Why the businesses who lost out on Groupon only had themselves to blame…

This morning I was on BBC Breakfast with a lovely woman, Hannah Jackson-Matombe, owner of a successful small business called Spotless Organic. Hannah provides a very high quality cleaning service using 100% organic products with values centred on ethical practice and being environmentally friendly. However, her business was profoundly impacted by a Groupon deal and I’d like to share my insight into what happened and how other smaller business can avoid falling into the same trap.

Groupon made promises that were not realised… “Increase your customer base”

Hannah admitted both in our conversation in the green room and live on air that she had perhaps been a bit naive to be seduced by what Groupon were suggesting – but without awareness of the risks and in a challenging economy a promise of a significant increase in customer based was very interesting…

Groupon had basically convinced an otherwise savvy business woman that by going against her first instincts she would benefit. Why didn’t this work?

How Groupon works; what’s the inducement to do such heavy discounting?

When Groupon first spoke to Hannah she offered a respectable discount on her oven cleaning services. A good offer to the consumer but one which still left her on a break-even position. Groupon works such that it sells a voucher for an item (service, product – anything) which will be activiated if enough consumers buy into it – so a viral social-sharing approach is encouraged. When a voucher sells the revenue is split 50-50 between groupon and the provider offering the deal. Thus, on a £19 oven clean Hannah only received £9.50 revenue. Not enough to cover her high quality cleaning products let alone her staff costs!

My first reaction was to think how ridiculous for a business to do such deep discounting, to put themselves immediately into a loss making position. BUT when you hear the “promises” groupon make, to encourage really deep discounting, you can see why one might be enticed.

Hannah was told that the uptake would be significant and that she would have the opportunity to up-sell her services (and offer her services in say 3-6 months time) to all these new customers. Spurred on by what seemed an investment in customer recruitment (thus the discounting could be called marketing spend) Hannah’s team delivered their exceptionally high service level in the belief that by doing what they do best, wowing their customers, they’d obviously come back…

So whilst I would NEVER advise ever selling anything at a loss-making price I can see how the attraction of securing potentially 100’s of new, loyal, happy customers would make it seem worthwhile.

It isn’t. Here’s why…

Attracting the RIGHT customer not just a bargin-basement customer!

When I speak to clients, especially smaller businesses who have a high price but high quality service, I find myself repeating “don’t compete on price compete on service”. It ties in to positioning – step 2 of the 10-steps to retail success and of course it also then has a knock on effect on step 3 – ideal customer and step 5 – pricing and promotions.

Had Hannah’s offer have been perhaps £75 (her full price is £95) then she may have secured a few more appropriate customers – willing to pay a high price for a great service. People who bought into her brand values and appreciated what her offer was worth. Returning to them 6 months later, offering a repeat clean for £95 is still likely to be tolerable to them and many would have been happy to buy again. But her offer was for £19. She attracted a larger number of people who were predominantly attracted to the very low price. The chance ANY of these would repeat a clean given the full price is low – and of course that’s what’s been proven in Hannah’s experience. Groupon really should not be using this “promise” of repeat business and if they had any idea about customer engagement, attraction and retention, then they’d realise why!!!

So, Hannah, if you want more customers and can invest marketing budget in finding them, spend that budget wisely and find customers who love your product, your service and respect that you can’t offer what you do unless you charge a higher end price point.

What DOES Groupon work for and how can businesses benefit from it?

Groupon is ideal for businesses where there are economies of scale. Think about a bowling alley. Off-peak maybe only 10% of the lanes (2 out f 20) get used. The same premises costs apply, broadly the same utilities costs and the staff have to be there too. So essentially whether running 2 lines or 20 lines the underlying cost base is about the same.

If a bowling alley offered massive discounts on off-peak bowling and saw demand peak to running all 20 lanes then whilst the income may only be marginal they absolutely have an opportunity to make that very profitable. How?

Well firstly each customer coming through the door likely represents at least a break-even on their cost to serve, possibly a slight margin. The key in this model is that there is a captive audience who having got a cheap game of bowling may splash out on the available drinks and snacks. As I am sure you know, these make them a great deal of margin and thus by filling up the premises in traditionally quieter times and making related sales to the captive audience the offer as a whole can be very profitable.

So, groupon can work and it does work. My final word on this is simply to give these pointers:

  • When ever considering a promotional deal / discount plan it out from a cost to serve and revenue basis, do the maths and understand your exposure. NEVER sell anything for less than cost price if you can possibly help it!
  • Recognise the impact of the activity on your positioning and your ideal customer – will you be attracting the right people? Will you increase customer base or just devalue your product / service and attract the wrong audience.

Well I hope you’ve found this interesting, any questions, please give me a shout 🙂

PS – If you want a top-notch, ethical, organic & environmentally friendly cleaning service get in touch with Hannah – her website is http://www.spotlessorganic.com/ – I hope she now gets some HIGH QUALITY customers thanks to the feature this morning!!!

