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I have been a huge fan of Groupon, a coupon system for local merchants, since I first heard about it last year. The site provides consumers with a way to tap into group bargains without a group, and local merchants with a way to gain new customers and increase store traffic. Strategically deployed it can enhance visibility for local merchants. One business owner, however, has shared her story of how offering a deal nearly sunk her business.
Cafe owner, Julie Burke used Groupon to offer a deal of $13 of product for $7. More than 1000 consumers bought the deal and the amount of consumers coupled with the failure to account for costs left Burke $8,000 in the red and having to withdraw from personal savings to cover payroll for the month.
According to Burke, she was hesitant about the deal and the revenue share (Groupon would keep 50% of the revenues) but against her husband’s advice decided to do it. Burke does not blame Groupon for her bad experience but shares her experience so that other business owners can learn.
Below are 5 quick takeaways from this business case:
- Know your cost to provide your product/service. If you do not have the in-house capability to develop cost data it is worth it to hire an accounting or financial professional to do this for you. VA Firms or Accounting Agencies can provide you with project based help.
- Know your capacity. Promotions when successful will result in an influx of business. Do you have the infrastructure, staffing and supplies needed to manage an increase in business.
- Never let someone else override your instinct about your business. Burke was hesitant to do the deal but moved forward because other trusted businesses had done it successfully. This is a classic lesson. Just because a bigger, higher visibility, or longer established business does something does not mean that it is right for you and your business. Trust your instincts and judgment.
- If you don’t like the terms, ask for new ones. Burke indicates that she was told that the deals could not be capped. The Groupon CEO indicates that is incorrect. People can be wrong. The sales person may have been new, overly eager to sell a deal, or just misinformed. Even if the sales person has the information correct ask for different terms. If you really want to move forward in a deal, negotiate the sticking points even if means pushing to a higher level.
- Discount carefully. Discounting to drive traffic seems like a low cost and effective solution but as Burke’s case highlights it may not make sense for every business owner. Discounts may bring in new customers but they may also bring in bargain addicts who will never support your business long term.
To their credit, Groupon’s CEO left a comment on Burke’s post with an apology, explanation and promise to “make things right.” Groupon has done a nice job of leveraging social media for marketing and it’s nice to see that they are also actively listening and responding.
I encourage you to read Burke’s account and see what other lessons you gain from her experience. Please do share your insights in the comments so that we can all learn and grow together.
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It’s a shame that this business owner didn’t know the deal could be capped. As a Groupon customer, I see deals offered that have caps so I’m puzzled why she didn’t realize this or should have asked. Well, lessons learned and hopefully she’ll come out of this a smarter business woman.
Hi Bill, yes wisdom is definitely the key to making discounting work for your business. I appreciate your input!
“How to wisely use groupon in 5 moves”, this should be the title of your post :-).
Small business owners often rush into something new just because everybody did it, such as Groupon: wrong move.
Also, as Fred Schlegel said: “Know your costs, Know your costs, know your costs.”. This is crucial when you want to invest your hard earned money.
Bill Marston
While the initial expense can seem high, business owners need to be more proactive in making Groupon work for them both during and after the sale.
For a restaurant, this may mean making sure their specials during the event have better margins, their staff knows how to sell both the specials and upsell additional products, desserts get sold, and a solid attempt is made to add every person walking in the door to the restaurants email list so they can then pitch these people on their own instead of having to do another Groupon.
Meryl, I love the Groupon model but would advise business owners to carefully evaluate before executing any discounting strategy. It is definitely a double edged sword. Your comment really echoes an honest reality – we may take advantage of deals to try new places (or places that don’t fit into our normal budget) but it does not mean we will come back.
Fred, I will admit that when I first read I was shocked that she didn’t know the math for her business but I don’t think she’s alone. I agree with you that turning away the loyal customer was not the best move to make. I would have given her the deal or offered another concession that validated how much I valued her business.
I had been wondering if the Groupon (and other similar services) deals were worth it for the companies. Not only are they cutting costs, but they’re getting 1000s of orders. It may bring people to their stores / services, but how long will it take for them to see results? So far, I haven’t returned to the places I’ve bought Groupons for. (One place I had been to before the Groupon, but rarely shop there because it’s expensive.)
Ouch.
“Know your costs, Know your costs, know your costs.” Although I’m not sure the way she treated a loyal customer was wise. Once you’ve made a bad promotional mistake, the last thing you want to do is cause the one benefit you might achieve (longer term loyal customers) to evaporate as well.