What are group buying or deal-a-day companies?

Deal-a-day sites first emerged in 2008 as a unique approach to combating the horrible economic downturn. Sites like Groupon, LivingSocial and DealNation partner with local businesses to help them generate more revenue by offering a steep discount on their products and services that is promoted by the deal-a-day company on its site.

I bet most of you are thinking that this sounds exactly like your traditional coupon – boy are you wrong!

With traditional coupons, the company offering the discount is responsible for the cost of developing, creating and distributing the offer and usually the distribution method is not as targeted or expansive as what a deal-a-day would provide. When using a service like Groupon, there is no cost associated with creating and distributing the deal for your business because that cost is fronted by Groupon. Groupon will design, create, and distribute the deal for you, all you have to do is sit back and wait for your deal to go live and watch the number of people opting into your discount rise.

So what’s the catch?

Well of course a deal-a-day site isn’t going to just promote your company for free! Let’s pretend Blue Magnet decided that it wanted to expand into other business ventures and opened up a boutique donut shop. In order for us to build buzz for our newly found company, we decided to partner with Groupon. We come to an agreement with Groupon to discount a dozen of our delicious donuts normally priced at $20 to $10 – that’s a 50% savings to the customer! Groupon will then split the purchase price with Blue Magnet, meaning that for each deal that is sold we both make $5.

Selling a product that is regularly priced at $20 and only making $5 seems a little steep, doesn’t it?

If you’re looking at it strictly from a revenue stand point, then yes it doesn’t make much sense. But, if you think back to Economics 101, you’ll remember the Opportunity-Cost concept. Sure, Blue Magnet could decide to not partner with Groupon and wait for customers who are willing to purchase our product at full price, the problem is we could be waiting for something that never happens. Or, we could sell our product and make $5, create awareness and build a loyal customer base.

Hotels understand this concept better than anyone; an unoccupied room brings in $0 revenue, so selling it at a discount is often better than not selling it at all. Obviously this is true to a certain level, because at some price point the room will cost more to maintain than the customer pays.

The Good

Most small businesses don’t have the ability to reach out to a large customer database and build brand awareness the way that a deal-a-day site does, and that is what makes this service so remarkable. Groupon utilizes a variety of Internet marketing tools to promote their daily deal. For example, deal is posted on their website, distributed as an e-blast to anyone who signs up to receive daily notifications and is promoted on social media sites. In fact, there are blogs dedicated to promoting daily deals that are completely separate of Groupon’s efforts.

The amount of buzz and brand awareness that is created by Groupon for your company is incomparable! People who don’t even purchase your deal will learn that your company exists and may keep you in mind for future purchases. Think of it as positive PR!

Statistically between 20-30% of people who purchase your deals don’t end up redeeming them! So, while you would like the opportunity for these people to utilize your service so you have the ability to WOW them and turn them into loyal customers, you at least are making up for some lost revenue due to the steep discount.

The bad

The ugly truth is that some businesses have been severely damaged by using a deal-a-day promotion. Groupon does not cap the number of customers that can buy into your deal and there is no way to determine how many customers might purchase. As a business, you have to be prepared to handle a large volume of customers that you may not be used to serving.

Let’s use the Blue Magnet donut boutique as an example again. Let’s say that on a typical day our company produces 1,200 donuts to be sold throughout the day. We go forward and run a deal on Groupon in which 1,000 people purchase the deal and our customer base drastically increases due to brand awareness and customers wishing to redeem their Groupon. For the next few weeks we increase our production from 1,200 donuts a day to 1,500 to try and handle the requests but it still isn’t enough. Then the worst case scenario happens and it is multi-faceted and creates a snowball effect.

Blue Magnet’s donut boutique has more demand than it can handle and this can affect customer service, product quality and quantity, destroy relationships with loyal customers who in the past always had a great experience and fail to convert new customers into “regulars.” People will then discuss their subpar experience with their friends, on review sites and social media. This negative PR could destroy the very thing you were trying to create by using Groupon. Now you have a large number of people who know about you, but have nothing good to say AND you’ve turned away your once loyal customers.

It is important to remember that people who use deal-a-day sites are usually very internet savvy and are active contributors to sites like Yelp and TripAdvisor. In a recent article from HotelMarketing stated that Nielsen research indicates that 9 out of 10 consumers believe another consumer like them more than they believe corporate messaging. This is exactly why you can’t afford to underperform and cause people to write negative reviews – it will be next to impossible for you as a business to then change their minds.

Is a group-buying or deal-a-day promotion right for you?

I think it is up to each hotel to determine whether or not a deal-a-day site is right for them. Like I mentioned before, you HAVE to be able to handle and impress the new customers that walk through your door due to this venture. If this is not something you can guarantee you will be able to accomplish, then don’t go forward with this strategy because you WILL do more harm than good. This is especially important when it comes to your normal clientele because you don’t want to lose the customers who supported you prior to your promotion.

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