When Does a Social Coupon Deal Make Sense?
If the sheer volume of offers currently available on Groupon, Living Social, Amazon Deals and other social group coupon sites is any indication, many business owners are eager to make such offers. But, before you take the plunge, make sure you are realistic about what to expect.
Expect to Lose Money on the Coupon Itself
In most cases, a social coupon/discount deal will not be a money maker. Why? Because you will need to offer your product at a substantial discount (usually 50 percent or more) and the hosting company takes a substantial cut (often up to 50 percent) from whatever the customer pays. Unless your product mark-up is more than 400 percent, you will lose money on each coupon redeemed.
When does losing money make sense? It only makes sense to lose money short-term when you are going to make money long-term by generating:
- Non-coupon sales. The coupon can serve as a loss leader that will get the customer in the door so that you can sell them additional goods or services.
- Repeat business. The coupon will bring new customers into your business—and you will be able to generate repeat business from these new customers.
- Publicity. If you are adding a new line of products or services, or if you are moving into a new market area, an e-coupon deal will get your name in front of thousands of prospective customers.
This is where steely-eyed realism can help avoid a bad business decision.
How Much Will the Customer Spend?
Using the social-deal coupon as a loss leader can make sense if you feel reasonably confident that most customers will purchase goods or services over the value of the coupon. The probability of this depends on your business and your ability to cross-promote or upsell goods and services. It is important that you understand your customer's buying habits and how much they usually spend.
George, the owner of "Tzatziki Greek Restaurant" offers a social coupon deal: $20 to spend at his restaurant for only $10. If Tzatziki customers usually spend considerably more than $20, then he will make some money on the deal.
Andrea operates "Tough as Nails," which specializes in spa-quality manincures and pedicures. She knows that more than half of her mani/pedi customers also buy lotions and nail products for use at home. She feels that the sales of these products will offset the loss she takes on the half-price manicure service.
Will the Customer Return or Refer a Friend?
Losing money on the customer's first interaction with your business can be worthwhile if that person becomes a regular who gives you a steady stream of business. Again, this is the time for brutal honesty. Examine your current customers and their purchasing habits. And, examine your current sources of new customers. You must also consider whether your business is the type where repeat customers are likely or whether you must always bring in a steady number of new customers. In the latter case, referrals can be critical for long-term success. For example, a restaurant is more likely to see far more repeat customers than a helicopter tour service will see. But, a satisfied helicopter tour customer may post about your business on travel review sites, recommend it to anyone who has out-of-town guests, or suggest it as a corporate event. If you are currently getting a significant amount of referral business, then you may be able to recoup the losses on the coupon offering. If not, then you may want to pass on offering a coupon deal.
New customers are necessary, but your regular customers should not feel "jilted" in the process. Cultivate a relationship with your existing customers through loyalty rewards and valued-customer promotions. Offer them a discount for referrals. It costs more to acquire a customer than to retain one, so periodically review and fine-tune your customer-care programs.
Converting the Bargain Shopper
Often the extent to which you can generate repeat business turns on whether you can successfully overcome the "bargain shopping" mindset of most coupon users. This means your unique selling proposition and outstanding customer service will compel someone to return to pay full-price for what you offer. See our article, "Business Success Depends Upon Successful Marketing" for some pointers on how to determine your unique selling proposition. It is very important that you understand exactly why your steady customers value your business. What brings them back? Is it your wide selection of hard-to-find products? Or, do you have a signature menu item that no other restaurant offers? Perhaps it is your friendly and upbeat staff? If you don't know what your "regulars" value, find out before offering a group deal. Then, make sure to leverage that information with each coupon-bearing customer that walks through the door.
Your ability to overcome the bargain-shopper mentality will also depend on how many similar businesses in your area offer similar products or services. Unless you have a truly unique business, you are not going to be the customer's only option—or the only one offering a group coupon. The more half-price choices a potential customer has, the less likely they will be to pay full-price unless they have been really wowed by your business.
Zoe, the owner of Tranquility Spa is considering offering 50 percent off on a one-hour massage, $60 for a service that is normally $120. She goes onto the group discount sites that offer coupons in her area and realizes that 10 salons within 12 miles of her have a similar deal currently active. The odds are very high that a customer will use her service only once. After all, why should the customer return and pay full price when they can get a similar service for half-price only a few miles away?
Before offering the coupon, Zoe needs to determine what, if anything, she can do to set her service apart. (See our article, "You Must Understand Your Competition" for some tactics to learn more about your competition.) Perhaps Zoe's best option would be to forego the coupon and concentrate on referrals or more traditional advertising.
Getting Your Name Known—In a Positive Way
Publicizing your business is another viable reason to offer a money-losing group coupon. You may be able to benefit from the reach of the social couponing networks if you are opening a new business, taking over an existing business or introducing a new line of products or services. For example, if your restaurant was closed due to a fire, you might want to offer a group coupon to publicize the reopening. Or, if you have a specialty food store and you have recently added a new line of gluten-free, paleo-diet-friendly products, you may want to offer a coupon to get the word out. However, even if your main motivation for using a group coupon is for publicity, you must still be able to convert those bargain shoppers into loyal customers or referral sources.
Do not offer a coupon deal if you cannot effectively handle the sheer number of customers and the demands these customers may make. Unless your goal is to get a reality TV show based on your business being a train-wreck, you must have sufficient staff, products and poise to deal with higher volume in a way that makes each customer want to return and pay full price for your goods or services.
Let the Seller Beware
What can be a great opportunity for the bargain-hunting consumer often proves to be a disaster for an unwitting or unprepared seller. Offering a coupon deal can be risky business, particularly if your margins are low and your ability to rapidly scale up to meet a spike in demand is limited. If either of these is true in your case, you may want to forego the coupon deals and work to build your customer base using more traditional marketing techniques.
What's been your experience with social coupon sites? Share your experiences--good or bad--by posting your comments below.