Groupon in Retrospect
Note: Unexpectedly, this blog post has spread through cyberspace like wildfire. And I will attempt to respond to each comment as it comes in, though it may take me a few days…
Before commenting on this blog post, please note that the purpose of this post was to explain to our loyal customers who visit our little cafe 1) why we would not be accepting Groupons after the expiration date, and 2) share with the consumer how Groupon works for the business, the actual percentage split between Groupon and the business, etc.
I take full responsibility for my decision, as you will read in the post below. Please do not attempt to interpret this post as me blaming Groupon or our customers for anything. I am merely sharing the experience. The decision to run a Groupon campaign was my own decision, and one I regret. Lesson learned.
And finally, our dear and loyal customer, Lucinda, was taken care of. She is the loyal customer that encouraged me to write this blog post, and for that I thank her.
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For months I’ve been thinking about whether or not to write a blog post about Groupon, and sharing the kind of experience it has been for the business. I’ve been weighing the possible repercussions of such a candid post as well, but after today, and having to decline a longtime customer’s Groupon for being past the expiration date, she asked that I share with everyone the reality of Groupon.
Today one of our most loyal customers, Lucinda, came in and asked if she could use her Groupon that had expired the day before. I felt terrible, but I had to say no. I knew she was upset, and I wanted to explain, but there was a line, and it would take longer than the few seconds we had together there to share why I couldn’t. She came up to me later when there wasn’t a line to tell me that she was really disappointed, that she had been a longtime supporter of Posies through the Mamananda Group, and that this experience made her never want to come back. I knew she felt my declining was personal. So I explained to Lucinda, and now to all of you, how Groupon works for the businesses, and why it has been the single worst decision I have ever made as a business owner thus far…
I heard about Groupon in January of this year from a friend, and after doing my research, I thought the idea was pretty clever. I, the business owner, would offer a discount to the consumers utilizing Groupon’s social network, and we would get noticed by many who may never have seen us otherwise. A great marketing opportunity and way to increase future foot traffic! I assumed Groupon would take a percentage, but that it wouldn’t be that huge… maybe 5-10%? I spoke with John, a Groupon rep, and we started formulating the idea. He didn’t have to sell me on the concept, I understood and thought it was genius. Then we talked pricing. We were going to offer a $6 for $13 (pay $6 and get $13 worth of product) because John told me people really respond to deals that are over 50% discount. It wasn’t starting off as that great of a deal for us, but we kept talking. Then we talked the percentage split. John told me that when the consumer pays less than $10, Groupon usually takes 100% of the money. What?! He reassured me that most customer buy more than the $13, and that we would never have to advertise again after taking advantage of their network. In my mind I thought “false. You can never stop advertising as a business,” but outloud I said, “Ok, let me think about it.”
I hung up and thought it over. I called him back and said we would have to get at least 50% to cover our costs of product… to this day I don’t know why I thought even 50% would be a good deal for us. Maybe because I thought since we were covering our food costs. What I didn’t think clearly enough about was that that margin we mark up is what covers all of our other costs… like staff, rent, utilities, etc. Our overhead is roughly $25,000/month, and this decision was about to make it so that we didn’t cover any of those other costs.
Against my husband’s advice, I decided to do it knowing how many other businesses I admired had utilized Groupon. We were featured on March 9th and sold nearly 1,000 Groupons. When I talked to Lucinda today, she asked if there was a cap on how many were sold to help protect the business from too much loss, and the simple answer is, no. When you sign up for Groupon, you are agreeing to sell as many as get sold… and why would Groupon want it any other way? They get half of the earnings.
We were bombarded the first weekend after our feature because our feature had come out a month late, and unfortunately coincided with the Kenton Library’s grand opening. Over the six months that the Groupon is valid, we met many, many wonderful new customers, and were so happy to have them join the Posies family. At the same time we met many, many terrible Groupon customers… customers that didn’t follow the Groupon rules and used multiple Groupons for single transactions, and argued with you about it with disgusted looks on their faces, or who tipped based on what they owed (10% of $0 is zero dollars, so tossing in a dime was them being generous). Or how about the lady that came in the day of Groupon (though you’re not technically allowed to use them until the day after) and asked for the Groupon discount without an actual Groupon in hand because she preferred to give us all $6 rather than half of it to Groupon. While the idea is noble, this causes mass confusion among the staff and makes it seem that without commitment, anyone should be able to get anything off of our menu for 50% off.
