While many small business owners have considered offering a group deal, only 10% have actually run one, according to recent research from MerchantCircle. And while the results have been promising for these early adopters — and 77% say they would run another one — group deals don’t work for everyone. Among the people who said they wouldn’t offer another deal, 42% said it was not effective in customer acquisition, and 24% said they lost money.
Given these mixed results, it is critical that entrepreneurs do their homework before embarking on a group deal to make sure they’re positioned for success.
Here are five tips to help you get the best results:
While all can get your business in front of consumers who’ve expressed an interest in daily deals, these services “can vary widely when it comes to terms and conditions,” says Brent Harrison of marketing consulting firm SmokeJumper Strategy, who has tested out more than a half dozen group deals services for his Mountain View, Calif., wine bar and shop Savvy Cellar.
For example, Harrison notes that “with Groupon you’ll get the biggest volume, but also the least attractive economics and control. Groupon typically wants a higher share of the deal price, and they also spread out payments to the merchant over a period of months.”
Another issue related to volume is audience targeting. “With a high-volume provider, you’re essentially deep-sea fishing with a driftnet: You want the valuable salmon, but you’re going to get all sorts of less attractive life forms while you’re at it,” adds Harrison. While high-volume services may be a good fit for larger, more established businesses, he suggests that new or niche businesses test out a few smaller, more targeted services to see which one brings in the right clientele.
The good news is that there are many vertical and niche deals sites to choose from. There’s Daily Gourmet for foodies. There’s Yuupon and TripAlertz for travel. There’s even a deals site for dog owners called “Doggyloot.” There are also business-to-business deals site such as RapidBuyr. Before choosing the first vendor that calls you, do some research into which ones offer the right terms and audience for your business.
With most group deals services, you won’t have much control over the timing of when your deal hits — this can make it difficult to service the increased demand and could lead to bad reviews from new customers and existing patrons alike.
“People who redeem your offer are likely to follow your usual traffic patterns and come in when you’re already at peak capacity,” notes Harrison. “At Savvy Cellar, I’m typically looking to fill in the downtime such as Tuesday evening, but without constraints on my deal, I know that most people will come in Friday or Saturday night, which could put a strain on my operations.”
For this reason, Harrison recommends putting time constraints on your deal when possible. “Think about making your offer valid Monday through Thursday, or running a special event on a specific day with a limited number of spaces available,” he suggests. You can also set up your deal so that the value of the discount is greater on your slowest days or during off-peak times. If your business has significant seasonality, try just running deals during your slowest months.
Some group deals services are actually beginning to give merchants more flexibility and control over when volume comes in, so it’s something to ask about when choosing a vendor. For example, Groupon recently launched a “Groupon Now” product that lets you put out more modest deals around a certain item or timeframe.
In many cases, group deals don’t result in an immediate profit and may even result in a net cost to the business. Make sure you’ve done the math ahead of time to minimize costly surprises.
Here’s the basic formula: your group deal needs to be offered at a steep discount to the regular price — let’s say somewhere around 50%. You will then need to share revenue from the deal with your service provider, at rates as high as 50% or more. So if your spa is offering a $200 service for $100, and you have to pay $50 of that to your service provider, you’ll end up with $50 for your $200 service. If it costs you more than $50 to provide the service, you’ll actually lose money on the deal — and the better the deal does, the more it will cost you.
Even if you do make a profit, if your business has a limit on capacity (such as a restaurant or a spa), deal seekers may be edging out regular customers who would have paid full price.
But there are other ways to benefit from a group deal besides an immediate profit. A successful group deal brings new customers in the door and gives them a taste of your business. There are up-sell opportunities once they’re in your shop. Plus, your company’s name gets in front of thousands of local consumers through the service providers’ marketing of your deal.
Given the economics of group deals, there’s a lot riding on getting new customers to spend beyond the initial deal, but according to recent Rice University study, less than 20% of deal users return again to make a full-price purchase. In order to improve these odds, it is essential to make the most of each new customer visit.
This means that in addition to making sure you have enough capacity to serve both new and existing patrons, you should also think about developing special up-sells for people who redeem your coupon. For example, a dentist could offer new customers $5 off a Sonicare toothbrush at the end of their appointment, or a yoga studio could offer a discount for new patrons who book a series of sessions before leaving the studio.
Also make sure to capture people’s information when they redeem their coupon so you can continue to stay in touch with them. Have a sign-up sheet at the check-out counter for people to register for your email newsletter, encourage people to “check in” at your establishment on Facebook Places or Foursquare, and let them know how to follow you on Facebook or Twitter.
Have you offered a group deal? What was your experience? Share your thoughts in the comments below.