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.

One of the most distinct trends of 2010 and one that is on everyone's watch list this year has been the rise of private & group sale sites, the most noteable being Groupon. The CEO of Groupon, Andrew Mason reports that in 2010 their newly created business did over 760 million dollars in revenue and began 2011 with over 51 million subscribers world-wide.

Awed by the success of Groupon, local businesses and hoteliers alike have been trying to devise how—and if—they should participate in this new trend.

Most hotels are hesitant to wade into those waters, and rightly so. These "Online Private Sales" companies such as Groupon, LivingSocial, Rue-LaLa etc are emerging every day. The companies approach hotels soliciting their participation but there are more negatives than positives in the debate:

• Not True Private Sales: These so called "private sales" are questionable. Anyone can join the networks, and it just takes just one local negotiated client to sign-up for these deals to destroy the trust hotels spend months or years establishing.
• Huge Discounts: Some of these sites demand discounts of ~50% in order to participate, and then reap substantial margins of 20% or more. This limits the net revenue to very little per room.
• Hotel Best Rate Violation: At this deep discount, these companies advertise lower prices than on hotel's Brand.com which is a violation of the hotel's Best Rate Guarantee.
• OTA Rate Parity Violation: Online Travel Agency (OTA) partners realize these channels are also competition. As such, they closely monitor these channels and as soon as they see better rates for our properties than what they get from us today they will not only demand the same rates but also question our price parity strategy.

Most importantly, from my perspective these offers are a lot of work, with little payoff. The hotels I've worked with that have pursued this type of channel spend days or weeks setting up these offers, tracking them and managing them, yet the hotels rarely walk away with room revenue above what it would cost to clean the room. Finally, there's no proof to show that this bargain buyer will evolve into a loyal guest, so what is it really worth?

While it's not in the hotel's best interest to participate, there's still a very important lesson to learn from Groupon…

Groupon's business model is very simple. First, Groupon entices local businesses to discount their services or wares by the theory of "bulk buying." In other words, if you do 10 times your normal business then even at half-price, your business is still seeing 5 times the revenue it would normally. Secondly many companies offer to give discounts to Groupon in exchange for the publicity—i.e. access to the thousands of subscribers they've captured in your local area. That's pretty much the whole sales-pitch.

The facts are that, in a given year, a local area has at least 365 businesses that are willing to discount their services at 40-80% OFF and then share 20% of their final revenue with this group-buying giant. Groupon reassures their vendors that the partnership will be rewarding—but are there no promises? Do businesses really see the revenue promised them by the "group buying" process, or is it a quick spike in foot-traffic, little revenue growth and no lasting loyalty—just as we've seen it was with hotels?

Groupon has built its success on the backs of local businesses desperate to get seen. And here-in lies the key.

If businesses in your area are so desperate for attention from Groupon buyers, doesn't that suggest they could use your business?

Hotels have all of the same tools that Groupon does. Hotels have email subscribers either through their Brand or via independent list pulls. Hotels have a Brand website that receives thousands of views per month depending on your area. Not to mention what the Brand's special offer or rewards site would add to the campaign. Then finally we have hundreds of guests everyday that rely on your hotel's front-desk or concierge services to find the right restaurant, spa, or activity during their stay. In short,your hotel has bargaining power too, and we know that businesses in the area are ready to listen.

Building a value-added package and negotiating special rates has been a time intensive task in the past, but Groupon and other local area bargain sites have proven it's worth the time. They have also warmed up many of the businesses in your area to the idea. Add a lasting relationship to the deal—and the absence of any 20% service fee—and your well on your way to offering your guests a more rewarding stay, your online shopper a great bargain, and room revenue that can actually benefit your bottom line instead of devastate it.