Why Group Deals Are Killing Small Businesses: 7 Thoughts From CityGrid Media at SXSW 2012

(See all of Ramon’s SXSW Interactive 2012 coverage here)

At SXSW 2012, Kara Nortman,  Sr VP of Publishing at CityGrid Media shared her research and thoughts of why group deals (like Group On) are killing small business.

Overall she advocates that if you are launching a product and want to get the word out to a large base of customers a traditional group deal could be for you or if you have low variable costs then a group deal could also be for you. However, beyond these two categories, think VERY carefully before launching a group deal.

Here’s what she shared:

Most people have a love hate relationship with group deals. For most businesses, either you love it or you hate it.

The typical restaurant business owner (representing many business owners) has high capacity at one time and low at other times and they are looking to fill those low times, hence the typical restaurant owner might turn to do a daily deal – he decides to run a daily deal. On the good side he does get higher traffic and some stay. But on the bad side he gets customers at the wrong time, when he does not need them and possibly angering his regular customers who are now crowded with new customers taking advantage of the deals.

Something else is bad – Joe is losing money: Joe gets $12.50 of revenue for $60 of service. He has a 30% variable cost and so he loses $9 by serving each customer.

This money losing could be profitable or at least break even, f customers buy more product than on the coupon then he does ok, of if the group deal service takes less of a cut he’ll be ok. But often times these good variables don’t happen.

Will customers come back and pay full price later on?

Data shows that 44% will come back to the business. But much of the 44% might have already been your customers.

Another  question to ask is, does the group deal hurt his brand?

Make sure your deal is targeting the right customer.

Who is the typical daily deal consumer?: Mother of 2, 36 and has high disposable income. However, they are overwhelmed with group deals, so much is in her inbox, about to expire. These group users have too many deals and people are not opening many of them. Jackie (typical customer) is disgruntled – hence 61% of people have let a deal expire before redeeming.

People don’t use daily deals with their friends.

Will daily deals sites thrive or die?

For the group deal services, customer acquisition costs are unpredictable.

The percent of voucher paid to business is evolving – 50% is taken on the deal value as in the case of Groupon.

Deal services  must show clear ROI. Right now many businesses think negatively of deal services (guilty until innocent).

Groupon should turn into a data driven company and help local businesses get the right customers into the right business.

What “deals” are being done right?

American Express OPEN is doing Small Business Saturday – this local initiative encouraged 103 million Americans to
shop on Small Business Saturday and small bsuiness merchants expeienced a 23% increas in business.

Other ways that local deals are succeeded, beyond a traditional Groupon service:

Savored – pull marketing (people find deals by search) and selling a high end service focus first and foremost instead of pushing a focus on just “cheap” deals.

Think Near – Proximity marketing (I assume through smartphone GPS). Help a business identify typical demand patterns and variables such as real time data-weather, traffic, near by events. Think Near auto generates 5- 10 campaigns per week per business; does extensive A/B testing; builds deep deal density in a .5 mile radius. This is clearly much more than Groupon offers to its customers.

This results in reaching high quality customers nearby whne in need vs deal seakers subscribed to email alerts.

In the New York area they’ve signed up 400 merchants in 10 weeks.

Additional p0ints include:

- adding location and discount to the ad resulted in a 2X increase in click throughs

- redemption rates was highest for restaurants at 6 – 7%

- salons did not convert

- no discernable pattern around discount rate (customers are not concerned so much with what the discount is, in as much as they at least GET a discount)

Another group deal success are loyalty based incentive deals. Note that 15% of your customers generate 50% of revenue so by paying attention to your customers you can BOOST your revenue.

 

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About Ramon Ray

Ramon Ray, Marketing & Technology Evangelist, Smallbiztechnology.com & Infusionsoft. Full bio at http://www.ramonray.com . Check him out on Google Plus, Twitter or Facebook

  • http://www.facebook.com/profile.php?id=100000512521432 Tera Lanphear

    Great article. As a suggestion, try running it through spell check.

    • http://Smallbiztechnology.com Ramon Ray

      Thanks Tera, in fact I’ll go through it right now!