Online consumer promotion and coupon services such as Groupon and Living Social, offering specified “deals of the day,” are becoming increasingly popular.
While consumers jump at the chance to receive their favorite products and services, usually at 50 to 90 percent off their original price, businesses need to think strategically about what they are hoping to accomplish by offering such discounts.
“For years I have said that retailers and businesses need to be careful in how they discount,” said Mike Allen, president and chief executive officer of Shopping Bargains.com. “They need to make sure, particularly when using these very attractive online promotion sites, that they don’t cannibalize their existing sales or hurt their bottom line in the process.”
A study conducted by Utpal M. Dholakia, an associate professor of marketing at Jones Graduate School of Business, Rice University in Texas, sampled 150 businesses that ran and completed a Groupon promotion between June 2009 and August 2010. The study concluded that two-thirds of the respondents found the Groupon promotion to be profitable for their business, and the other 32 percent were not profitable.
“Some of the negative stories surrounding some of these promotion sites probably could have been avoided if they would have crafted their social promotion specials so they wouldn’t have such a drastic effect on the business’ bottom line or low-margin items,” Allen said.
Coupons are supposed to change consumer behavior, he said.
“The study indicates that restaurants had a particularly hard time turning a profit using Groupon promotions, because Groupon customers were labled as ‘bargain hunters’ that didn’t tip as well and were only there to use the coupon. As a business, you’ve got to try to convert that person into a regular, convince them to come back or spend more with great customer service.”
Social promotions need to reward consumer behavior, not just reduce the transaction or order size for the business, Allen said.
“An effective strategy might be to prepare your employees for the flood of bargain hunters that might be coming in,” Allen said. “Inform them that they may not be as friendly as the regulars, they are probably only there to use the coupon, they probably aren’t as willing to spend as much money and they may not even tip as well. Preparing them for that means customers are more likely to leave happy and often means there is a greater chance they will come back.”
Groupon was formed in November 2008 and came to the southeastern Wisconsin region in February of 2010. Living Social, another social promotion site, launched in the Milwaukee area in September.
“We never position it as a money-making opportunity for a company,” said Julie Mossler, spokeswoman for Groupon.com. “Most companies will probably break even, and some may gain a profit or even lose money upfront, but you have to look at the initial investment. Most people are not going to come in alone and most will end up spending more money than the coupon is worth and are more likely to come back in if they had a good experience.”
Groupon does not require a company to put down money up front and splits the proceeds of each sale directly with the company.
Nino’s Italian Bakery Inc. of Menomonee Falls recently did a Groupon promotion that allowed consumers to get $15 dollars worth of product for $7.50. Groupon sold more than 1,000 of them.
“We had a really great experience with it,” said Ann MarieBaier, general manager of the bakery and daughter of the owners, Tony and Nina Sgroi. “We had so many new people come in to the bakery and are still seeing new people come in every single day.”
According to Baier, most Groupon users bought more than the $15 worth of product, and the bakery hopes to use the social promotion site again.
Groupon executives work closely with a business to come up promotions that will be effective and a viable option for the business, Mossler said.
“Most of our promotions are at least 50 percent off and can range as high as 90 percent off,” Mossler said. “That’s what we want to be able to give our Groupon customers, but we work with the businesses to determine what a viable option is for them and we also allow them to cap it or cut off the deal anywhere in the process.”
Dave London, owner of Milwaukee-based Philly Way, was hesitant to use the Groupon service promotion at first, but reluctantly did so if he could cap the deal at 50 coupons, he said.
“I don’t really need to give coupons, and I usually don’t,” London said. “I ultimately decided it might be worth it, but I wanted to set a limit of 50 coupons on the deal.”
A glitch in the system did not set the limit, and Philly way ended up selling more than 600 Groupons before the deal could be cut off, he said.
“My representative said they’d never had that happen,” London said. “It was very overwhelming; we have a very popular restaurant and don’t need to give coupons out. Overall, the experience was fine, but I don’t know if I’d do it again.”
Since issuing the Groupon, London has opened another Philly Way in Cudahy and said he might consider doing a social promotion for that store with a limit only to bring people to the new location.
“We rely on our Groupon businesses to know what their regular traffic is,” Mossler said. “We provide our businesses with a preparation packet that outlines suggestions they can take to better position themselves for success using Groupon, and 96 percent of businesses we survey after the experience want to work with us again.”
