Pros and cons of running Groupon deals – DSP 31

Whether to use Groupons or not is a question that nearly every float center will face. Having been in the industry for more than seven years, Graham and Ashkahn have experienced multiple angles of this conversation and try to lay out, in depth, the pros and cons of running these types of discounts for floats.

Graham and Ashkahn re-reviewed Groupon after trying it out for a little while. Check it out!

DSP 361 – Groupon Revisited

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Transcription of this episode… (in case you prefer reading)

Graham: So, today our question is, “What are the pros and cons of running a Groupon?”

Ashkahn: Pros and cons of running a Groupon.

Graham: I guess let’s start with, what a Groupon is for anyone who is not familiar with that.

Ashkahn: Sure, okay. I guess ‘daily deals’ is a more generic name for it. Groupon is just the most popular one that people tend to go with.

Graham: Sure.

Ashkahn: I mean does LivingSocial even exist anymore?

Graham: I’ve heard some loose stats that Groupon has something like 80% market share of that kind of space so they’re sort of the big ones at this point.

Ashkahn: Yeah.

Graham: And I guess daily deals isn’t even necessarily the most accurate thing to call them anymore unfortunately.

Ashkahn: That’s right, because they’re not daily anymore. I mean, what is it? Just bulk … What do you call them?

Graham: I think they really want you to call them Groupons. It’s like Kleenex, you know?

So Groupon is basically a site that you list floats for sale on, or people list different services — in our case, floats — and you list them at a discount they mail out to their gigantic mailing list of people, or a segment thereof with that percentage off your deal they list it on their Groupon app, and basically try to encourage people to spend money and buy discounted floats from you and they take a cut of that action.

As far as marketing, they kind of build themselves as an alternative to something like taking out an ad in a paper. Whereas you’re tossing money towards an ad to try to reel in some amount of people, Groupon says “Okay well, we’ll actually only get paid when we generate a paying customer,” so it’s the difference in their business model. They have a long and kind of sordid past in the float industry.

Ashkahn: Right. We’ve run a few Groupons, not in a long time at this point but definitely at the beginning of opening our business and I think it’s important to realize how much Groupon, or all these things, have changed from what they were in their inception.

So Groupon, at least when it got really popular, what it was was they would give just one deal to an entire city for one day. You had 24 hours and the whole city was one single mailing list that would get blasted with that one specific deal for that day. And it had to be at least 50% off at the beginning of what the normal price of that product or service would be, and then that was it. Literally, one deal would run for 24 hours and then it would be done and then the next deal would start up. That was when they launched to being – I think, at the time – the fastest company to a billion dollars or something like that. Groupon specifically.

Graham: Yeah, so we ran a Groupon way back in the day so they must have launched about eight years ago or something because we launched a Groupon seven years ago, and that was still very much their format and they were just expanding in the Northwest a little bit more. They were very young still as a company so seven years ago Groupon is not the same Groupon that we see before us today.

Ashkahn: Right, because now it’s way more complicated. Right? It’s not like the … You can’t even explain it in a single sentence anymore. Now they have multiple mailing lists and they target different people. You can sell a certain amount and then they’ll shut it off and you can set them to recur every month and there’s so much more …

Graham: It’s very much what Groupon wants too, is for you to set those deals to recur every single month and for you to have them active for two weeks at a time or always turned on so that people always get the Groupon deals as opposed to your full price.

Ashkahn: Yeah, and I guess it makes sense for them. I understand why they switched to that business model, because they’re like “Oh, we’ve hit a cap of how much money we can make, we can just send one deal a day,” and so they switched to being able to offer multiple deals all the time in a number of different ways but I’ve never seen Groupon really have that same punch that it had — we kind of hit it right before they switched away from that model. We hit it when the entire city of Portland, I think at the time they had one list. And how many people were on it?

Graham: Oh gosh, a couple hundred-thousand?

Ashkahn: Yeah, I mean huge. A huge chunk of people.

Graham: I think it might have been 300,000, was the size.

Ashkahn: Right, that was my memory as well. 300,000 people on a single list that we got blasted out to and you just can’t get that sort of exposure with Groupon anymore.

Graham: Yeah, they’ve moved away from being as much a email mailing list site as they really want you to use, or they want to train their users to use the Groupon app, they want people to find them on there.

Ashkahn: Right.

Graham: If you’re wandering around a neighborhood, for example, they just want their users to pull out the Groupon app, see what has deals around them, and that’s how they convince businesses to go in, too. It’s like “Hey, we have all these people using this app just strolling around the streets, don’t you want to show up on there?” And have a mobile-based billboard almost.

Ashkahn: And I would say that’s the biggest pro of Groupon, is that it’s a platform for discovery, right? So as opposed to emailing your own mailing list or offering discounts to your existing customers, on all those places you’re reaching people who already know who you are and perhaps have floated with you already, and Groupon’s big pitch is “Hey, reach people who don’t know you exist yet, and try to get in front of new eyes,” and as opposed to a magazine article or a magazine add or a newspaper ad or something like that they’re like “Hey, get in front of new eyes!” You’ll make some money off of it instead of losing money off of it.

