Part 2: Three reasons in against.White-in-article.jpg

 

By Reed Richardson.

 

In Part I of our social coupons series, we offered three benefits to be derived from social coupons, including the exposure they offer to local customers, their ability to boost business activity to cover slow periods, and their guaranteed measurable results. (For the full story, click here.) But, not surprisingly, all of these benefits must be carefully weighed against the potential pitfalls any social coupon program entails. Here are the three most critical dangers to keep in mind:

 

1. When “many” suddenly becomes “too many”

For small businesses, the old adage “be careful what you wish for” especially applies when it comes to social coupons. While a struggling entrepreneur may consider thousands of new customers walking through the door as a dream come true, the reality can be quite another experience if your business isn’t prepared for the logistical aspects of a sudden or sustained spike in activity. Or as Eversave president Jere Doyle told The New York Times recently, “It is really important to cap offers…we don’t want to bomb, say, a restaurant who may not have adequate staff.”

 

A Rice University study published in October, which surveyed a small sample of 150 small businesses that had used the social coupon site Groupon, reinforces this notion. It found that the size of the discount or the service offered had little to do with the deal’s ultimate success. “Surprisingly, employee satisfaction is found to be the primary driver of the promotion’s profitability,” noted study author Uptal Dholakia. “The business owner could do this by preparing his or her employees for the barrage of customers that ensue from the promotion, and compensating them adequately.”

 

Moreover, retail business consultant Bob Phibbs warns that if you don’t plan well for the expected social coupon deluge, you could find some of your loyal customers getting washed away as well. “Say you’re a small business—Jane’s Spa—that just sold 1,000 coupons to be redeemed in the next three months,” explains Phibbs, who also writes The Retail Doctor blog. “You have to consider how all your regular, loyal customers are still going to fit into your spa schedule. Can you really do it all without alienating them?” Phibbs strongly believes the answer to that question is no.

 

“What happens is that you end up punishing your regular customers with longer wait times and so on, while you’re giving the much better deal to people who have no relationship with your business.” That upside-down reward-to-relationship ratio, Phibbs says, is one of several reasons he counsels small businesses not to engage in social coupon offers. (For more on his thoughts about social coupons, click here.)

 

What do you think?  Do you think social coupons (like Groupon) would work for your small business?  Click here to view our poll.


2. Beware of customers for whom it’s always about “the deal”

Discounting, in any form, can often be a double-edged sword for businesses: it brings in new customers, yes, but these price-conscious clients can also act as an overall drag on your company if they stick to a one-and-done purchasing philosophy. So, as much as a full, bustling restaurant can warm the heart of a fledgling restaurateur, if most of the patrons are strictly staying within the limits of set-price social coupons and showing no interest in being converted to regular customers, the restaurant’s bottom line will have generated mostly light and little heat.

 

On its website, social coupon provider Groupon says its customers “spend an average of 60 percent above the value of the [coupon]” and touts a recent survey of businesses that claims, “89 percent said [social coupon] customers were likely to be repeat customers.” Based on its anecdotal evidence, however, the Rice University study still concluded, “There is widespread recognition among many business owners that social promotion users are not the relational customers that they had hoped for or the ones that are necessary for their business’ long-term success.”

 

Retail business consultant Phibbs agrees with this assertion and cautions that social coupons have a tendency to commoditize a business’s offerings. “I think this idea that a trial [customer] is worth anything [to get] doesn’t make sense in the long run because it just erodes a business’s value proposition and makes it all about the deal,” he explains. “And the danger of bringing in all those deal-focused customers is that while Jane’s Spa, from my earlier example, may fill their needs this week, next week they’ll just move on to the next great deal, over at Mary’s Spa, never to return.”

 

Still, businesses like spas that, by their nature, necessitate a longer customer experience have a better chance of overcoming this bargain-hunting behavior. After all, it’s easier to establish your value proposition if, say, a client must spend an hour getting pampered by one of your company’s masseuses instead of just a few seconds giving one of your baristas a coffee order. Nevertheless, it’s still hard to predict how this deal-focused phenomenon will impact an individual business’s social coupon experience.

 

For instance, the Rice study found that, among small businesses, spas had some of the most profitable social coupon experiences, with an impressive 82% of them reportedly making money on their deals. Restaurants, which have a similarly heavy reliance upon customer service for survival, had mostly profitable social coupon experiences as well but at notably lower rates, as 20 out of 48 restaurants in the survey, or 42%, reported that they lost money.  

 

3. Bigger potential rewards also mean bigger potential risks

Without doing your due diligence about social coupons, a small business can quickly find itself in the losing category, as coffee and pastry shop owner Jessie Burke discovered this year. The owner of Posie’s Café, in North Portland, Oregon, Burke ran a $6-for-$13 worth of product offer through Groupon this past March that generated nearly 1,000 social coupons in sales. She split the roughly $6,000 in coupon sales with Groupon, but after three months of redemptions, Burke says her business was bleeding red ink and, at one point, she had to take $8,000 out of her personal savings to cover her business’ payroll. “It was sickening, especially after our sales had been rising,” she recalls of the experience on her company’s blog.  Since then, she has vowed to never again offer a social coupon, a decision that puts her in a distinct minority, according to Groupon, as it says 95% of its business customers would use their services again. (The Rice University study of former Groupon business clients found this figure to be 58%.)

 

But as she openly acknowledges on her website, Burke’s financial troubles resulted from a series of self-inflicted wounds. First, she erroneously believed that she couldn’t cap the number of social coupons sold to limit her financial exposure. Then, during negotiations about the size of the discount, she only included food costs in calculating her breakeven point and failed to account for overhead and other soft costs, which meant her deal was structured from the outset to potentially lose much more money than she expected. Finally, she didn’t grasp the difficulty of retaining profitable social coupon customers in a retail setting, where a consumer’s time spent interacting with the business is fairly brief. As a warning to other small business owners who leap before they look when it comes to social coupons, Burke absolves Groupon and all her customers of any blame and writes, “I take full responsibility for my decision... Lesson learned.”

 

In the end, this dichotomy between a big upside in terms of local exposure versus a big downside in terms of potential risk is what small business owners must realize about social coupons. So which is it? Fabulous growth-producing marketing technique? Or dangerous money-draining waste of time and energy? The answer may lie in the kind of business you own. (Spas and restaurants and businesses in which the customer spends some real time in your establishment seem particularly well suited to the approach. Quick, hit-and-run low-price retail environments, not so much.) It also may lie in how careful you are in your analysis before embarking on a social coupon program. “It all depends on a few little numbers,” explains entrepreneur Jay Goltz on The New York Times’ You’re the Boss blog. “Traditional advertising requires spending some money and knowing that it can be lost if the ad doesn’t work.” But with social coupons, he points out, “you spend no money up front but you mess with your formula for making money. You can win big and you can lose big.”

Similar Content