Find Out if Group Coupons are Right for Your Business
The success of Groupon has spawned a slew of social couponing sites promising business owners loads of customers. But beware, those promises may fall short of your expectations. The benefits really depend on the type of business you’re in and many other factors, like the number of repeat customers resulting from the deal. The math doesn't always prove out. Often, the real beneficiaries are the coupon companies, and some believe their popularity will fade as consumers find them less valuable as the economy improves.
Consider these pros and cons when deciding to use coupons for your business:
- May result in a quick infusion of cash.
- May be a quick way to unload inventory.
- Like sampling, coupons remove some of the barriers to first-time trial, making it easier for people to try before they buy (at full price).
- May encourage people to switch brands.
- May lead to add-on sales for items that weren't discounted (sometimes called a loss leader and a common grocery store practice when the discounted item is sold way below retail to entice people in the door).
- May attract first-time buyers, which could increase your customer base for the long-term. A recent Rice University study reported that 66% of respondents said their Groupon promotion was profitable. These businesses saw 50% redemption rates and 31% returning for another purchase.
- Some coupons are never redeemed, so you get some of the positive effects for free.
- Can be costly; be sure you understand what you can afford to give away. Don't forget to include the coupon service's take in your calculations.
- Customers may only buy the discounted item and never return, making it a very short-term promotional strategy. Here again, the Rice University study, "...a significant number in our study, 48 (or 32%) reported their Groupon promotion was not profitable. For these businesses, only about 25% of redeemers purchased products or services beyond the Groupon’s value and less than 15% came back a second time to purchase products at full price." The study also said, "Restaurants appear particularly susceptible to these negative outcomes: 42% of the restaurants in our study (20 of 48) reported unprofitable Groupon promotions." I imagine this is especially true in areas where there are many dining choices; people will just skip from one discount to the next.
- Cannibalization of existing revenue. In other words, you’re giving a discount to those people who would buy from you at regular price anyway. One way to avoid this is by limiting the offer to first time buyers or setting the geographic distribution of the coupons beyond your normal target area (which may not be possible with some social couponing services). However, try promoting benefits and value at full price before you try discounting to capture less price sensitive customers.
- P.O. Factor – could alienate loyal customers who have purchased at full price and aren’t eligible for the discount.
- May lessen the perceived value or quality of the item being offered, especially when it comes to products or services people value based on price.
- Potential negative impact on brand image – could make you look cheap, especially if you have a luxury brand or are discounting items no one would want anyway.
- Customers may get used to waiting for deals, rather than paying full price.
- Discounted customers may crowd out your regulars if you have fixed capacity.
- Employees may limit the quality of their services if they feel they’d be tipped less based on the decreased amount of the bill.
How to Make Coupons Work
- Understand your profit margin on an item before you decide on the discount amount; be sure to include overhead in your calculation. If your profit margins are thin, discounting could put you in a loss position. That may work great for supermarkets, because they expect buyers to purchase a shopping cart full of items at the regular price. You may not be able to afford that luxury.
- Always consider your offer from the customer’s point of view. Will they find it valuable? Will they buy more than the discounted item? Will they come back again after the initial purchase without the discount incentive? Will they think less of your business because of it?
- Assess the impact on your regular business and customers.
- Weigh the cost of acquiring the customer against their lifetime value, not just what you’re going to make on that one-shot deal. If the customer is smart, they too are considering what it will cost them over the lifetime of use. In other words, one month free phone service is pretty insignificant compared to the long-term expense.
- Similarly, consider the impact of the percentage discount on an item, i.e., $300 off or 1% off the purchase of a $30K car probably won’t motivate a buyer.
- Ideally, the perceived value should exceed the actual cost to you of providing the discount. For example, if your business model involves high fixed costs, like a movie theater, it doesn’t cost much to give away a seat that may go unfilled anyway. However, people could get used to waiting for discounts as I’ve mentioned.
- Set limits when appropriate and available, such as expiration date, minimum number of buyers required before anyone can redeem, preclude current customers with “first time buyers only”, restrict to less expensive or easier-to-deliver services, use small denominations that can’t be applied to the same purchase, like a minimum amount off per meal. Alex Salkever in his article “Is Groupon Changing What People Are Willing to Pay?” said it well, “Watered-down offers will inevitably result in watered-down interest, because customers aren't stupid. But small-business owners aren't either, and they're the ones who must find the balancing point between deals good enough to lure customers in, and deals so good they make customers rethink their idea of fair value.”
- If you’re offering a service, the first-time delivery of that service may be at a high cost to you. However, if subsequent services cost you less, it may make sense to pull in those customers for a first-time deal, because your cost will decrease over time; which means you’ll get a bigger margin over time. A good example of this could be housecleaning, where the first cleaning is more costly, but touch-up visits require less work.
- Finally, if you decide to use coupons to lure in customers, be sure you understand their motivation for purchasing the coupon and be ready with the right products, services and follow-up promotions that will turn them into repeat customers.
The choice to use coupons depends on many factors, including your business model and what you’re trying to accomplish. It’s not a quick fix. That may seem complicated, but the simple truth is that coupons are advertising. That is, you’re paying to attract customers. Think your strategy through before you take the plunge.