This post previously appeared on OPEN Forum.
Everyone’s heard a horror story about a Groupon deal gone awry, but there’s a reason why daily deals have become so ubiquitous among small-business owners in the last three years. When done right, a targeted Groupon offer can pump up customer acquisition rates and boost immediate sales in ways that just aren’t possible using traditional marketing methods. Here’s a deeper look at Groupon, the controversial platform that can make or break a local merchant struggling to turn a profit.
How It Works: Subscribers who sign up for Groupon’s daily e-mails receive special deals from local businesses offering 50 percent to 90 percent off their usual prices on goods and services. When a particular offer looks enticing, the customer can purchase it online, and—assuming a minimum number of deals have been sold—redeem it at the local business starting the next day. Merchants can accept Groupon deals by scanning their customers’ smartphones or taking printed vouchers that look similar to traditional paper coupons. Groupon pays merchants the revenue collected from their deals—minus its 50 percent commission—in three installments over a period of 60 days.
Groupon in Action: Groupon deals are sent out to more than 115 million subscribers each day, which helps explain how businesses like Yoga Shelter, a chain of six yoga studios in Michigan and California, sold more than 8,500 of its “$24-for-24 Classes” offer last year. Most deals run for 24 to 48 hours, after which businesses can expect an onslaught of new customers coming through their doors. Whether or not these deal seekers turn into repeat customers depends on the business’s own ability to up-sell its services and keep those new customers coming back for more.
Why It Works: Consumers are more willing to spend money on nonnecessity goods and services when they feel like they’re getting a deal, and Groupon capitalizes on that with its 50-percent- to 90-percent-off offers. In return for offering steep discounts, merchants are rewarded with new customers who may not otherwise have checked out their businesses. Groupon works especially well for startup companies looking to build a clientele, as well as fitness studios and gyms that can offer these deals without accruing any additional product costs.
Researchers who study the business of daily deals have found that Groupon deals pay off for merchants in the health and wellness industry, many of whom can make room in their classes for additional clients. That’s certainly the case for Eric Paskel at Yoga Shelter. Paskel doubles down on his staff each time he runs a Groupon deal, but incurs few extra expenses beyond the personnel costs.
Many of those who do have to spend more to accommodate their Groupon customers consider it part of their marketing expenses. In an effort to get the word out about its new children’s salon in 2011, Chelsea Piers offered a one-time deal—$15 for a children’s haircut and batting-cage tokens—to families who had never been to the salon before. Chelsea Piers senior vice president Dana Thayer says the company took a hit on each of the deals it sold, but that the cost was still worthwhile based on the buzz and targeted consumer reach that Groupon was able to provide.
Maximizing the Benefits: One of the keys to daily-deal success is having processes in place to retain Groupon customers once they come in. Groupon can help get thousands of new people through your door, but it can’t make sure those customers come back after their vouchers have been redeemed. That responsibility falls squarely on the business owner. Merchants who use CRM software and take advantage of the tools that Groupon provides, the most important of which is the Groupon Scheduler system, can collect contact information from new customers to be used in subsequent e-mail marketing efforts.
At Restaurant Michael in Winnetka, Ill., chef Michael Lachowicz places strict restrictions on the Groupon deals he offers and requires that buyers make reservations before coming in for their meals. He then downloads this information into his database and cross-references it with reservations made with OpenTable to determine how many Groupon customers are coming back for more. Lachowicz’s calculations show that 30 percent of deal buyers have become loyal customers as a result of his Groupon offers.
Stephanie Miles is an associate editor at Street Fight.