After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month. It was sickening, especially after our sales had been rising. Sure, maybe thinking of it as just marketing may seem justified, but anyone that knows me well knows that I would never pay more than $100 for advertising, much less $8,000, because I don’t believe that regular advertising had much return on investment at all. So the experience jaded me, and the interactions with the few bad Groupon customers we had jaded our staff. After all of this, I find myself not even willing to buy Groupons because I know how it could hurt a business (side note: service industry businesses do quite well with features like this because it is just the cost of time – you are not paying for a product for resale. Resale, in my opinion, get hit the hardest).
In short, to dear Lucinda and anyone else that comes in with a Groupon in hand, please know that our respectful decline of your coupon is not personal. It’s because we cannot afford to lose any more money on this terrible decision I made, and the only saving grace we had was an expiration date.
Jesse,
I wish you and your enterprise well. Clearly, you have paid for an (expensive) lesson in business and marketing. I truly hope that your business survives, as such experience will only prove invaluable to you in the future.
I want to extend my gratitude to you for shedding light on Groupon and other social coupon/buying organizations, and their impact on a business. I’m certain it’s not something many people are aware of, and it may cause some to think hard about the impact their decision to participate in Groupon has.
I, for one, have enjoyed the benefits of social coupons. It’s a great way to explore businesses I’d have never known about otherwise, with less risk.
But there’s a risk involved to businesses–they might devalue their product in the mind of new customers; they might reduce margins to unsustainable levels without building a customer base that will help them recover; they might end up being forced to expand to meet demand, and be unable to drive the cash flow to remain solvent in the process.
You don’t need my advice. And free advice is worth exactly what you pay for it. Nonetheless, I offer this: Remember that it is more expensive to win a new customer than it is to keep an existing one. Precisely because so many of these people have been through your store, you have a touchpoint to get them to come back. Do NOT reduce your price to get them to do so–remind them of the positive experience they had, and exactly why it’s worth coming back for again. That’s the value proposition, and that’s where the repeat business will come from.
Best of luck to you.
It’s weird, because I am interested in internet trends, and saw several references on a website to “Groupons” and couldn’t for the life of me imagine what it was.
Now that I read your story I realise why. This coupon business is almost unheard of here in the UK (I don’t know about the rest of europe). It is quite fascinating that there could be several internet businesses based on the coupon idea in the US, but not here.
Its about darn time someone said this. Thanks for posting your thoughts with the world, this is imoportant stuff to some of us.
Amen. This trend from everyone from groupon and on is really sweeping the sales marketing world. I take calls weekly about why I don’t ever do a deal. 1. I don’t need it, 2. I agree why would I give up that much in sales when you have no promises that it’s new customers coming through your doors.
You can try this though, make them pay the full amount of the discount. I have had 2 companies agree to do this since they are under pressure to get a certain amount of offers. Then set a hard cap on the amount available. They want to do it since they don’t want to take the cost for to many coupons on. With quite a few upstart companies out there following this model you can get great free advertising at no cost to you.
maybe we should use foursquare instead ;-)
http://www.mediapost.com/blogs/raw/?p=3937
Found this through the local seo guide – amazing set of posts and a must-read for any restaurant owner. I am really glad that Posies shared this – it is like a mini-retail MBA education.
I wish Posies cafe the best in their business.
It appears that if the Groupon has expired, Groupon will refund the customer. Perhaps Jessie should tell her customers to contact Groupon for a refund. Not sure if Groupons dings the business back for these refunds, though.
Here’s the math that some are missing:
Coupon = $13
You Pay = $6
Groupon Gets 50% of your money = $3
Business Gets 50% = $3
The business is already -$10 per gift cert, or about $10,000 in in the hole in this case.
