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Deal of the Day

Author: Karen Hart
May, 2012 Issue

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Merchants are finding social coupons to be an incredible marketing tool.

 

What’s the hottest new marketing trend? Social coupon websites, which offer daily deals. In the last few years, there’s been rapid growth in these websites promising deep discounts for local services and giving consumers a daily deal. Want to try out that restaurant you’ve driven past hundreds of times but never stopped? Or, get a massage at a place you thought was too expensive? How about taking a hot air balloon ride? Looking for a getaway? Social coupon websites also offer package deals for rooms and airfare.

The daily deal industry was initially created in 2008; the idea was born out of a social activism website called ThePoint.com. The website, founded by Andrew Mason (now founder and chief executive officer of Groupon), was first designed as a place for people to come together to affect change. The idea was that a coordinated group could have a larger impact than people acting individually. People were able to pledge time or money for a campaign, but that pledge would only be redeemed if it was actually going to affect change (this is the “tipping point” model that inspired Groupon). Together people could, for example, raise money for a cause, get rid of high-fructose corn syrup in processed foods, or create a new national holiday.

The point of ThePoint.com was to get people to work together toward a common cause, says Chad Nason, a spokesperson for Groupon. However, Groupon, the collective buying concept which started as a side project of the The Point, “was an immediate success with subscribers and business owners,” and eventually took on a life of its own, he says.

Groupon’s daily deal was the antidote to a common problem for most consumers: So many things to do and see, so many places to eat and shop, but where to begin. With too many options, many consumers often rely on what they’re familiar with and continue to shop and eat at the same places. Daily deals encourage consumers to try something different…at a discount.

With Groupon, a minimum number of people must purchase the daily deal for it to tip. “The tipping point is the minimum number of people needed to buy the deal before it becomes active for everyone,” says Nason. “Now, we have so many subscribers that virtually every deal tips.”

 

Explosive growth

Today, Groupon has more than 140 million subscribers worldwide, and the company is available in 45 countries, including Australia, Germany, Denmark, Spain and Brazil. Since Groupon took off, a number of similar sites have also taken the marketplace by storm including Qponomics (which uses your smartphone’s GPS to target deals to your location), family focused Plum District, SocialBuy (now part of kgbdeals), LivingSocial and more. These daily deal sites promise high customer demand in return for a deep discount to consumers and a percentage of the deal to the sponsoring daily deal site.

“It’s great for local business owners looking for new customers,” says Nason, “and we’ve always been excited to work with local merchants. Groupon is an incredible marketing tool.”

Another daily deal provider, LivingSocial, began in the summer of 2009. Today, it has 46 million subscribers and a deal is offered every day in more than 600 markets worldwide. “We help members find the coolest thing to do in their neighborhood or city at a price they can afford,” says Jody Gavin, a spokesperson for LivingSocial. “We’re on the pulse of what’s cool, unique and fun to do in your city at a price that’s of great value.”

Why are daily deals taking the world by storm? “People are always looking for value,” says Gavin.

As a consumer, once you join a daily deal website, you can take advantage of significant discounts for local goods, services and events. The daily deal for a massage at a spa, for example, might be $75 rather than $135. If you’re planning a vacation, you can also take advantage of the daily deal in the city where you’re traveling, so long as that city participates in the program. Everyone who signs up for a particular deal has his or her credit card billed. The day after they make their purchase, they’ll receive a voucher via email and can print it out, or they can access it via the Living Social app and bring it to the merchant.

 

Why daily deals work

Why do daily deal websites work? It’s all about volume and marketing. Consumers get a deal on virtually everything from meals out to spa treatments. And it’s a great way for merchants to market their business to new customers. The consumer gets to try a new service, product or experience at a discounted rate; the merchant gets the opportunity to market their business; and the daily deal website gets a percentage of the deal. It’s a win-win-win for everyone who participates.

The most popular services among daily deal users are restaurants, salon services, spa treatments and experiences (such as visiting a museum or getting a membership at an aquarium). But any service is fair game. LivingSocial, for example, recently ran a deal for a new patient exam and dental checkup for $49 at a participating dentist in the Napa/Sonoma area.

