Pros Vs. Cons: Are Group Buying Sites Good For Your Business?
I recently availed of some CityDeals, and went along to four restaurants to find out about the group buying phenomenon for myself. However the experience was one of disappointment! How come these businesses failed to take advantage of this opportunity? In an effort to answer this question, I’m going to argue that group buying sites do provide businesses with an effective marketing channel, but only when used properly.
First up, I invited Shane O Leary, Communications Manager for mylunch.ie, Ireland’s biggest lunch value site, to give us some background information and argue against from the viewpoint of the restaurant industry.
Here’s Shane’s take:
The proliferation of daily deals sites in the market currently is staggering. International exponents such as Groupon and Living Social and Irish equivalents such as BoardsDeals and Pigsback (can it even be called social buying?) have sprung up. I’m sure that everyone who is reading this has either availed of an offer, or is at least familiar with what these entities do.
How it works
You know the drill, a massive discount (sometimes as much as 80%) off a product or service, with an upper limit amount of deals to be bought, and usually a lower limit too (meaning you are invited to share the deal with your friends to activate it).
The market for this has gotten so big, that subsidiaries have now sprung up (see sift.ie or dealpage.ie for examples), which simply list all the daily deals on one page, meaning no longer will you have to sift through ten mails every morning to find what you’re looking for
Google famously tried to buy Groupon for $6 billion, an offer which was declined and was followed up by rumours of an initial IPO valuation of $25 billion for Groupon itself.
The model is obviously lucrative, but with the early signs of market saturation and/or a bubble beginning, the question has emerged, are group buying sites actually good for business?
“As a food lover and restaurant goer, and from regular interactions with owners of food retail establishments, I have quite strong feelings on this particular subject, and a deep understanding of how they impact the restaurant sector.
Let’s look at it from a retailer’s point of view.
A large, successful operation, with a huge marketing budget and thousands of your prospective customers at their call comes to you, offering much needed exposure to your venue, and the opportunity to drive guaranteed footfall in your door.
A no-brainer right? You offer the prescribed discount, follow their advice and wait for the stampede. After all, once people taste your food, they’ll definitely return.
To an already struggling restaurateur, the lure of more covers is tantalising, even if they are chopping already trimmed margins. Typically, these deals are based around something like 50% off your service/food etc, but what many on both sides of the counter don’t realise, it that most of these sites also take up to 30% of the rest of the margin, so generally as a retailer you are making quite a loss on the exercise.
On top of this, some of the sites delay payment from the deals purchased for up to 90 days, at 1/3 of the gross revenues per month, meaning the cost of each deal is weighted on the restaurant for that period.
But offering such a deal is really a marketing exercise for all intent and purpose, and even with the above negatives, it’s still a worthwhile exercise to get bums on seats right? After all, quite a large percentage of all deals are said to be never used, and plus, new customers are sure to come back once they taste your food right?
Well no, not necessarily. From conversing with hundreds of owners who have used the sites, they say that after the prime redemption period, they see very little of the redeemers again, and many of these “Deal Whores”, as one owner so eloquently put it, just move on to the next restaurant deal.
Have we become so used to these deals that we simply expect them now, and is this a fatal flaw in the model, that it sure doesn’t promote loyalty and repeat trade as a primary goal?
You can now obviously see why certain types of service providers (grooming, hairdressing, pedicures etc) can afford to avail of the sites, but for those eateries that do use it, they really need to maximise what it does for them. There have been many complaints of smaller portions, worse service and generally a bad experience, and this is literally like throwing away all of the opportunities group buying affords the small business.
The very worst thing that you can do, is agree to a deal and not maximise its returns for you. If you’re not conversion focused, and don’t show the user how good your offering is, these prospective customers will become the worst kind of ambassadors which you can imagine.
Who can it work for in the restaurant industry?
- New venues looking for “pure performance marketing”, and to get the word out that they are open for business
- Those premises with enough cash reserves to stave off the possible lack of cash flow, and still provide a good experience to the deal purchaser
- Conversion (repeat business is the primary conversion goal) focused restaurants, who aim to provide as good an exposure to their offering as possible, in a bid to ensure the redeemer returns.
Who does it not work for in the restaurant industry?
- Those who see it simply as a way to get covers in the door and abide by the vanity that are turnover numbers.
- Those who use it to off load poor quality or poor selling stock.
