Do Daily-Deal Sites Like Groupon Work for Local Businesses?
LivingSocial, Amazon Local, and small companies
Full disclosure: I’m something of a Groupon groupie. Like a Pavlovian dog, I salivate when the emails pop up in my inbox—alluring messages promising 50-percent, 60-percent, even 80-percent discounts on the hottest local fitness classes, haircuts, restaurant meals, and other goods and services. I’ve purchased some 15 to 20 offers from Westchester businesses via daily-deal sites like Groupon, LivingSocial, and Amazon Local. I’m living proof that, from the consumer perspective at least, daily deals are genius.
But how do businesses fare in this model? Are Westchester companies actually making money and gaining loyal customers from these steeply discounted packages? The answer is yes. And no. And sometimes.
The booming popularity of these daily deals is easily understood. They offer local merchants a fast and easy way to advertise to a huge database of eager email subscribers. And unlike traditional advertising, there is no upfront cost. Instead, merchants have to offer a discount typically around 50 percent, and share the revenue from the purchase of the deals with the daily-deal site. With Groupon, for example, it’s generally a 50-50 split.
“Our goal is to help local companies create customized campaigns by identifying their needs and their goals—whether they want to gain exposure, pull in extra cash, or find new users. Then we coach them on how to best retain these new users,” explains Andrew Graham, Groupon’s city manager of New York.
For some local companies, the daily-deal model has been a godsend. When opening its first location in White Plains, Westchester Burger Company used Groupon as its only source of advertising. Just four days after launching the deal, the restaurant sold more than 3,000 deals ($7 for $15 worth of food) via Groupon. The company, which has since added locations in Rye Brook, Mount Kisco, and Nyack, New York, now offers a Groupon about every six months, with more than 8,900 hungry diners purchasing its most recent offer. “Groupon is a guaranteed marketing tool for us,” says Michelle Bernal, one of the general managers of the restaurants.
Other Westchester businesses have not fared as well. Nicole Sanders, owner of Ladimax Sports and Fitness, has used Groupon once since moving her business to a larger space in Thornwood in March 2013. Though 350 people purchased the offers and roughly 280 have redeemed them so far, being locked into offering a discounted three-, six-, or 12-month membership hasn’t been great for Sanders’ business. A customer purchasing a year’s membership at the $200 rate, for instance, nets Ladimax just $100—and no guarantee that they will re-up at the full price after their first 12 months. “The value of my gym and my experience as a trainer goes way beyond what I can offer through Groupon,” Sanders says. “My business doesn’t really fit the daily-deal model, so I don’t plan on doing it again.”
Fitting the model is easier for some businesses than others, explains Larry Chiagouris, professor of marketing at Pace University’s Lubin School of Business. Daily deals are more profitable for companies offering services—such as a massage, a dental exam, or a house-cleaning session—than products, he says.
“Companies offering services are only sacrificing their time, not the additional expense of inventory or ingredients or other goods associated with delivering a product,” Chiagouris explains.
This may explain Elite Dental Studio’s positive experience using LivingSocial and Groupon to offer X-rays, exams, cleanings, and teeth-whitening services. “These deals were a great opportunity to meet new clients and expose them to what we have to offer, which we feel is a different experience from most dental offices,” says Lucy Khorram, office manager for the Yorktown Heights practice.
Some of the Groupon and LivingSocial customers who came to Elite admitted to using these kinds of specials every six months for dental cleanings—possibly indicating that they may not become loyal patients. “But even if these patients do not return, they may refer a friend based on their positive experience,” Khorram notes.
Chiagouris also believes daily deals can work for companies selling “perishable” events like concert or sporting-event tickets. “Companies either capture these perishable moments or the money is gone forever. Selling a reduced-price ticket is better than an empty seat,” he explains.
That’s been the case for the Westchester Philharmonic, which has featured half-price concert tickets on Amazon Local and Pavé Life, a deals site for arts events. “We were not expecting to make money from these deals, but it was a good way to sell some last-minute seats and hopefully capture new qualified buyers,” says Lenore Eggleston, director of marketing and development for the Philharmonic.
Overall, the most commonly touted benefits of the daily-deal model are the guaranteed eyeballs and the low-cost exposure to potential customers. For new businesses, like 18-month-old Dobbs Ferry jewelry and beading boutique Bangkok Bead, this aspect has been invaluable. “As a small company still building our business, it is hard to afford traditional advertising. With LivingSocial, our deal was visible to 100,000 subscribers and we didn’t have to lay out any money. Even if no one bought the deal, we would have gotten free advertising to 100,000 people in Westchester,” says Paul Ross, the shop’s co-owner.
While Bangkok Bead sold only 62 deals, Ross was happy with the results. Several buyers came in for the shop’s Ladies Night Out jewelry-making classes, bringing full-paying friends with them. And many purchased jewelry once they were in the shop.
