Consumers want a good value. Businesses want consumer dollars. Group buying deals from companies like Groupon or Living Social strive to bridge this gap by appealing to businesses and consumers: the former get a burst of cash and exposure while the latter gets a bargain. The proliferation of copycat sites suggests this is a potentially lucrative business model, but what’s overlooked is the wider gap between the business and the consumer.
Suppose you own a small spa and you launch a Groupon deal for $100 worth of services for $50. You will pocket half of the value of each coupon, so now you are only making $25 for that original $100 service. You’re providing the service at a quarter of its value, but you’ve hopefully gained mass exposure. Acquiring new customers is pricey for any business, but with an established deal site like Groupon (with 25 million subscribers), you’ve created awareness in a more efficient manner than traditional advertising.
The true value of the deal, however, lies in its ability to attract repeat business. Once the guest redeems the service, how likely is he or she to return? According to Utpal Dholakia of Rice University, two-thirds of businesses said their Groupon deal was profitable, but less than 15% of customers returned.
A friend of mine who owns her own yoga studio in Chicago once offered a flash sale through a social commerce site. The sudden burst of business seemed great, at first. However, those who redeemed vouchers booked prime appointment slots, depriving spaces for her regular paying clients, and few of these coupon-carrying yogis returned the following week. Her primary complaint was that consumers who subscribe to group-buying sites may be loyal to the site more than to the business they try at a discount.
The guest experience may also be affected. On her recent foray into Groupon deals, shoe company owner Nicole Tongson said, “It’s hard to believe that a small salon or restaurant that’s servicing 1,000-5,000 clients extra in six months can hold up to the same standards of customer service as they did prior to running the promotion.” It’s tough to know the answer to that without quality assurance measures in place on a regular basis.
A flash promotion is great for a one-time surge in business, but spas need to give them plenty of forethought. What’s being promoted needs to be compelling enough to spark new interest in a product or service. Eric Clemons, a Wharton professor, notes these deals are advantageous if your service is better than what the market perceives. If the quality of that $100 spa deal isn’t already perceived as being worth $100, then the market dictates it is in fact a $50 value, and your customers will only return at the discounted rate. Daily deals can offer that quick influx of cash, but only unique or interesting offers coupled with high levels of customer service will generate the customer retention and loyalty most spas are seeking.