I also heard from a restaurant whose website I host and who also participated in a Groupon, that he was paid in 3 installments over a 3-month period.
If that’s true here too, then the business would have to cover the majority of the cost of the gift cert the first month (let’s say 60% of $13,000 redeemed, or $7,800) of product out the door with only $1,000.
Add on labor (additional labor to cover additional traffic), rent, and other costs for the month and these deals are a very steep price to pay. Frankly, she’s lucky it was only for $13 and had an expiration date. There are other deals where far more money goes out the door – image $50 for $25 and selling 1,0000. The business must cover $50,000 with $12,500 (or worse if they’re paid over 3 months). Not many businesses have $37,500 just hanging around in this economy.
Some of these coupons/gift certs do not get redeemed, so the business can pocket the $3, but my guess is that this is not a very high percentage.
To make money out of this, the business really needs to have a plan of action on how to get customers back, which some have done. Seems that to break even here, Jessie would need have enough new customers to generate at least $10,000. It would be interesting to see the average lifetime value of a Groupon customer – my guess is that it’s not very long, since many seemed only interested in the next deal.
I think Groupons can work for only certain types of businesses, situations, or for very specific packages. For example:
1) New businesses where you need to advertise anyway to get the word out,
2) High margin businesses where you can give away some profit
3) Businesses like dentists, where you’re almost guaranteed a revisit after that discounted teeth cleaning or the customer is mostly likely to come back and pay full price,
4) Venues like museums where most of the cost is fixed.
5) Very targeted discounts at time’s you’re normally slow, or for higher margin products that you’re able to pair up, as some have mentioned here.
Hope Jessie can recover quickly and flourish.
Sorry for the long post. Best of luck to you!
Hey Jessie,
I applaud your candor and courage, to post an expose about customers, Groupon, and the effects of running a promotion of the sort on your business. I can certainly appreciate how it would be a huge shock to have to absorb $8K in costs to run a deal to gain new customers. What do you do about more social media focused marketing outreach for Posie’s? I see that you have a Facebook community page, but is there a Fan Page for it too? I bet you’d have a lot of fans rallying around it after the buzz around this post…
If you want to chat more about getting a Fan Page up and starting to reach out to your fan community on Facebook, give me a shout, you have my email. I would love to talk to you– we do a lot of studies with small businesses and would love to get you involved, we can put up some of our promotions on a fan page for you (on us) and see how it goes– it helps us to gather material that we use to publish posts on our OWN blog with actionable advice and tips for marketing on brand Facebook fan pages.
I’d love to hear from you!
Maya
Advertising and specials should serve specific goals. Advertising should be for a specific audience, the audience that wants your product and will return again for your product because of the value and experience you offer. Specials are for gaining more traffic from your regulars and entice potential customers to see the value and give you a try.
in my opinion, Groupon doesn’t appear to target a specific audience. Finally, don’t forget your regular customers if they dine there regularly, pay & tip, etc they can be your best goodwill ambassadors, offer them an incentive to recruit for you. I have done this for my fellow business and rarely never used the offers. Why? Because if I wanted the business to be there for me I need to be there for them.
Jessie, this is an interesting post, thanks for providing insight into the Groupon business model for those of us who haven’t been solicited by Groupon or their many competitors.
Taking off my marketing hat and putting on my customer hat, I admit that I use Groupon and several similar services. As a fairly new resident in my city, these have been great ways to get me into some establishments I might not otherwise try out.
I do always tip on the pre-discount bill and abide by any restrictions. I’ve seen a few restaurants specify a tip % that will be added right in their coupon offer. That’s one way to avoid some pain, though I’m sure a few customers object even though it’s right there in print. Some people are jerks, and will assume that whatever terms you state don’t actually apply to THEM.
I’ve found some restaurants that I continue to patronize. I’ve found a few others I enjoyed but that didn’t seem like a great value at full price; those, I will save for special circumstances/occasions. And a few were just duds – bad food or bad service. Those businesses wasted their marketing dollars by paying handsomely to get me in the door and then doing a poor job.