Indeed, upselling is a key way to capitalize on these deals. Getting customers in the door at a discounted rate can still pay off if they spend more money once they are there. So Groupon users who purchase a 60-percent-off haircut deal from the high-end Vasken Salon in White Plains may also opt for a keratin treatment and splurge on pricey hair products because they feel they are getting such a bargain, explains salon owner Vasken Demirjian. “Our Groupon customers purchase many other ancillary services when they see our high quality, and they often end up spending more than our regular clients,” he says.
Nat Mundy, co-founder and vice president of the 120,000-square-foot family entertainment center Grand Prix New York in Mount Kisco, knows that customers who purchase a racing and arcade package from Groupon are likely to stay for bowling and bouncy-castle time, too. “Plus they are going to eat,” Mundy says. “We never offer food on our Groupons, which helps us to control our costs a bit.” In addition, Grand Prix’s Groupons are based on peak (weekend) pricing, so the company is not actually losing that much revenue when customers redeem the deals during the week.
And because all Groupon customers who come in to Grand Prix have to sign a waiver, Mundy is able to collect their contact information and send them promotional emails. “Groupon has helped us broaden our reach to customers in New York City, Long Island, New Jersey, and Connecticut who would never have known about us,” Mundy adds.
When the deals are very popular, the volume of cash they produce for local merchants can be significant. “We’ve used these deals as a short-term revenue generator,” notes Wendy Vigroux, owner of Westchester Yoga Arts in New Rochelle. “The payments from our most recent offer are helping finance our move to a bigger space.”
When more than 1,200 people purchased an $85 Groupon for the always-popular French restaurant La Panetière in Rye, the volume helped deflect increased food costs, says General Manager Cheryl Just. “The Groupon was also a great way to boost business in a down economy,” she adds. “A lot of people who want to come to La Panetière, but maybe couldn’t afford it, were excited to be able to dine with us. It also helped to bring back customers that haven’t been here in years.”
But while there are clearly a lot of benefits to offering daily deals, the most common challenge—turning those customers into loyal, full-price patrons—is enough to threaten the efficacy of the whole model, according to Chiagouris. “Because of the economics of these deals—companies discount their products or services and also have to share the revenue—it is a losing proposition unless you can be sure that the deal will result in someone continuing to do business with you at a more profitable rate,” he explains.
Other businesses cite concerns over cheapening their brand as a reason to avoid daily-deal offers. Restaurateur Marc Tessitore, owner of nessa in Port Chester, felt that way after trying LivingSocial once. “I will never do it again. It attracts bargain hunters, not serious diners, and it confuses and annoys your staff,” he says.
And though she’s run successful promotions with Amazon Local, Lenore Eggleston from the Philharmonic worries that using daily deals too often can set up an expectation of a discount that could prevent people from buying tickets at full price. “I don’t want people always waiting around for a coupon. I wonder if we are cheapening the tickets and the product by putting these offers out, and I’m not convinced it will actually translate into future sales,” she says.
Chiagouris shares her concerns. “The only way to ensure repeat business from these customers is to offer something so wonderful that they will want to come back again and pay full price,” he says.
That is Wendy Vigroux’s approach. “My job is to make these customers’ first experience at the studio so great that they want to keep coming back,” says Vigroux, who has advertised numerous yoga and Zumba deals on Groupon, Amazon Local, and LivingSocial. Running an offer bumps her class size up by as much as 75 percent, and she typically retains 20 percent of the people who purchase the deals.
Vasken Demirjian also counts on superior service to turn Groupon users into repeat customers—with phenomenal success. His salon has seen a whopping 74-percent retention rate from the thousands of Groupon users who have bought offers. “When they come to our salon, we give them such high-quality service that they can’t think of going anywhere else,” he says. Demirjian’s last offer sold out at 1,000 haircuts, netting the salon $20,000 from Groupon, and, to date, its Groupon customers have brought in an additional $44,000 in business.
“Companies need to move beyond the preconceived notion that Groupon users are just bargain hunters. We have a very high-end brand and I think our experience is proof that you can bring in Groupon buyers and make them regular clients as long as you have impeccable service,” Demirjian says.
At the opposite end of the spectrum are people like Steve DiDio, owner of Pleasantville fitness studio and sports medicine center Physical Fitness Xperts (pfx), who ignore the potential customer-retention issues because of other gains. DiDio has offered deals through Amazon Local and LivingSocial and achieved retention of only about 10 percent. But, he says, even a person simply coming to his facility to take 10 spin classes for $20 can be a benefit. “Even if they don’t join the gym, that customer now knows that we also offer physical therapy and massage and maybe they will need those services in the future, or recommend us to someone else who does,” DiDio says. “That type of soft ROI is invaluable.”
Ultimately, each business must decide for itself whether running a promotion on a daily-deal site will be an effective marketing vehicle or a waste of time. Whichever conclusion they come to, they are likely to have plenty of company.
Amy Roach Partridge is a veteran business writer and editor in Thornwood whose daily-deal addiction is now well-documented.