While working on new marketing initiatives for Snapdragon Inn over the last few months, we had the chance to talk to Groupon
about a possible deal for their group coupon website. Snapdragon Inn just completed their first Groupon deal this week, offering a two night getaway package for the new small luxury inn. Before deciding to work with Groupon, the owners of Snapdragon Inn weighed a number of items discussed in this article and thought it might be helpful to review the costs and benefits of participating in a large discount sale program. Each business will know best if a bulk discount program will hurt or benefit their brand, but our recent experience may help refine some initial impressions.
While Groupon’s recent huge IPO makes them the most visible and newsworthy company in the discount direct sales gift market, there are plenty of competitors offering similar services such as Living Social, Google, Dealtime, Tuango, Amazon, and hundreds if not thousands of other regional services. Each company has different requirements and pricing models, but their goals are the same–to build a large database of “captured” users, localize the deal-hunting experience, and create enough buzz and demand for discounted products to command large (very large) commissions.
We were well aware of the challenges that come with using any discount site. For example, many bloggers and some reporters have written about the perceived detrimental effect of Groupon to brand value. The argument basically goes like this: rather than build loyalty to your product, Groupon builds loyalty to the discount itself. In other words, even if people show up and love your product, they wont be back unless it is deeply discounted again. Some marketing professionals refer to these as “Groupon crackheads” and dismiss them from long range brand building plans. Other business owners feel like a successful Groupon for a product, such as a massage service, can permanently devalue that service in the market. The perceived value is less to the customer after Groupon, and that perception can be very hard to change.
Additional concerns include the actual “costs” of a partnership with any discount sales service. Normally a business will retain approximately 50% of the price the customer pays when purchasing a gift voucher from a discount sales outlet. That is 50% retained from a sales price that is already discounted at least 50% off of retail price. In addition they will pay a 2.5% to 5% or more credit card commission to the discount sales outlet to reimburse them for processing transactions. This varies from site to site and from deal to deal, but it is an easy average to illustrate the point. So if a customer purchases a two night travel package for $400 which is normally priced at $800, the business is actually going to be paid $200 (minus credit card fees) for the sale. This means that a room that is normally selling for $400 a night is now being sold for less than $100 a night. Of course the cost of opening that room (carrying costs, heat, electric, food service, staffing) do not decrease proportionally. If a hotel has a 20% cost of goods for opening a room, then the cost of that $400 room is $160. When sold at a discount site for $100, this is a loss of $60 per room night. An online deal that sells 100 vouchers has just generated a “loss” of $6000. The same formula applies to discounted meals or spa services though each company will have a different cost of goods structure.
So what are the benefits?
One of the main benefits you hear from participants in these programs is cash flow. Online services normally pay their business partners when the online deal closes or in some installment plan that the business can project. Therefore, the cash flow is not tied to actual redemptions and a business collects the entire amount due from their discount sales offer in the current operational quarter of business. Of course, these are gift cards, so there is a liability to provide that same dollar amount of service to customers, and depending on local laws, the gift cards may not be allowed to expire.
-Marketing Exposure & Value
While estimates vary wildly, it is safe to say Groupon is now representing access to hundreds of millions of users. Their relationship with their users is a strong and a closed system. If this is understood then a business can plan on the best practices and deals to build their own relationship with Groupon’s users to make them their own. Groupon’s direct email campaigns, affiliate programs (pushing even more traffic to their site), main website promotion, and overall brand recognition all translate to the opportunity for thousands if not millions of users to see any given deal, even if they do not purchase.
-Enhanced Sales & Customer Building
These are the most debated benefits and success rates seem to vary wildly when reading online experiences from businesses who have used discount sites. Some find it easy to enhance sales with additional items once the customer is onsite-most notably in a restaurant setting or in a full service resort setting where amenities are not included in the deal. Other businesses find that customers are there for the deal, the end. This also applies to repeat customers as some businesses have success in retaining discount users while others find them to be deal hunters and even begin to resent them.
In general, we found our recent experience with Groupon to be extremely positive and the marketing exposure is perhaps the main reason we chose to work with a discount site. For this project, the exposure and increase in brand awareness were seen as high value when compared to advertising costs to reach similar audiences. We can also confirm Groupon’s claim that they do indeed hand select their partners–at least for Getaways. We worked with an account manager who researched our property thoroughly–including everything from online reviews to articles and recent marketing surveys. We also discussed a long term strategy with Groupon that was beyond just the initial deal. We wanted to introduce our brand to a larger market and keep options open to expand even further with future deals based on the performance of our first offer.
Groupon’s marketing led directly to thousands of new unique visitors to our website as well as hundreds of calls and emails to our reservations center. Each of those contacts already meets our goal of creating brand awareness–which was our high value goal. Those contacts know our name and more about us now and they called and contacted us, we did not cold call them. In addition, our own customer database (both from opt-ins on our email lists and from actual reservations) greatly expanded allowing for future in-house direct marketing.
We planned our initial deal as a advertising and marketing expense rather than an income generator. We took budget that would have gone to print and online advertising and placed it into the cost of operating a Groupon deal. We felt it to be an excellent return on investment for an advertising expenditure since it allowed direct contact to customers who booked and contacts for potential customers. It also provided some cash flow though it remains to be seen if we will see repeat customers or any true brand advocates come out of our Groupon users.
In the end, every business has to weigh the cost of their operation and keep in mind that a successful Groupon deal has the potential to create a lot of real operational costs. However, if those costs are planned and accounted for then the marketing exposure, planned cash flow, and potential long term sales opportunities seem well worth it.