The key to making this work, I think, is to have a successful operation to begin with. If business is slow because people don’t like something – location, prices, service, or food – driving a bunch of new traffic at great expense will be a total waste. On the other hand, spending money on a social service like Groupon might be more effective than, say, buying print, radio, or TV ads. Groupon (and clones) will definitely get people in the door where you have the opportunity to convert them into repeat customers. Media buys come with no traffic guarantees.
Best of luck!
Roger
I’m appalled by the heartless, and to some extent even ruthless comments made here. As a small business owner I, too, have to be careful to watch every penny, so I commisurate.
I’ve been suspicious of group buying coupon sites like Groupon for the simple reason that, to lose money with every sale makes no sense. Call it an advertising expense if you want, but for small businesses, it’s a risky proposition, especially if you’re not given the opportunity to cap the number of sales.
Not only that, I’m convinced that people are more loyal to the deal sites themselves than the businesses being represented. Plus, as one commenter said, it lowers the value of your good and services (and possibly your brand) to do so.
If you’ve got a large advertising budget, or high margins on products, that’s one thing. But, if like most SMBs, the converse is true, I don’t see this as a winning proposition.
Frankly, I think there are better ways to approach it. For example, you’re in the Denver area. Right up the road from you, in Boulder, is a startup called Loyal2.me, a customer loyalty program that puts the merchant much more in control (and much less at risk by virtue of that). I know the founder personally and believe that he has keen insights to the liability of using the group coupon approach.
Several commenters want to kick you while you’re down with a bunch of “should’s” and “oughts.” I want to commend you for your honesty, candor, and transparency. You’ve likely saved a number of small business owners from suffering the same fate. Thank you!
Best of luck to you, Jessie. I’ve shared your post with a few people, and at the very least, it’s thought provoking. As a small business owner myself, I feel your frustration. It’s so tempting to get such exposure and rapid growth through the internet. At the same time, exposure is also a euphemism for vulnerability.
Discount marketing has pitfalls. Some businesses are set-up to take advantage of it. It sounds like you’re not. (I know that my business isn’t, which I’ve also learned the hard way). Despite knowing that, I know how tempting it is to take advantage of discounts and coupons… I know a coupon will lead to a few sales here and there when I just want to see more orders… and it’s not my customer’s fault for taking advantage of a discount.
I hope this is just a speed bump, and you’re able to move past it quickly. As a side note, I think you have a beautifully written blog. Don’t worry about people who need to TYPE IN ALL CAPS to get their message across. What strikes me is that you have more than $8,000 in savings, and you believe in your business enough to use it. Bravo, keep it up, and good luck.
@Zeljko Dakic – You really don’t get it. You work in the online space, where margins pretty much don’t exist. I’ve worked in the online space for years now, but come from a restaurant background (i’m a trained chef, in fact).
Your biased argument it totally ignorant of the realities of running a restaurant day to day. She’s being honest, and I’m totally floored that ANY restaurant ever gets involved with groupon. It just doesn’t make sense.
To the owner of Posies, I feel for you. It seems like a nice idea on paper, but i really don’t understand how it can be profitable for many verticals.
If Groupon brought you over 1,000 proven customers through your doors you should definitely do it again. This time, make the Groupon work for you on better terms and prepare your business better for the success of the Groupon.
After all this hype coming from the competing blog posts, I would suggest you could get much more than 1,000 customers by running the campaign again. You might also be able to negotiate a better discount from Groupon because you weren’t happy the first time :)
@Jay:
In addition to the $7 lost via discount, Groupon took $3 from each transaction. So there’s a loss of $10 per Groupon.
Groupon like so many other bully sites ie Yelp only care about their profit and only their profit.
Money makes evil out of any good intentions.
However, one needs to protect themselves by doing due diligence to make sure service can be rendered and equitable. But also don’t forget that this was a PR move. You should see benefits over time.
Good luck to you.
When you say that it was against your husband’s advice, it makes me kind of wonder. Did he crunch the numbers and then tell you that it was a bad deal, but you went ahead anyways because you FELT that it was a good deal, and you innately believe that YOUR FEELINGS trump any math?
