Filene’s Basement may finally be out of business after 102 years, but discounting is hotter than ever. Earlier this month Groupon chief executive Andrew Mason became a billionaire at age 30 when the company launched its initial public offering.
Mason’s good fortune must gall some of the owners of local restaurants, spas, bike shops and other businesses who have helped Groupon become what Forbes described as the “fastest growing company ever.” A vocal minority whines about Mason’s remarkable invention. They say they end up losing money on Groupon deals. They report that Groupon customers rarely become repeat customers willing to pay full price.
Some commentators imply that the daily-deal craze Mason pioneered is impoverishing local economies by teaching consumers that full price is never a fair price.
A Rice University professor surveyed business owners who did deals with Groupon last year and discovered that one-third of the businesspeople in his sample were unhappy with the deals they had struck. The unhappy owners reported that 87% of Groupon-wielding customers never returned to pay full price. Even the two-thirds of business owners who said they were happy with the performance of their Groupons admitted that 70% of the customers who came in with the discounts never returned.
Have you been burned by a Groupon or similar services offered by LivingSocial, Yelp or OpenTable? It would be impolitic for Mason and his colleagues to say this, but I can: Blame yourself.
I’m convinced the vast majority of small businesses that fail at these daily deals could fare better by embracing Groupon not as a stand-alone cure-all to slow sales but as one element in a well-honed marketing plan. If you’re thinking of trying these steep-discount daily deals and are anxious about losing money, there are at least four major blunders you should avoid.
Keep in mind that Groupon discounts really aren’t that different from other types of big markdowns that a business might use to attract new customers (stimulate trial) and energize their existing customer base (activate latent demand). I’ve worked with some of the most successful discounters in the country, and they all like to say that there’s a right way and a wrong way to discount. So steer clear of the four classic mistakes I’m about to describe, and you’ll be one of the winners who gain from the daily-deal format:
Mistake #1: Treating coupon customers as second-class citizens
Treat Groupon customers like VIPs. Luring all those potential new customers into your door with a 50% discount and then treating them like second-class citizens is madness. If you only offer them half the menu or the most stripped-down version of your service, it’s off-putting. They may assume that’s how you treat your full-price customers, too.
It’s important here to note the difference between the two types of discounting. There’s the ordinary markdown—that’s when, say, Crate & Barrel offers to sell you one of its $1,200 sofas for $700 to reduce inventory of a model it overstocked. And there’s the off-price. That’s when, say, Donna Karan makes her entry-level pumps available to Designer Shoe Warehouse or Bosch sells a stripped-down version of its dishwashers through Sears.
Groupon and its rivals promise your customers that they’ll get the real deal at half the price. If you water down the drinks when the Groupon hordes show up, they’ll be disappointed. And they really won’t come back.
Mistake #2: Failing to recognize and reward returning Grouponers
Huh? I know it seems antithetical to pile a second discount atop the one you’ve already given. But remember: These folks are about to spend twice as much at your business and put four times as much revenue in your pocket as they did when they came in with their Groupon. You hate to blow it just when you’re on the verge of turning them into a serial full-price customer.
But by all means, find a reward that’s non-monetary but meaningful. If they come back for another massage, give them a sample-size bottle of moisture lotion. Or if they come back to your restaurant on a busy night without a reservation, give them priority on the wait list and offer them a drink. Even something as simple as remembering their names and thanking them for coming back can clinch the deal.
Mistake #3: Discounting opportunistically or randomly
Discount predictably. Steep-discount promotions like a Groupon deal can be powerful, but be aware of what you’re training your customers—especially your regulars—to expect and when to expect it. If you offer steep discounts too frequently and too randomly, you’re likely to scare off the full-price patrons, who’ll feel they’re foolish for accidentally showing up on the one day you’re charging full price. After the Groupon deal runs its course, it’s probably time to lay off discounting for a while.
Or plan on building discounts into your pricing model permanently. Think here of how T.J.Maxx always sells its goods discounted 30% to 50% but assiduously avoids big clearance sales where its entire stock is marked down further. A T.J.’s customer feels safe shopping at the store throughout the year. Or consider Talbots, which caters to a cadre of bargain-shoppers who will only shop its sales. The retailer follows a predictable schedule, signaled by snail- and e-mail alerts, so that its full-price customers won’t feel cheated. The once-a-year wedding-dress sales at Filene’s Basement were marvelous, even if it meant the chain had to plan its inventory throughout the year for the big bridal blowout.
Mistake #4: Blaming the customer
When Groupon customers don’t return, take it to heart. It’s a pretty good sign your prices are too high, your service is subpar, or your products aren’t winners in the real-world marketplace. The business owners who told the Rice University researcher they were unhappy said that only 13% of the Groupon customers returned to pay full price. That’s half the average return rate reported by happier business owners. Take a good look at your relative value against competitors and substitutes before blaming coupons for your slow sales. Try adjusting prices, upgrading your service or resetting customer expectations through your marketing messages.
Bottom line: don’t simply “do a Groupon” and hope that alone will put your business on the map (as it did for this nail salon back in 2009). That’s not management, that’s passivity. Go forth boldly. Incorporate coupon discounting within an overall marketing strategy that you alone are responsible for. Groupon may introduce you to new potential customers, but it’s your job, Mr. and Ms. Business Leader, to close the deal.