Crafty Business: Groupons, Living Social, etc. deals are a One-Night-Stand

Ok, I just have to say my peace because I have heard of enough stories about these webisites selling the "glamour life" to entrepreneurs.  So, I offer you this analogy:  "Social Deal Sites" (from now referred to as SDS) as a one-night-stand.

1)  Mailing List.
SDS has tons of friends - over a million Facebook friends.  Yes, he's cool.  People follow what he says.  He sends out emails to his friends all the time.  He even drives a flashy new car.  And he's throwing a party just for you!  It's a huge soiree!  He's going to evite 500,000 of his friends to meet you, because he thinks you are cool.  Have you asked yourself how many of those people are going to call you after the party and ask you out to coffee, or to walk around Greenlake?  You know, something where they can really get to know you?  There may be some, I mean what are the odds that your aren't compatible?  But is his contact list really full of people who are looking to meet new people, or do they just love a good party?  Do you now why most of these people don't care about you?  SDS is throwing another party tomorrow night with a different really cute girl!

SDS may have a mailing list / following of 500,000 people, but are they really your customers?  Let's think about it.  Who of your friends buy Groupons, etc.?  Do they buy a deal, then faithfully follow that company for life - or do they jump to the next deal as soon as it comes along?  My experience is that the "deal customer" is one that is looking for a deal, not a relationship.  There's nothing wrong with that - to a certain extent I am a coupon shopper too.  But I try incredibly hard to resist the urge to buy a Groupon, etc. from a business that I know that I would patronize regularly at full price.  If I buy one, it is to try something out.  If I like it, I make sure to give them repeat business - at FULL price!  (If you don't believe me, here's a study from Rice Univ.)

2)  Marketing expense.
SDS tells you we should have the party at your place - it will really show off who you are!  So you plan the menu.  You guess that 50 people will come (you are realistic after all and your place is small), so you buy appetizers and drinks for 50.  But then SDS tells you that you can't put a cap on how many people can come - and that you should expect at least 300.  Holy cow!  Ok, buy some more appetizers and get a new dress, because SDS's friends must really want to meet you!  But now you went WAY over on your social budget for the month... well maybe for a few months... ok, with the dress and shoes it was for the whole year.  But SDS really likes you and he'll take care of you, right?  You'll be invited to all of his soirees in the future, plus you will have tons of new friends!  Right?  Wrong.  And when it was all done and over, your place was trashed.  You are exhausted.  And your credit card is over the limit.  Now you have to pay to have your place fixed back up (or the landlord will come after you) and you are paying interest on your credit card.  Clearly you didn't calculate how much this night would cost you.

Did you know that the deal site takes AT LEAST 50% of the deal price, leaving the business with no more than 25% of "retail"?  I've even heard stories of some sites taking 100% if the deal is for less than a certain limit.  So let's review - can you afford to give away your product or service for 50% of your full price to hundreds of people you will probably never see again?

Ok, it really is a marketing expense.  You are trying to get your company name out there so that you will get the repeat business that you are hoping for.  Say you were to pay a reputable marketing firm to throw together a quick marketing campaign for you (say something you can email to their mailing list ONCE which is broad and not targeted necessarily to your ideal customer).  How much would you pay?  What have you budgeted for marketing for the year?  That's built into your price, right, into the profit margin?  Ok, say you are willing to pay $500.  Wow - that seems like a lot for 1 email going out to a bunch of people who may not even like handmade goods (or are too thrifty to pay $50 for a scarf).  Now, here comes Groupon.  Let's put together a deal for 1/2 price scarves - $25.  Great, new business!  Hmmm, I get $12.50 after I give Groupon their cut.  But, I am willing to put $500 in to see if it works, so if I sell 40 scarves that's great.  Oh, I can't put an upper limit on how many to offer unless I sell 300?  300 * $12.50 = $3750 - that's alot of money to put into marketing... but ok, if I get 300 new customers that's great.  Hmmm.... if someone buys my scarves at $25 - are they going to turn around and buy another for $50?  Hmmm... oh, did I just see a Groupon for a Macy's gift card?  Yeah, there went my 300 customers running to Macy's to get 1/2 price scarves there.  That was $3250 down the drain (I will write-off the $500 as an expense I was expecting to pay).

4)  Stress on you and your business.
So, you wait to hear from SDS after the party.  He doesn't call, but surely one of the 300 that came to the party will - I gave them all my cell # and email...  They don't call either.  So you fall into a deep depression - what did you do wrong?  You email yourself from a different address - but your email is working fine.  You call your cell from your home phone (maybe the sound is off) - nope, the volume is turned all the way up.  You can't leave the apartment, because what if someone shows up at your front door because they lost your number - plus you are busy patching the hole in the wall, steam cleaning the wine stain out of the carpet, and trying to figure out how to replace the broken light fixture...  Your friends call you to invite you out, but you decline because you are too busy cleaning up after the party, plus you don't want to miss THE call - and you can't afford it next year :(

I will share a personal experience as far as the stress placed on a business.  I patronized a local business that was in the service field, that decided to do a Groupon - say it was a hair salon.  They sold hundreds.  GREAT!  Hundreds of new customers... all wanting appointments... in the same month...  I called to get my regular monthly appt.  and they were booked... for 3 months out.  Hmmm.  I can't wait 3 months to get my haircut.  I have a show coming up.  You can't even squeeze me in?  No, because all of the stylists are overbooked with new customers?  Really?  That's ok, I will go to my friend's salon this time, just to get a quick trim.  Guess what?  I never went back.  I liked the new salon better because they valued repeat customers and the receptionist made sure I was taken care of for my following appts.  After a few months of going to the new salon and chatting with the receptionist, I told her why I switched salons.  Ends up, their salon had done a Groupon, that also was disastrous to their loyal clientelle, so they learned a valuable lesson.   My advise - if you do a Groupon, etc., hire temporary help for a few months to handle the influx of new business.  Chances are good that it will die off after a couple of months so you don't have to keep the temps on the payroll.  Oh wait - did we work the extra payroll into the cost of the deal?

In conclusion, Just say no to Social Deal Sites!  You are hurting small businesses if you purchase their deals online.  It would be far better if you went to their business and paid full price.  OR if you want to purchase the deal, make sure you "upgrade" once you get there - buy more than the minimum, and make sure you tip the servers based on the FULL price (not the deal price).  And then go back again if you want them to stay in business.  They were looking for repeat customers, that was the whole point of the deal to begin with!  It's KARMA after all - do you want people to treat your business that way?

What are your experiences with Groupon, Living Social, Quite Unique, Moolala or other social deal sites? 

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