As the Internet coupon industry explodes businesses and consumers pay the price
When Ryan Munday spent $29 on a Dealathons voucher in April to get his oil changed and summer tires put on it sounded like a good deal. But what he ended up with was a damaged car and three months of grief.
The string of problems started when he tried to book an appointment. Overwhelmed by the unexpectedly high number of deals sold the garage told Munday they couldn’t get him in until the end of June. After pressing the garage to get him in sooner he managed to secure an appointment for the end of the week.
And when Munday went to get his car at the garage after it was serviced he was immediately skeptical.
“I knew the garage wasn’t very reliable as soon as I went to pick up my car” he says. “The work was supposed to take a day but when I arrived they said it wasn’t ready and asked me to come back at the end of the next day.”
But bad service wasn’t the only downside of his “deal.” A few days later while driving from Calgary to Saskatoon things began to fall apart — literally.
“All of a sudden I heard a loud crash underneath my car followed by a scraping sound” he says “I pulled over and saw that the plastic shroud in between my front tires was hanging on by just two of the 18 bolts that should have been in place.”
Annoyed he ripped the plastic piece off tossed it in his car and drove to the nearest town. It was Good Friday and repair garages were closed so Munday spent $50 on a Wal-Mart socket set to reattach the piece himself.
Back in Calgary the garage agreed to pay for the shroud to be replaced by a mechanic of Munday’s choice. A new part had to be ordered from the manufacturer and three months later he’s still waiting for car to be fixed.
Munday says the garage missed its opportunity to gain a repeat customer.
“I gave these guys a chance to do this work on my car and they didn’t take the time to make sure it was done right despite having an extra day to do it.”
MODERN-DAY MARKETING
For those whose email inboxes haven’t yet been flooded with daily deals the concept of Internet group buying is simple: Companies such as Groupon LivingSocial Dealfind and many others sign up local businesses in offering heavily discounted deals (50 to 90 per cent) on services and products — everything from cellulite-reduction treatments to weekend vacations to junk removal. Each discount is available online for one to three days; consumers buy vouchers with a credit card and print out their numbered coupon. Vouchers have an expiry date typically one year from the purchase but consumers should read the fine print for all the restrictions and rules.
Deal sites take a portion of the profits —usually 50 per cent — and businesses are given a venue for online advertising and marketing that is supposed to increase brand awareness just as radio newspaper and TV ads do. But unlike traditional forms of advertising a daily deal draws guaranteed business from customers who pay for the merchandise and services in advance with a credit card.
Daily deals started three years ago when Groupon initially offered discounts in Chicago; and since then online group buying has become a global sales phenomenon. With the arrival of TeamBuy in Canada about a year ago the concept has sparked more than 170 deal sites nationwide 20 of which operate in Alberta.
With a hefty discount on products and services it’s no surprise that plenty of people are buying into the trend but with so many sites competing for businesses some customers and merchants are paying the price for deals that sometimes go awry.
It’s easy to see why business owners are signing up — the sales pitch touts free advertising an instant cheque and a quick customer base.
But for businesses there are significant risks.
The number of discount vouchers purchased often escalates out of control which in turn overwhelms staff resources and often leads to huge long-term profit losses.
MORE CAN BE TOO MUCH
Tom Kim owner of Sushi Motto on 14th Street S.W. has had his share of negative experiences from placing an online deal with Dealfind.
“I needed to build a customer base” Kim says “and I expected this deal would sell about 500 vouchers.”
More like 4400 vouchers.
If someone had asked him to spend $178000 on advertising last year he would have laughed them out of his restaurant. But that’s the amount he says he ended up losing in profits when he signed up to offer $50 worth of Sushi for $20 last December. (Check the math: Dealfind collected 50 per cent of the profits and with a five-per-cent credit card fee Sushi Motto received $9.50 for every $50 of sushi ordered by customers with vouchers — a loss of $40.50 per customer if they had paid in full.)
As for the promise of gaining long-term loyal customers Kim says he didn’t really gain any. “They just move on to the next deal.”
“I don’t know why any restaurant would sign up for this. You can’t make any profits.”
But Albert Bitton head of Group Buy Canada an independent firm that provides research analysis and consulting on group buying in Canada says profits aren’t the point.
“Daily deal sites are a marketing vehicle just like a coupon book or a newspaper ad” he says. “You do it for branding for customer acquisition not for instant profits.”
The problem says Bitton is that the majority of retailers don’t know how to use this relatively new service. “They’re signing up and then washing their hands of the responsibility of actually acting like business owners.”
He suggests businesses should offer deals on one or two items classes or services to get new customers in the door — and not give away the entire lemonade stand. He also says that although the standard cut for this online advertising is 50 per cent merchants particularly in hot markets should be able to negotiate that to at least 40 per cent. For smaller businesses Bitton thinks the best strategy is to choose an online deal site that suits the size of the company or to place a cap on the number of vouchers sold.
MAXIMIZE THOSE DEALS
Krista Hopfauf owner of Rewind Consignment Clothing on Macleod Trail S.W. did exactly that. She chose SwarmJam for her first deal because of its smaller customer base. “I couldn’t advertise with Groupon or Living Social because I don’t have the stock.” Hopfauf sold a manageable 35 vouchers and is looking at doing another deal in the future when sales are slow or she needs to move stock.