 

Rice University study

Is there a downside to social couponing? Daily deal websites such as Groupon are popular with shoppers, but they might not be as big a hit for businesses, according to a study by Rice University’s Jesse H. Jones Graduate School of Business in Houston, Texas.

The study found that Groupon promotions were profitable for 66 percent of the businesses surveyed, but they were unprofitable for 32 percent. More than 40 percent of the respondents indicated they would not run such a promotion again.

Utpal Dholakia, author of the study and professor of management at the Jones School, conducted surveys with 150 businesses spanning 19 U.S. cities and 13 product categories that ran and completed Groupon promotions between June 2009 and August 2010.

The study showed that having “satisfied employees” was the key factor for the Groupon promotion to work successfully for a business. If employees remain satisfied through the promotion, the likelihood of profitability is significantly higher. The study also found that the percentage of the discount offered and the number of Groupons sold didn’t predict the deal’s success in terms of profitability, nor did the percentage of Groupon users who purchased beyond the Groupon’s value or purchased again at full price.

What is Dholakia’s advice to merchants who are considering using a social couponing website? “Do your homework,” he says. “Make sure you’re able to manage a large influx of customers, and make sure employees are compensated for their work.” According to Dholakia, social coupon customers tend to be deal seekers, and bargain shoppers and may not tip as well as an average customer or be willing to purchase beyond the deal.

Dholakia also recommends that merchants keep track of the coupons or voucher being redeemed. “Some people come in and use the coupon again and again, and that hurts business. There’s no way to know whether the coupon has been used unless you record the number on it,” he says.

According to Dholakia, there are three other strategies merchants can use to take full advantage of a daily deal promotion. First, use promotions to build relationships with new customers, rather than focusing so much on a one-time transaction. For example, instead of offering $60 worth of food for $30, parcel it out to offer $20 worth of food for $10 over the customer’s next three visits. Second, don’t offer discounts on the total bill. Instead, offer a specific discount for various products or services. And finally, choose items judiciously to sell new items or unfamiliar services through the promotion.

 

What does the future hold?

Daily deals are here to stay, according to a report by Dholakia and Sheryl Kimes of Cornell University in Ithaca, New York, released in September 2011.

According to the report, daily deal users have an unabated, even extreme enthusiasm for the daily deals concept. The heaviest daily deal users were found to be the most enthusiastic—they look forward to receiving their daily offer, strongly believe they’re saving money on things they usually buy, and they’ve integrated daily deals into their normal shopping behavior.

“Merchants often say people will walk in with their Groupon and say, ‘I’ve seen your place, but I’ve never been in,’” says Nason. “You get an incredible spotlight shining on your company [by offering a daily deal]. Hundreds of businesses in the North Bay have participated.”

 

North Bay merchants get on board

Many North Bay merchants are already on board with the social coupon frenzy. Here are a few businesses that decided to market themselves through a daily deal website.

Jon Seeger, owner of Boskos Trattoria in Calistoga, found Groupon to be a successful way to market his business to new clients. Boskos, which originally opened in 1983, offers Italian comfort food at reasonable prices. “I think we’re the oldest [existing] restaurant in Napa Valley with the same owner,” says Seeger. “When we opened, we were the hottest thing and didn’t discount.”

Over the years, Seeger found that other restaurants were offering discounts to get more customers in the door. “I fought it for years, but after talking with other business owners [who had tried Groupon], I decided to try it. We’ve become a discount world.”

Boskos promoted Groupons to subscribers in both May and then again in August 2011, offering $50 worth of food for $25. The result? Seeger sold more than 1,000 Groupon deals. So far, 383 subscribers have redeemed their Groupon and the average check on redemption was $70.96. To keep Groupon customers coming back, they were also invited to sign up for Boskos in-house promotion, Boskos Table of Friends, for additional discounts and offers, which they receive via email.