I ask because I too tried to run a business with my wife, and kept running into this situation where I would crunch the numbers and PROVE on paper that a deal was bad, only find out later that she had gone ahead and made the deal anyway because she FELT that the deal was good, so she wanted to make it.
If that was the case, you now have proof that feelings do not trump the cold reality of the math.
Needless to say, the business failed, and now I have told my wife that she needs to work for someone else, where she has NO authority to unilaterally make deals, especially when the numbers do not add up.
I am still not sure that she gets the point, but as this was leading to a divorce, I think we have come to an understanding. At the very least, she no longer has anything to do with my new business, except to share in the profits that sensible decisions are bringing in.
Stores should not honor invalid coupons.
Interesting post. I can see both sides of this. I wonder though – have you ever used Entertainment or a newspaper’s discount program? Entertainment Book (and no I don’t work for them) states up front that tips should be calculated upon total cost BEFORE discount. Groupon should be doing the same.
At any rate it is commonsense to do so. However one also has to look at these things by taking into consideration the whole picture. What type of area are you located in? Are people there usually going to the cheapest restaurants? I’ve always used discount programs to try new places and some I return to while some I won’t patronize again. Part of that has to do with staff attitude. It is the owner’s responsibility to train their waitstaff properly. These days if you go out to eat invariably the waitstaff or person behind the counter will try to sell you a drink before you even sit down. Upselling is part of the process of most any business. And that’s the key. Entertainment Book, Newspaper discounts or Groupon – the staff still has to upsell – to a more expensive entree, an additional drink or a dessert. Yes there will always be those customers that will stiff you but you also have the opportunity to gain more customers that will repeatedly return to your establishment.
As for GroupOn – you did not do your due diligence. First you should have limited the amount of coupons one can purchase to 2. Following is a snippet from the front page of today’s Springfield MA GroupOn offering:
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The Fine Print
Expires in 1 year
Limit 1 per person, may buy 2 additional as gifts. New customers only. Registration required. Must use in full within 1 month of activation. Not valid for private sessions.
See the rules that apply to all deals
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When you go to The Rules (highlighted in Blue) you get a list of rules that include the following:
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The fine print says “Limit 1 per person” and “May buy multiples as gifts.” Can I buy myself some Groupons as gifts to myself and use more than one?
No. If the fine print says this, you can only redeem one. If you buy more than one then you have to give them away as gifts to other people.
How much should I tip when I redeem my Groupon?
Please tip on the full amount of the pre-discounted bill.
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This tells me that you, as owner of the restaurant, did not set up your fine print section properly nor did you read The Rules. Had you done so you could have printed out The Rules to deal with the “bad customers” and you also could have put the following into The Fine Print: “A 15% service charge will be added to the total of the bill prior to discount.” That would have handled customer stiffing your waitstaff.
Yes there are a lot of crude and rude customers out there that do not know proper etiquette. Yes there are people who will try to take advantage of you. (I have had that many a time in my business.) But if you stand firm something like GroupOn can work very well for you.
I think you have were blinded by this free marketing hype, that you just fail to calculate the numbers in the detail. Many commenters have already addressed the corre t math so you can get inspired for the next time.
But through this blog post I think you have acconplished what you originally wanted. Your coffee is now famous. Congratulations!
So let me get this straight,groupon pushes that in order to promote your business you offer a product at a discount of which groupon keeps all the remainder of the money if it is under 10$, so it is in effect free to the costumer ( no matter which cost is it to you) , this offer is valid for X months with no cap on the amount sold?. SO what you are doing in fact is buying an uncapped cost ad in their webpage, in the form of a virtual currency that they print and collect and you redeem. Anybody else sees “cui bono”? why not just call it businessgivemeyourmoney.com? outrageous.
I still don’t understand why Lucinda was a day late if the coupon worked for six months? Had she not been in the business for 6 months?
I am coming from the side of a GroupOn user. I do not own a business. I have purchased several Groupon deals for myself as well as giving them as presents.
