one time risks losing the regulars. If the retailer fails to meet the expectations of the coupon-clients who are social media savvy, then the reputation of the retailer can be put at risk. Keep a close eye on review sites such as TripAdvisor and Yelp.

Final thoughts

Why would a service/retailer do a group-buy promotion? These deals do drive new business to the retailer but they do not bring in new, loyal clients. Is an additional 1-2% of new regular clients worth the cost running the promotion? Instead, it can damage the image or the brand of the retailer.

The principal reason for running a promotion is to use up excess capacity and lower overhead costs. If the bookings and reservations are handled exceptionally well without any customer-complaints then this promotion will provide a short-term boost. But if anything goes wrong — if the design of the promotion is too complex, too expensive and the discount is too deep and sale is too large — things can go wrong very quickly.

Links

• Groupon stock sinks as daily deal service struggles (Washington Times,, Nov 2012)
• Rebound: Groupon’s share price has doubled since its record lows, rising 99% in 58 days (TNW, Jan 2013)
• image courtesy of Indigo Fish

Elizabeth Lipsz is a Management Consultant at BluHorizons Inc, which provides general business consulting services for SME. She specializes in manufacturing with regards to business analysis, business planning and assessment of systems of operations and methods of work, particularly in context of ISO 9001, in order to reduce costs and improve efficiencies. You’ll find more on LinkedIn.