Since using social couponing, Boskos has enjoyed increased website traffic. What’s more, some Groupon subscribers who came to the restaurant started writing about their experience at Boskos on Facebook and Twitter. Seeger also monitored Yelp.com and found that Boskos had 300 hits in May and 270 hits in August.

“Groupon has exceeded my expectations,” says Seeger. Boskos Trattoria is now on board with social couponing as an effective way to get new customers in the door. “Paper ads and radio don’t work nearly as well, and there’s no way to really track if they’re working.” On the other hand, when a new customer comes in with a Groupon, Seeger sees first-hand how his current marketing strategy is working. Regular customers also take advantage of the deal. “These are once-a-week customers, and they’re happy and excited to get the discount,” he says. According to Seeger, his servers have already noticed that some Groupon customers are now repeat customers.

 

Casting a wider net

SkinSpirit Skincare Clinic and Spa, located in Mill Valley, Walnut Creek and Palo Alto, has also had a positive experience with social couponing. “When social couponing hit the area last year, we watched to see how it was going then took a leap with LivingSocial in September 2010 at the Walnut Creek location,” says Stacey Yates-Sellar, who serves as director for all three locations. For the first deal, SkinSpirit offered a massage and facial at a 65 percent discount and sold 700 vouchers.

“It’s a great avenue for a business to find new clients,” says Yates-Sellar. “Everyone is watching their money so carefully right now, and people want the opportunity to have a reduced-risk trial. The key is to make sure you get the price point low enough that potential clients will try your service, but high enough that you’re not devaluing your service. The goal is to attract clients who will be repeat customers when they see the value of what you’re offering.”

Since social coupons have hit the North Bay, Yates-Sellar has tried a number of daily deal websites. What advice does she have for North Bay merchants? “Don’t hesitate to try social couponing, it’s a great way to market your services and products to a large demographic at one time. If you know your business and market, [a daily-deal website] lets you throw your net wider.”

Even if a potential customer doesn’t purchase the voucher online, you still get great exposure, says Yates-Sellar. “If you’re featured on [a daily deal website] branding to a half million people, that’s a half million people who just saw your name and what your business does.”

 

Long-term gain

Lavender Hill Spa in Calistoga was looking for a way to increase exposure without having to pay a lot of money to advertise. The spa offers massages and body treatments for everyone, but mostly markets its business as a garden spa for couples. “The spa is a small, family-owned business, and the owner wanted to do something big but didn’t have a lot of money to advertise. The ultimate goal was to increase our exposure,” says Jennifer Mickey, general manager at the spa.

According to Mickey, the cost of running an ad on a website runs about $5,000 annually, so she decided to try Groupon. Lavender Hill’s romantic setting features three small cottages, and is only set up to handle eight clients at a time, so offering a deal-of-the-day experience through a social couponing site posed a bit of a challenge. “We offered a $40 certificate toward an $85 bath treatment and sold out both times,” says Mickey. The key, she says, was to limit the number of Groupons to 300 so they could handle the flow of potential new customers. “At first, I was nervous about selling so many Groupons, but we may increase the amount next time,” she says.

They also offered Groupon customers additional deals and discounts when they visited, including 25 percent off spa products for the day and another coupon for their next visit. What’s Mickey’s advice for merchants thinking of trying a daily-deal website? “The most important thing is to position yourself correctly and use it more as a marketing tool. Be clear about the number of Groupons you want to sell.”

It’s not about the initial income, it’s about generating exposure, she adds. Lavender Hill Spa is more of a destination than the kind of spa that attracts regular customers. “Groupon is a great marketing tool, but it will be a year or two before we see return customers.”

Lavender Hill Spa hoped to get more exposure through Groupon, and sales did increase during the months they featured a promotion. “We had a 5 percent increase in income while running Groupon deals,” says Mickey. “Our last Groupon expired in August and we saw a drop in income [when it expired].” As a result, Lavender Hill Spa has already scheduled another promotion.

How does marketing through social couponing compare to traditional advertising? “With Groupon, it’s really clear how many people purchased the Groupon and how many people came in,” says Mickey. “In this economy, it’s reassuring to see that [our marketing efforts are] working.”



 

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