- Any venue who diminishes the quality of their offering during the period of the deal, in a bid to lower the cost to them.
- Those who have figured it into their business model, as a continuous means to market themselves. (Believe me, there are some, and the resultant brand damage is massive.)
For the sites themselves, it’s a great business model, and they sure are making a mint from it. It works for some retailers, and of course it’s good for consumers, but there’s no doubt that if people keep expecting such huge one off deals all the time, and aren’t loyal to the restaurant afterwards, it may harm the restaurant industry.
With sporadic factors such as the market possibly reaching saturation point, users getting fed up of a ton of deal emails waiting for them every morning, a heightened effort to get deeper and deeper discounts from businesses as more sites seek to gain consumer attention, and an obvious limitation on the amount of businesses whom the sites can target (with repeat deals not an option for many), will this perfect storm combine to undermine the ability of such sites to get businesses to participate?
The overall business model may be lucrative, but is it lucrative enough for the businesses involved?
A recent study by an American University concluded that in the services sector, restaurants tended to do poorly, while salons and spas were more successful, so perhaps it’s certain types of businesses that are feeling the negative side of this type of promotion?
Thank you, Shane!
Now it’s my turn to argue for:
Group buying sites work because customers are always on the look out for value for their money. In understanding how best to make this opportunity work for your business, it’s worthwhile to understand what they are not:
- A sales channel
- A profit making exercise
- An opportunity to offer a lesser service
Many business owners may well be ending up damaging their business as a result of misunderstanding the group buying opportunity, but that is not the same as saying that it doesn’t work! So what is it?
Group buying sites are a marketing channel
They present a unique opportunity to:
- Pay nothing up front
- Get lots of exposure for free on the site and in the email blast
- Get lots of people through your door
- Up sell people when they’re onsite
- Capture details for follow up marketing
- Get repeat business
- Get word of mouth
- Get social Buzz
Group buying vs. traditional advertising
When you compare with traditional marketing i.e newspaper adverts etc, it’s a non competition! What other form of advertising can deliver potentially 1000s of new customers through your door in such a short space of time? None!
Cost of Acquisition
The cost of acquiring a new customer is a critical consideration when deciding whether or not, a group buying site is right for your business. If you are a boat trip provider, then you run a fixed cost business so having additional passengers at a discounted rate won’t cost much extra. If on the other hand, you are a restaurant owner, as in Shane’s examples above the customer acquisition cost is likely to be greater, but there are still plenty of ways to keep it down.
Also, a business such as a restaurants should of course consider the opportunity cost of using the group buying model ie. a discounted user displacing a full price paying customer etc.
As I mentioned, my own experience of using CityDeals to try out some new restaurants was very disappointing. In all cases, the customer service was very poor. Now I don’t know if this was because I was a group buying customer or these restaurants usually treat their customers badly.
The point is that! Customer service combined with group buying has the potential to be either very benefical or very damaging – for two pretty straightforward reasons:
- It is the major factor in that customer returning
- People are going to tell their friends about the experiece
Think about it! If a business gives 100s of people a good or bad customer experience, these same people will then tell their 100s of friends and very quickly you have created a viral word of mouth that could be good or bad depending.
First impressions will go a long way
In a city the size of Dublin, this viral effect could be far reaching and very benefical or it could also have dire consequences for any business. The key is to look upon it as an opportunity to increase the reputation of the business, ensuring that you make your very best first impression with all these possible new patrons.
It is important to brief your staff and explain to them what’s required, they will need to represent the business in the right way.
It should go without saying that the customer experience is also strongly allied to the opportunity to up-sell. If it’s good, people are much more likely to order more than their voucher entitles them to.
Capturing details for follow up marketing
Another effective means of creating repeat business is to capture the customer’s details so that the business has additional opportunities to do follow up marketing. For example, send customers a questionnaire asking them about their experience and entitling them to an additional special offer etc.
Group buying will work for smart businesses that prepare well to take advantage of the opportunity
The group buying model can be a very effective marketing channel but only when used properly. It has an inbuilt potency that traditional advertising simply can’t match but as with all powerful forces, this can just as easily be destructive if a business misunderstands what group buying is. My advice is to give it some serious consideration, but don’t jump blindly or you’ll simply end up with a lot of unhappy people spreading the wrong message about your business.
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