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Apr 11

Riding the group buying train

RENEE WEI

When the Coca Cola company ingeniously introduced printed coupons more than 120 years ago, no one imagined that coupons in the 21st century would have taken a brand new direction and be sent around the world through the internet.

Taking an advantage of a returning frugality among consumers, Groupon, an online discount site that combines “group” and “coupon”, began operations in November 2008 in Chicago. It has grown faster than Ebay, Yahoo and Google, operating in 45 countries, with 70 million subscribers and offering 900 deals each day.

For small local businesses, it provides the opportunity to create buzz around their brand and products on a low marketing budget.

“Groupon began offering deals in Ottawa on August 11, 2010,” said Groupon spokesperson Chris Nason. “Since that time, we have worked with more than 220 local businesses and have more than 175,000 subscribers.

Those subscribers receive discount offers of 50 per cent or more off posted prices every day.  Such deals are available only if a minimum number of consumers finish the transaction by buying Groupons online. For frugal buyers, the savings can be large. Groupon, after all the deals are sealed, pockets 50 per cent of all the sales. Many say it’s a win-win-win situation.

Dr. Umar Ruhi, assistant professor of management at University of Ottawa, believes that, if used appropriately, Groupon can be an effective sales promotion platform for small businesses.

“For small local businesses, it provides the opportunity to create buzz around their brand and products on a low marketing budget, reach new customers, and moreover, reach a younger demographic if such target market is desired.”

Groupon’s power rests on the popularity of social media promotion platforms, but getting customers to the door is only the first step. Groupon can also spur sales volumes of new products, because consumers tend to spend more than the value of the Groupons.

Nason said that 84 per cent of Groupon deals had over spent, that customers on average spent 59.6 per cent above the Groupon value across all categories, and “80 per cent overspend in restaurants alone.”

Compared to traditional advertising methods, Groupon has its advantages.s.

“In terms of its efficacy as an advertising platform, cost of using Groupon is based on performance, and the campaign results are easily tracked via impressions, clickthroughs, sales, and redemption,” said Dr. Ruhi.

While there are clear winners in the Groupon game, the online deal website is not for every businesses. There are many things to consider before jumping on the Groupon bandwagon.

HIDDEN EXPENSES

Working with Groupon doesn’t cost anything up front, but it can get expensive as the deal advances. Typical deals are discounted by 50 per cent. On top of that, Groupon keeps another 50 per cent of all sales. Thus, businesses only earn around 25 per cent of what they would normally make.

There may considerable opportunity cost associated with cannibalization of sales from their regular clients when businesses are unable to serve their regular and loyal customers due to the influx of Groupon customers who may be one-time deal seekers.

In addition, administrating a Groupon campaign costs money. However, some types of businesses would make more from Groupon deals than others. Dr. Ruhi says that Groupon works best for a business “with a low cost of goods sold and with highly perishable products, or those experiencing difficulty in generating sales volumes”. While restaurants that mark up menu prices significantly beyond the cost of ingredients can be good candidates for Groupon promotions, Dr. Ruhi suggests service industries be cautious.

A September 2010 by Rice University in Houston, Groupon users poor tippers, often existing customers and typically did not spend more than the face value of the Groupon or return for repeat purchases.

“There may considerable opportunity cost associated with cannibalization of sales from their regular clients when businesses are unable to serve their regular and loyal customers due to the influx of Groupon customers who may be one-time deal seekers,” said Dr. Ruhi.

PLAY OFF THE COMPETITION

Groupon’s success has spurred competition, and the two biggest web sites available for Ottawa businesses are Living Social and Kahoot.

Kahoot is the newest player, launched in September.

“Our sales force is from Ottawa … we make it a very important focus to make sure all the workings of the deal work for the business involved,” said Kahoot CEO and founder Ryan Wilby. “We are here to help, day or night and will be with the clients every step along the way.”

Before signing up, though, businesses should be cautious.

“(Businesses) should consider the subscription base of the service provider, the revenue sharing details, the transparency of the campaign in terms of click-throughs and sales,” said Dr. Ruhi.

“Additionally, businesses should look for tools and features that facilitate sales promotion campaign management. These include contact list generation, coupon tracking etc.”

BE PREPARED

Whatever site a business selects, the power of group buying can rally significant numbers  to its store. The high traffic in a short period of time can be overwhelming to businesses that are not prepared.

“The most successful Groupon merchants are those who know their businesses and are honest with themselves and Groupon,” said Nason. “You can always put a cap on the deal to ensure you only sell what you’re prepared to handle.”

Dr. Ruhi has another suggestion for business owners.

“They should take the time to perform a cost-benefit analysis and a break-even analysis based on sales volumes with price discounts and additional resource costs.”

But overall, businesses should realize that the focus of a group sale campaign is on building relationships, rather than transactions.

“Businesses need to plan and execute campaigns so that they can prolong their interactions with Groupon customers,”said Dr.Ruhi, “and to also incorporate elements that would help them convert a Groupon customer into a loyal customer.”

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