PROS
1. I have maybe never heard of your business before. I am willing to try it at a discount. YOU get to decide that discount, it doesn’t have to be 50% off. Even a 10-30% discount could drive new traffic there.
2. After using the Groupon, I now have experienced your business. I may want to come back and come back often. Do I expect a discount next time? No. Do some people, Yes. That is how people are.
3. I have told friends about your business and maybe highly recommended you to them. Do they go? Maybe, maybe not.
4. Not everyone uses a Groupon. Unused Groupons are 100% profit for you (and Groupon). I have had Groupon coupons expire. My loss, your gain. AND, I still know about your business and probably still want to try it or may even speak of it to someone.
5. Not everyone buys a Groupon, but sees it on the Groupon site. That’s advertising. How much did Groupon charge for those 50,000 views on that page? Nothing extra. Could you get that large number of people hearing about your business another, cheaper way? If so you need to get into marketing business then!
CONS
1. You lose money on every sale, and there is no guarantee for repeat traffic.
2. You need to put more stipulations on the coupon to reduce potential losses (eg: tip is automatically added onto your bill, minimum purchase of $XX, not valid on Friday when you are the busiest). Be UPFRONT, and let people decide if they still want it.
3. Long time customers feel slighted. Maybe you should take more interest in those reliable customers by giving them a discount once in a while to show how much they are valued. Slip in a 10% off your next visit coupon with their check or receipt.
OTHER
Someone comes in with a recently expired Groupon? Say sorry, and offer them a free “whatever” with a purchase or even 10% off. You already made that money off the Groupon. If they decide to leave, no loss, but may never come back and have negative feedback to others.
I know the unused Groupons are projected into the cost/earnings and businesses using Groupon count on a good percentage not being redeemed. What’s better: someone walking away with an expired coupon, or someone purchasing something at a slight discount at a profit to you.
There are a bunch of sites similar to Groupon. Why not trying one with a smaller # of redemptions? I don’t know what rules Groupon imposes.
Only you know what your business costs and how much you can afford to discount. Groupon is in the business to make them money, not you money. In the future, maybe Groupon will need to do some profit-sharing with the businesses that use them. If X% redeems the Groupon, then Groupon gives some money back. Whatever it takes.
Dear Jessy,
I think you are a little harsh on what Groupon has to offer to businesses.
As you say, the campaign you did with Groupon, brought you 1.000 new customers. Furthermore, imagine how many people (visitors of groupon site) saw you this day, so you also have to calculate the reach of possible customers that you offer/campaign did through Groupon.
Lets clear things up:
1. If you had not done this campaign you possibly wouldn’t have acquired 1000 new customers and thus 1000 new customers to serve.
2. Your expenses include payrolls and maybe rent so its better to earn a few bucks to be able to pay these than get 0 or very few bucks. Think about it.
3. 1000 new customers is an important number of new customers
4. If you are smart, you need to be able to make these 1000 new customers visit you again making them loyal customers.Remember, t’s up to you!
5. Your office issues, misunderstandings with customers, means that before agreeing of doing such promotion you have to think about all possible positive & negative scenarios. I am sure you did not did that.
The business is yours and you set the rules. Try to be more proactive and smart.
Good luck!
Thanks for sharing. Ever since first seeing Groupon I have been concerned about its potential devastating effect on businesses and on how it will train consumers to behave in ways that will make it hard for businesses to stay open. I think you have done a great service for others by sharing your opinion.
One tiny point though, I really don’t think it’s any better for service industry businesses simply because it’s “just the cost of time”; payroll if often the biggest expense many small businesses have so I would say it’s likely worse for service industry businesses than for product businesses. And if it’s the owner’s time, well they have a finite amount of time to produce to really I think service businesses would get killed by group on, not be better off. That’s not to discount Groupon’s negative affect on a product business but instead simply point out how Groupon is likely bad for every business, not just some.
I feel bad for this business. I can’t believe it cost her $8,000! I was approached by a company like this to run a teeth whitening promotion. Glad I held off. Seems like it would just cannibalize my existing business.