NB: This is guest post by Daniele Beccari, vice president at Isango and a technology consultant.
Talking about Groupon gets people hot under the collar – and Stephen Joyce’s excellent post last week, with all the related comments, proved it once again.
But although it is not immediately obvious, the model might just work for some tourism-related businesses, without them all seemingly “racing to the bottom”.
Groupon simply channels the advertising budget of a merchant into the buyer’s pockets (and in Groupon’s, too).
It’s like a cashback model on steroids. No wonder consumers love it – anyone selling at a 70% discount would make a splash.
The model simply doesn’t work at these over-doped discount levels for most travel business structures.
But there are some cases where it can work:
1. Where there is either very low (or even zero) cost for the merchant.
For example, a restaurant, hotel or a cruise in low season, where the fixed costs remain the same whatever the number of guests.
Or a theatre with empty seats during weekdays. Or a museum empty most of the time.
At least, filling low season rooms at 25% of high season rate is better than nothing. And the empty theatre seats can be filled by customers who will enjoy the experience and hopefully buzz about it.
Here is one example sent to the Paris list.
2. When the merchant can afford a virtually zero margin, but manage to cross-sell something else.
For example, a theme park/resort ticket (ideally in low season) where people will end up buying souvenirs and eating at on-resort restaurants.
Cooking classes, where the course is free but you end up buying the book, the pan and the ingredients kit. Coffee vouchers at Starbucks where you’ll end up buying the muffin and the nuts bar too.
Here from the San Francisco list.
3. When there is a chance to create viral buzz.
For example, a fitness center with amazing new machines, an exceptional dining experience, anything with such a unique service that people would not have tried otherwise, but once tried customer will absolutely tell all their friends.
Here is one from London – ever tried floating in salt water?
4. When someone had planned to splash money on advertising anyway.
An $8,000 billboard campaign for the launch of a new attraction or hotel/resort near big cities could have much higher impact by spending $8,000 with Groupon to get real footfall, and carefully manage the buzz generated (social).
Here is an example (although I don’t think this was for a launch).
Let’s also not forget that a decent-sized operation is required.
This provides not only lower marginal operating costs, but also the ability to absorb the impact of hundreds of customers that a small café with 4 tables would take years to absorb.
Wrapping up
Groupon’s own CEO, Andrew Mason, says that 97% of merchants surveyed would repeat. But a recent Rice University study found that 42% would NOT repeat.
Clearly, there is still a learning opportunity in all sectors. But the global success of the Groupon model clearly shows it’s not a fad: it appears to work everywhere at the moment.
We’ll soon see Groupon-like deals showing up on travel sites as ancillary services: “hey, you’re going to Barcelona, here are amazing deals for your stay in Barcelona”.
But remember one final rule of thumb: customer segmentation. And, yes, Groupon customers can be loyal: to Groupon!
Some live their entire week with Groupon deals, and there are sites like LiveOffGroupon to help out. Let’s not forget these are dealseekers, and they have subscribed to a daily deal site.
The next time a dealseeker goes out for dinner, they will first wait for the new Groupon offer to come in at 70% off, or worst case, get a decent coupon at restaurant.com.
If this is your target segment, then there might be something in it for you.
NB: This is guest post by Daniele Beccari, vice president at Isango and a technology consultant.
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Great article, Daniele!
I doubt that this daily deal model will become extremely successful in the future… It is more a trend. The amount of discount they are looking for is incredible and hardly feasible for most tourism products. Once advertisers see the low repetitive buyer rate, they will very likely avoid using that channel. The only advertisers who might be left are those who are heavily fighting against the fluctuations of demand and even for those it is questionable if they could spend the marketing budget more wisely…
Hi Johannes,
good point, but remember there is always someone that needs advertising, especially among small businesses in big cities. There is always a new or a refurbished restaurant who needs visibility, a new spa or a new shop. Some stats talk about 20% yearly turnover in local businesses. Even if they’d only use Groupon at launch time, that’s enough to keep the Groupon-likes rolling.
Nice follow-up post Daniele and I agree with all of your comments, especially how this may make more sense to businesses that have high fixed cost structures.
