At BrandMoxie we work closely with entrepreneurs and SMEs in exploring new, affordable and efficient ways of marketing. Many of our clients face shrunken marketing budgets and slowing business cycles, and recently more and more have been seeking our advice on whether they should run marketing programmes through group buying websites such as Groupon, Cobone and Gonabit. These entrepreneurs see their competitors selling their services this way and wonder if it makes sense for them to do it as well. So for all of those who have asked us and wondered, read on….
As a business owner you scratch your head and think that since everyone is using group buying websites, then they must work. They work beautifully – with almost no caveats – if you’re the consumer. As customer you’re getting great value deals and promotions at lower price thresholds than ever. But – if you’re the service provider you have to assess the opportunity carefully before jumping in. Consider the business model: your service is offered for a limited time, to an unlimited number, and usually becomes active when a certain number of people join the deal. The powerful marketing catalyst is that it gets all those interested in ‘the deal’ to aggressively push the offer to friends and family. So the consumer gets a great deal, you make new sales (without spending money for marketing), and the group buying site gets its margin. Perfect win-win, right? Well, not always…
The big advantage that these services offer a business owner is that they can build awareness about the company (and the offer) through their mass mailings. Groupon, for instance, sends their ‘Deal of the Day’ in the US to a subscriber list of 70 million customers! All the group buying websites require you, as the business owner, to offer a big discount over your usual price, and to pass on a sizeable margin, to the group buying site as its commission. The idea is that you would make less money per sale, but you make more on volume, and you win new customers as well.
Where can it go wrong? For one, the discount you have to offer can sometimes be so steep that it cuts too much into your profit, and may ultimately not be worth it. That’s especially if you’re already on tight profit margins. If your profit margins are wider then you may be able to sustain offering the service at hefty discounts, in exchange for the promise of future returns.
Clearly the advantage may be better to you if you’re a service business, such as a hairdresser, as opposed to a product provider, such as a restaurant. The reason is that service oriented businesses usually have fixed overheads that make it easier ‘to get the resources working’ whereas a product based business has to incur new/ additional expenses in order to generate the transactions.
So the heart of matter is that you should be clear about your motives for participating in Groupon, Cobone etc. More often than not businesses use group buying sites not for the volume based returns, but for the promise of gaining new customers. The problem, and this is where we get into buyer psychology, is that this may damage the long term ‘positioning’ of your business as price is a dominant brand attribute. This is where your consumer may associate the facial and blow dry combo you offered once through Cobone with Dh 200 rather than with the Dh 450 that is the regular everyday price. In their minds they may not be ready to fork out Dh 450 for a Dh 200 service, but will be inclined to wait until that service is back ‘on sale.’
In the event the customer bought your service on Groupon, likes your service, and is ready to be a repeat customer (buying at regular prices), then whatever ‘losses’ you might have incurred on the initial purchase will be redeemed in subsequent full-priced transactions. If your business relies on single purchases, such as bridal gowns and cars, then you shouldn’t participate, for the obvious reason that you won’t be getting repeat business from your investment. Rather, in this case if you chose to participate it would be for no more than to gain from the volume-based (minimized) returns. Even assuming that the single-purchase person is going to recommend you to a friend, the repeat business opportunity may still be a long shot, and not worth any losses incurred from the discounts you gave.
While the lure of greater volume of business (even at smaller profit margins), and rapid exposure is always appealing, consider the challenges it poses to the long term sustainability of your business. Working for small margins can deplete your working capital quickly as you try to recover costs and make a profit. This is especially difficult for small businesses with insufficient equipment and small staff. Your staff may become overworked, exhausted and unmotivated just as your ‘newly-won’ customers become upset because you ran out of products or kept them waiting too long for service.
So while you shouldn’t rule out using group buying services such as Groupon, Cobone and Gonabit, as they will give you rapid exposure, make sure you plan well, and take into consideration all factors, including your costs, your resources, your profit margins, and the benefits that you expect to reap. Unleash is an innovation initiative by BrandMoxie, a marketing company based in Abu Dhabi that provides advertising, PR and strategy services.