Graham: Yeah, totally.

I guess this is a good place to talk about the actual pros of Groupon, as a category. So pros — definitely discovery, right? If you’ve never been mailed out to your city-wide Groupon or gotten on their app, then there’s new people that haven’t heard about floating on there who hopefully you can get in front of and pull in.

I always feel this need to do a disclaimer when we’re doing our podcasts of this-is-weird, Float On-land, as far as opinions, but we don’t like running discounts. So, Groupon is fundamentally a discounting website and Float On really tries to steer away from discounting any of our services as much as possible so that’s our very biased stance on this, I guess. Offering discounts is not the best thing in the world, so you’ll definitely hear this coming through, however, one of my little caveats to that is when you’re first launching your business, I think trying to get in front of as many people as possible is great. I would say almost the best candidates for running a really successful business that doesn’t de-value their floats is running when they very first open up, just kind of blast awareness out there.

Ashkahn: I think the other pro about Groupon is that float-tanks I think are almost ideal things to be on Groupon, right? You have to discount it so much what you’re doing. You’re giving a huge discount, then Groupon takes a cut from that discount, you know?

I mean, when we’re first doing this it was 50% off your product and then Groupon is gonna want anywhere form 50-20% of that, and that means you’re selling your floats for a quarter to a third of what they actually cost, or what you’d be selling them otherwise. That pretty much narrows you down to a service-based business, right? You don’t really see a lot of products on Groupon, I think for that reason. They just don’t have the margins in products to offer those sorts of discounts and, when you see services, they’re often trying to fill appointment blocks, which would just go unused otherwise, so in that sense floats are built well to take advantage of how Groupon works. It’s such a thing where people don’t know they exist and you want them to know they exist, so you’re taking advantage of Groupon’s discoverability pitch that way too.

So that’s one of the benefits. I feel like were you to have a business that were to use Groupon — float tanks are probably like the best suited business for it.

Graham: Yeah, totally, yeah.

Because our cost per float is low, and our overhead goes in building out our center’s to being with and staffing and everything like that it does make us a really good candidate in a way that restaurants do not because your cost of delivering food and things like that is so high that discounting your service down that much really can have a huge detrimental impact on your business.

Ashkahn: Yeah, Groupon back in the day — restaurants were going out of business because they ran Groupon so they couldn’t even do it.

Graham: Yeah, yeah.

Yeah, they got into some serious trouble for that one.

And they actually make you know the not-get-paid-your-full amount that you get from Groupon until the very end. You get the last 20% or more what you made and that’s specifically almost like a savings plan so that people don’t have this huge rush of clients coming in at the expiration and just driving things out of business.

Ashkahn: Uh-huh.

Graham: Which is kind of funny. The pros and cons are really intertwined here. It’s difficult to actually separate them into distinct lists.

Other pros of Groupon — you can actually now limit your people you’re bringing in buying Groupons by whether or not they have purchased a Groupon in the past. And you can put in terms and conditions that it only applies to first time floaters. That wasn’t always the case and now being able to make sure that you’re offering isn’t just bringing in repeat businesses or customers who are always waiting for that Groupon discount. Instead it’s actually new customers every time who are purchasing the Groupon, I’d say that’s a definite pro.

Ashkahn: Yeah.

What else? What else is a benefit of Groupon?

Graham: Yeah.

Ashkahn: I guess the other benefit is you get a chunk of money up front.

Graham: Right?

Ashkahn: Because running a business … That’s why we’ve run a Groupon before, in the past. We had a big construction project coming up and we’re like “Man, we just need a little extra influx of cash,” and you run a Groupon you get a lot of money and then those people come and float later. You have at least a chunk of the money in hand to use right away.

Graham: So line of credit pretty much, using Groupon? Line of credit?

Ashkahn: Yeah, not the most responsible thing to do. All he wants to hear is the benefit because it has benefited us.

Graham: And again, opposed to taking out a couple full-page ads in a newspaper which is cash going out of your bank account, you don’t have a cash expenditure at the beginning of a Groupon. It’s also advertising that although it costs you money, it doesn’t immediately take it out of your bank account. Which is nicer in some circumstances, like when your business is already low you might not have money in your bank account to run marketing, so in that sense Groupon is a nice boon.

Ashkahn: Yeah, I guess the other benefit, which is a kind of weird one, is that not everybody uses these floats that they purchase. So the redemption rates are what, around like 60-50%, something like that?

Graham: I’d say the lowest that I’ve seen from one of our campaigns was somewhere around 51%, and I think the highest that I’ve seen was around 58%, I don’t think I’ve actually seen anything above 60 so almost half of people are not using things.

I heard from another source that Groupon for most of their services it ends up being like 70% of people will redeem them, and maybe floating is just weird enough or scary enough to some people.