I think there are many creative ways to apply this model to a tourist business, and it may require cooperative efforts similar to how a CVB works with travel companies, but if you’re able to create demand then I think there are definitely ways to make this a win-win model. If Groupon has proven one thing, its that it’s able to get people off their duffs and out into exploring their city on a very large scale (like it has done for me). No reason that can’t work for travel.
Also your reference to viral buzz is very valid. Its not mentioned much but there is a possibility your brand could get some very broad exposure through the social graph. Something not easily accomplished for a small business operating on their own.
Excellent points, Daniele. It’s all about incremental sales which are, as you say, are a great way for high fixed cost providers to generate. The reason Groupon works is the same why for decades coupons and yellow pages ads have worked. As their name implies, it’s the same principle. Will it work for 100% of customers? Of course not. But does anything else?
Interesting and valid counter balance to last week’s post. Both pieces have overlooked a further potential revenue stream though.
The sense of urgency created by the flash sale approach is designed to whip people into an impulsive frenzy, sending them (and their friends on their social networks) rushing to buy into the Grouon deal.
However, once the excitement has died down, how many actually redeem? The revenue share on the breakage – ie the value of the unredeemed voucher – may be worth more than the slender margin on the heavily discounted redeemed bookings. This is key to the business model of traditional retailers of ‘experiences’ (eg Red Letter Days) and the same applies here.
Could the key to making Groupon viable lie not in driving unprofitable volume, but instead in selling a truck load of coupons that gather (virutal) dust until they can be converted into revenue?
Leo
Leo – good point.
There is a vicious and dramatic similarity between gift boxes and daily deal sites: a complete separation between the purchase decision and the actual need for the service.
With gift boxes, the buyer simply needs to buy a gift a time X and it’s up to the receiver to decide if and when to use it (there’s been lots of complaints in the past about gift box vouchers for hotels impossible to redeem over weekends and high season).
With daily deals, the buyer just hops on the deal thinking they will have a chance to use it before it expires. I myself bought 4 Groupons “just in case” and let 3 expire. At the frenzy purchase time, the date doesn’t matter.
This is obviously very different in the majority of travel scenarios where availability of service is the first driver.
Breakage depends on the product offered and for Groupon it’s estimated from 10% to 40%. Obviously small value vouchers are easier to forget than expensive ones.
One caveat – there seems to be a difference between US and Europe: in Europe Groupon only pays the merchant upon voucher redemption (merchant has to report a code back). So all unused vouchers remain in Groupon’s bank. I understand this is different in the US, I can only guess it’s due to the CityDeal acquisition.
Just fyi for everyone– Groupon’s customer service team is pretty stellar. I let a lot of my groupons expire as well, and I’ve never had trouble getting a credit for it, or if I have awful customer service at a merchant, they’re more than willing to refund the cash. I sound like I’m shilling, but it’s true!
Great point Leo, but unless there is some hard evidence to show consistent and duplicated breakage levels, that’s a big risk to ask a small business to take. I certainly wouldn’t expect Groupon or any other advertiser to lure potential advertisers using that argument (not without proof anyway).
Great stuff Daniele,
Lately, I’ve seen both Booking.com and Citybreak doing the Flash deals in their newsletters.
It takes out the outrageous fee, and leaves the hotelier and the merchant to spilt the discount. Newsletters cost a dime per 100, and you won’t have the competitor asking for rate parity because it’s a closed channel. Make it shareable and your reach might be comparable to that of Groupon and the likes.
Cheers,
Wouter
agree Stephen, break even on breakage isn’t going to be enough to hang a business case on.
That said, it could positively impact the overall cost effectiveness of a campaign. As Daniele suggests, the extent to which this may be the case will vary depending on the product on offer. For high transaction value travel products there is always an aspirational gap between the number and type of holidays people imagine they will take in the months ahead, and those their bank manager, employer etc will permit (back in the real world). Here breakage is a real opportunity. With lower value lifestyle products like restaurant deals, haircuts or excursions there is probably a far greater propensity to take up the offer, and therefore breakage will be less of a factor.
I guess the moral of the story for anyone talking to Groupon or their imitators is not to overlook the impact of the offers that are not redeemed, especially in your negotiations!