Tuesday, December 7, 2010

GroupOn and other discounters

I don’t know enough about this but read a local article (which is behind a paywall at SBJ.net so I can’t link directly to it) which highlighted this type of service and a business my daughter used to work for.

Found myself asking lots of questions.

Here are some salient facts:

Promoter/Discounter (Groupon or similar) offers half-price deal for local businesses. Retail value $30. Cost to on-line customer $15. Promoter pays business 50% of gross retail ($7.50). Promoter pockets $7.50 for every transaction.

Who wins? Of course the consumer/customer. They get something for ½ price by simply giving up a little bit of personal information. Groupon or whoever promotes it wins – they pocket $7.50.

What about the business? Back to my daughter. In her case the business in question paid used to pay her about a 40% commission on any service she completed. So if the retail was $30, she got $12. So the business had to pay her $12. The same business now only gets $7.50 from the discounter so they immediately lose $4.50. And reading the fine print – the deals don’t happen unless a minimum number of on-line sales are made so the business has to be prepared to handle that many sales (at a possible loss.) In a specific example cited in SBJ, 62 discounts were sold – do the math: the salon started with a net loss of $279 that they had to make up somehow. And remember this is all before overhead and supplies. The deal in question was for a haircut and blow dry so not too much else beyond shampoo but …

I understand marketing and loss leaders. If the business is able to upsell the customer who walks in with a discount voucher, OK. But as my daughter tells me from her years of experience in this type of trade, most customers who use these, don’t come back, they are hard to upsell and they often don’t bring ANY cash to buy anything else or tip.

You’ve heard the phrase “We’ll make it up in volume”? But that implies even a small amount of profit on any transaction. Make enough transactions and you can still generate some decent revenue. But when every most customers who walk in the door actually generate a net loss, not sure how volume is going to help.

So in my ignorance and in the midst of all the hype (think I heard Google was buying up Groupon – well a quick Google indicates the deal is off – SIDEBAR TRIVIA - Google the word Groupon and you don’t get the Groupon URL in the top ten, Hmmm…) this seems like something that doesn’t quite work for everybody.

Curious how this will play out in the long run.

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