“I interact with every customer that comes in” she says adding that she keeps an email database for e-marketing and rewards her customers with wine and cheese events. Those kinds of moves are how merchants can maximize their marketing dollars says Bitton. “A savvy business owner will take a percentage of voucher holders and convert them into an upgrade or a repeat customer” he says. “The goldmine in this industry is the database but most of them are flushing that opportunity down the toilet.” The concept is that by slashing prices merchants will draw in an instant loyal client base — people who will tell their friends return to pay full price or spend more than their coupon is worth during their first visit.
In Munday’s case his $29 voucher turned into a $700 bill when he agreed to the garage’s suggestions to do additional general maintenance on his vehicle. But when businesses are overwhelmed with demand because hundreds sometimes thousands of customers bought coupon vouchers they often don’t have the time and opportunity to make that all-important good first impression.
Last Valentine’s Day Dani received a spa-package coupon from her husband that offered three treatments for the price of one. She couldn’t get an appointment until the end of March and when she did go to the Calgary spa she mentioned she had a deal-voucher gift triggering the aesthetician to complain non-stop about how bombarded she was with voucher customers; and that said the worker was making her extremely tired.
“I felt like I was adding to her stress” Dani says. “I would rather pay full price and not feel guilty that I was inconveniencing anyone.”
There are some steps consumers could take to avoid disappointment.
“Read the small print and take a look at the businesses’ website before buying to make sure they’re legitimate and are in fact offering a discount off their regular retail price” Bitton cautions. “If you’re unsatisfied with a purchase most deal sites offer full refunds — no questions asked.”
Munday knows about trying to get a refund. He bought two coupons for house cleaning but was unable to redeem them because the cleaners were a no-show on the day he was moving. Eleven days and several emails later he was finally reimbursed.
Not surprising he says he’s done with buying deals that require making an appointment.
LOOKING FOR LOYAL CONSUMERS
And for those who want to unload their coupon or purchase one after the deal’s deadline has past a sub-genre of group buying has sprung up — Lifesta.com and CoupRecoup.com — which gives consumers an avenue to buy and sell pre-purchased vouchers.
For some people getting a quality product and decent service is more important than a discount. But for many deal devotees loyalty doesn’t matter when they know they can catch the next deal and avoid paying full price.
“People in their early 20s tend to go from one yoga or massage place or spa to the next to the next knowing they never have to pay retail again” says Bitton. “Those who are a bit older and have disposable income are less likely to bounce around as their time is more valuable and they want to support businesses they’ve built a relationship with.”
Karri Egan owner of The Hot Yoga Lounge knows firsthand what effect deal sites can have on consumer mentality. She offered 20 yoga classes for $20 through Dealfind in November gaining an instant client base of more than 3000 consumers for her new studio. Although she’s since converted 25 per cent of those potential clients into full paying customers she says there are some who try to convince her to match the latest deal they’ve seen.
“When a deal customer’s three months of yoga is coming to an end I offer them 15 per cent off a membership” she says. “But for some that’s not enough and they ask me to match the latest deal they’ve seen another yoga studio do. I’m happy to let those customers go.”
And in Calgary where there seems to be a new yoga studio popping up daily there’s no shortage of deals offered for yoga classes. But are all these discounts devaluing the product? Egan says they might be changing some people’s perceptions about what yoga is worth but as a new business it’s valuable marketing for getting your brand and name out there.
“On one hand I wish all the yoga studios could get together and agree to stop advertising through deal sites” she says. “But on the other it gave me guaranteed customers.”
PITCH GOT DITCHED
Egan was satisfied enough with her experience that earlier this month she ran a second coupon through Dealfind. But for every satisfied merchant it seems there are several who would never do a deal again. Harvard Business Review blogger Utpal M. Dholakia conducted a study of 150 businesses that ran Groupon promotions from June 2009 to August 2010 and found that 42 per cent would not run a Groupon promotion again.
Even CBC’s Dragon’s Den shunned the idea. When TeamBuy pitched their group savings website in 2010 Calgary entrepreneur Brett Wilson one of five “dragon” investors on the TV show couldn’t understand why any business would go for it.
“You just took someone’s product sold it as a discount and took half the proceeds yourself” he observed looking perplexed.
The dragons aren’t the only ones questioning the validity of the group-buying business model. Groupon has become such a runaway success that since announcing its plans to go public at the beginning of June it has come under intense scrutiny.
In an article titled “Why Groupon is Poised for Collapse” blogger and entrepreneur Rocky Agrawal argues that “Groupon is essentially holding a portfolio of loans backed by the receivables of small businesses. If a business goes under consumers will come back to Groupon for their money back. Unless Groupon is actually doing credit assessments on businesses that it chooses to feature this is a big risk for Groupon.”
But some of the Internet’s biggest players don’t seem too worried about liability.
Facebook and Google recently launched their own deal sites and travel giant Expedia last month sent subscribers a teaser about its upcoming collaboration with Groupon. Even the newspaper industry realizing that daily deals are eating a good chunk of print advertising is getting in on the act; Canada’s biggest newspaper group Post Media started its daily deal with SwarmJam late last year.
Even though there have been plenty of growing pains within these modern-day Internet coupon deals Bitton says deal sites aren’t going away any time soon.
“I anticipate the number doubling within the next year” he says adding that with more players getting involved in this new advertising-marketing system the percentage that businesses give for their deal to circulate on the Internet will likely become lower. In other words profit margins will tip in the merchants’ favour.
“Eventually the deal sites will only be collecting 20 or 30 per cent of profits” he says. And that may be the point when the two most crucial parties – consumers and businesses — of these coupon transactions will become happily satisfied in making their online deals.
