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!!!