About Clare Bailey

Clare Bailey, The Retail Champion (formerly Clare Rayner), is one of the most well-known and respected retail experts in the UK. With unrivalled knowledge in retail, high streets and consumer matters, she offers unbiased, independent content – whether engaged as a professional speaker, for broadcast media, or for a written feature. Clare is a business woman, entrepreneur and founder of several small businesses. Having been born into a family of successful business owners, it was inevitable that she’d eventually jump off the corporate treadmill and step out on her own! Today her brand portfolio includes The Retail Champion, The Retail Conference, the Future High Street Summit and the Support for Independent Retail campaign. In addition, she is co-founder of Mobaro Retail UK and a non-exec director of Beed Virtual Assistant Services. Having started her career as a fast-track store management trainee for McDonalds, she went on to work with leading retailers such as M&S, Dixons and Argos. She moved swiftly into management roles before being headhunted into senior consulting roles with global software giant SAP, and international management consulting brand, Accenture. Her corporate background in senior retail, consulting and technology roles, coupled with her experience of creating and running her own business, has enabled her to be equally capable whether consulting to global brands or micro businesses. This unique blend has not only positioned her as a leading expert in all things retail, but has enabled her to add meaningful commentary and insight to the debate around the future of the high street, and, how technology is driving fundamental change in the way consumers, and businesses, interact. Clare has become an influential voice in her field, which has resulted in her becoming a regular media contributor and sought-after conference speaker. Often seen on Good Morning Britain, BBC Breakfast, Sky News, and Chanel 5 (to name a few), Clare speaks on a myriad of retail, high street and consumer issues – but is particular adept when it comes to explaining the context behind retail trading results, newly released data, and government stats, in a palatable and informative manner. In addition to broadcast and conference speaking, Clare is the proud author of two best-selling business books published by Kogan Page - The Retail Champion: 10 Steps to Retail Success, published July 2012 and How to Sell to Retail: The Secrets of Getting Your Product to Market, published February 2013. She has provided contributions to various academic texts, including Retail Marketing Management (published by Pearson). With an engaging, conversational yet informative style, Clare writes for press and content agencies, providing features, articles, blogs and opinion pieces as well as contributions to white papers and reports. However, when the situation demands a more serious style, Clare can deliver - In 2016 she wrote an extensive report for a major insurance and risk law firm, as a retail expert witness, to support a public liability suit. She found that project particularly enjoyable as it played well to her strengths – assimilating large amounts of data and information, identifying the key points and articulating that in an understandable manner. When not on TV or speaking at conferences, Clare’s “day job” sees her supporting consumer-facing businesses through her consultancy services. When asked to describe what she most loves about retail consulting it is typically the opportunity to “dig deep”, getting “under the bonnet”, in order to leverage the business data to uncover the insights that lead to “lightbulb moments”. She also loves working on business change programmes that centre on improving the processes and systems to increase profitability by supporting more rapid, better informed decision making, improving the customer experience, or simply by become more efficient and streamlined. In this respect she considers herself a “business engineer” with a brain that works like a relational database! Due to her years of experience, her logical, objective approach, her quick, rational thinking, she is known for being able to cut through complexity, seeing right through to the crux of issues, finding creative solutions that others may have overlooked. As if all that wasn’t enough, Clare is a working mum, juggling a home life in rural Lincolnshire with her partner, their 5 kids, 4 cats, and geriatric Labrador! For all enquiries, contact Clare directly on 01727 238890 or email champion@retailchampion.co.uk.
This entry was posted in 10 steps to retail success, Consumer Trends, customer engagement, Increasing Sales, positioning, Pricing and Promotions, Retail Strategy and tagged . Bookmark the permalink.

7 Responses to Why the businesses who lost out on Groupon only had themselves to blame…

  1. James says:

    I think you are spot on! And this sentiment very true:

    “Groupon really should not be using this “promise” of repeat business and if they had any idea about customer engagement, attraction and retention, then they’d realise why!!!”

    Groupon is about a race to the bottom in my opinion and although I can fully appreciate in the current environment why small businesses do fall for their charms, I think businesses need to approach it with a healthy degree of scepticism!

    What works for Groupon and helps them achieve their objectives may not help small businesses achieve theirs!

  2. Great post Clare. I know some people that have been seriously impacted by the so called marketing campaign that Groupon promise to deliver. I have lost customers to Groupon too because the just go from one deal to the next and if they have a disappointing service they have the attitude of “well it was only £?”. I deliver a high standard and quality of service and so i want customers that want that too.

    Thanks for sharing this!

  3. Fantastic piece – we are up against a lot of big players in the toy industry and it’s tempting to sometimes slash prices, but we simply can’t compete. However customers get great knowledge and service from us, and we always try to go the extra mile. We’ve just been doing a 12 days of christmas offer and it can be hard to compete. We worry that our deals aren’t low enough, but we need to make profit and we need to encourage a customer who is looking for that extra customer service rather than just bargain chasing. Thanks for re-energising us and confirming that we are doing it the right way (or at least the right way for our business).

    • Clare Rayner says:

      Thanks for sharing Helen; remember 1 customer who makes £10 margin is easier to serve than 10 customers making £1 margin – in SME retail it’s usually about quality not quantity!

  4. Paul says:

    Good article.
    As a person who has a one man, labour intensive business (window cleaning), I doubt that Groupon would work for me. I would probably end up working far too cheaply for people who instead of giving me their regular, normal priced custom, would instead just go and seek the next bargain. I try to sell my business as an above average service for an above average price. I don’t try to sell myself as the best with sky high prices nor do I try to compete with tax dodging dole cheats. Just an honest, above average business with a fair rate of pay to go with that.
    The bowling alley was a good example of where it might work but many of these places slash rates at off peak times anyway so I can’t see them giving half the money to scavengers like Groupon.

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