The Groupon Effect – More Is Not Always Better

Every business wants more. More customers, more sales, more blog readers, more clicks. More is a sign of growth and success.

Nobody knows this better than Groupon. They give businesses what they want – More customers than they often know what to do with! Unfortunately, this level of “more” comes with some pretty dire consequences for some…

Groupon (un)success stories

Groupon, the king of collective buying power, has been wildly successful as of late. Even national retailers like The Gap have given it a shot. Often, a local business running a Groupon special can see hundreds or thousands of new customers. For many retailers (especially restaurants) this type of marketing works wonders for new sales and new type of customers.

Some businesses, though, have become overwhelmed with this type of volume.  A recent article about Groupon’s smashing success highlights the problem with Groupon celebrity for local businesses. Another article tells the story of how one merchant was almost ruined by their Groupon experience. And Econsultancy looks at the Dark Side of Groupon.

If you like numbers, check out MineThatData’s look at Groupon as it relates to profit. It paints a picture that is rosy numbers only for Groupon.

The downside of phenomenal growth

Three main problems areas are a common trend when it comes to overnight growth:

1. Overwhelmed
Some local businesses were not ready for the volume of customers Groupon generated. They were not able to meet demand, and their reputation and bottom line suffered.

2. Loss of profit
Other businesses did not “run the numbers” before launching a Groupon special. Their offer was quite enticing, but they lost all of their profit (and some took heavy losses) on the off-chance they could retain a large percentage of Groupon customers (the WSJ stated 22% of Groupon customers may return to a business after redeeming their coupon). If that did not happen (see #1 above), then they took it on the nose… Quite the gamble if you ask me.

3. Erodes the loyal customer base
This one hurts the most. The story of the hair salon that was booked for 6+ months and whose phones were always busy because of their Groupon offer is a classic example. Long time loyal clients who came back month after month suddenly could not get an appointment. They couldn’t even get through on the phone. Many left to find another salon, even after years of going to this one salon.

Slow and steady wins the race

There’s nothing wrong with slow and sustained growth over the long term. Sometimes the gimmick or extreme sales approach can be very risky. If not well thought out, it can be downright dangerous.

I’ve seen this type of problem in the hosting industry many times. A hosting company introduces an unbelievable  rate/offering, or buys another large customer base. They then realize they can’t keep up with demand without sacrificing quality, server stability, and overall reliability. And their reputation and standing fall.

For us, we’ve taken the slow and steady path. We’ve seen sustainable growth year after year for over 14 years. Nothing earth shattering. No overnight doubling of our client base. Just manageable growth that has allowed us to maintain our high standards of service and reliability while allowing us to grow as a company, offer new and improved services, and make both our clients and employees happy.

If you have the opportunity for a Groupon-like marketing event, make sure you run the numbers, plan for the worst case scenario (both too many or too little response), and have contingency plans to maintain “business as usual” for your loyal customer base.

Many times, when you take a step back, more of X is not always the best recipe for success.

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5 Comments

  1. Thanks for pointing out that businesses who are promoting Groupon do so at their own peril Rob. That’s why I wrote an 11-part series that culminated with this post about what the many issues at http://www.retaildoc.com/blog/final-coupon-groupon-small-business/

  2. I agree that a lot of businesses do not run the numbers before launching a Groupon deal. Groupon can however work if you run a business with perishable inventory, low variable costs and high fixed costs such as a hotel and if you run it during a slow period and can put limits on it. As for the level of repeat business generated that depends a lot on the experience of the company itself. We have had mixed results with this but overall have not been unhappy as a 4 star hotel that has used Groupon. It has helped generate exposure and some repeat business. But you should not rely on this solely. I would not advise anyone to over-saturate the market with these kind of deals as it can hurt your brand long term. See my article on our experience at Bay Gardens Beach Resort, St. Lucia. http://hospitalitymarketingtips.blogspot.com/2011/11/groupon-effect-and-caribbean-hotels.html

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