Ashkahn: It’s a lot. It’s a long appointment. So I can see that taking time being a discouraging factor.

Graham: I’m not sure what it is, yeah. But for whatever reason the redemption rate, specifically on floats, are lower than the industry average for Groupon.

Ashkahn: Right, but so that’s money that you keep despite the fact that those people did not come in and use their floats. Which, I guess I prefer for them to actually come and float, that sounds ideally better to me but at least if they’re not coming and floating that means that amount you made per Groupon you sold is technically higher than you think it is.

Graham: Yeah, now that you can actually discount down your services less than the full half-off that Groupon wanted initially, it means that you can end up with a percentage off of your floats that isn’t 50%, and you can end up with a split of your floats that’s greater than 50% that you’re taking. So Groupon has the smaller share of that. With that around 50-60% redemption rate we’ve found with our own floats at least that we offer that we’re getting close to making back the money of a full-price float per Groupon customer that comes in. Depending on your own arrangements with them, depending on your redemption rates, you might not see that same thing but certainly it’s not just that you’re making the amount of money that you’re discounting off or doing those exact mathematical equations. You need to factor in this non-redemption rate, which boosts things right back up.

Ashkahn: Yeah, and if you do the numbers right, it’s at least possible to not really be selling “discounted floats.”

Graham: Yeah, which is, again, really interesting. It was definitely not something we had in our minds when we were going into running our first Groupon we were doing the math not including redemption rates at all.

Ashkahn: We weren’t getting full price for those, it was just later when we were doing smaller discounts and taking bigger cuts and stuff.

Graham: And this is also a good point to say that you do have to honor gift certificates that are sold and Groupons that are sold after the fact, even after they expire for their full value.

Ashkahn: For the value that they purchased it for.

Graham: Exactly.

Ashkahn: If you have a $50 float and you sold it for half off at 25, after the expiration it becomes worth just the 25 that they spent on it.

Graham: So, they lose a little bit but they can always still cash it in, and depending on how you account in your own books for things like that, and depending on laws in your state what you’re required to save aside in banks accounts and things like that, to deal with outstanding amounts might vary.

Ashkahn: It’s a lot of disclaimers there.

Graham: Yeah, exactly, sorry.

So we’re getting into financial advisement almost on retained earnings off of a Groupon so, yeah it gets a little confusing.

So, cons?

Ashkahn: The biggest one is really the de-valuing of your product, and this is something I think a ton of people take almost offense to in the industry or in other industries when they think about Groupon is just this idea that you promote Groupon-hunters from always keeping their eyes open for another Groupon.

This becomes a bigger issue the more float centers you have in your area.

Graham: For sure.

Ashkahn: Right? Because it’s like you don’t maybe run that many, let’s say you run one Groupon a year, but there’s 12 float centers in your area, and everyone’s running one a year. That means every month there’s a float Groupon coming out and I think there’s a lot of nervousness about training people in your area to basically never be floating until they see a Groupon and buy floats off that Groupon.

Graham: Plus there always seems to be one center in a big area like that that’s just always running Groupons.

Ashkahn: Right.

Graham: Again, that’s what Groupon wants you to do. So at some point the float center got sold on “Well, you should probably just be running these for two weeks out of every single month.”

Ashkahn: Yeah.

Graham: Even when you’re not running them regularly, the idea of training your customers to go to Groupon to look for discounts means maybe you’re actually losing customers to competitors as a result of running a Groupon.

Ashkahn: It’s hard, and it’s out of your control. We really were not running them back in the day with huge amounts of frequency and even here in Portland we accidentally ran a Groupon the same day as another float place in town was running a Groupon. Two float Groupons-

Graham: Very confusing for both of us.

Ashkahn: Were released on the same day in Portland. Actually, we were upset at Groupon. We were like “Did you not want to tell us or plan this out a little bit better?”

Graham: Oh man. And they used the exact same image for both of our ads and both of us, the float centers, just had calls coming in to both our centers trying to schedule with the other’s Groupons, it was such a nightmare.

Ashkahn: So, yeah. It’s a little bit difficult in that sense that you can’t make your own plan of “Well, I’d only like there to be one Groupon every six months out there.” That sort of planning is out of your control. You can’t make decisions like that.

Graham: I guess, our own experiences running on the same day as another float center, brings me to what I’d say is the second biggest con against Groupon, which is basically they’re just a big corporation that doesn’t really care about you most of the time, you know? Even though the people who work for Groupon and are navigating through themselves, I think they’ll want to get you a better deal, and they actually can’t because of the bureaucracy that’s in front of them as well.

You’re fundamentally deciding to go into an arrangement with a giant corporation and if you’re on float collective or you’ve gone through that Facebook group you see a lot of stuff coming out of people’s bad experiences working with Groupon. In the float world where we focus on so much customer support and customer service, and it’s so front of mind, I think when dealing with a huge enterprise like this it’s easy to feel like they don’t treat you seriously or treat your concerns with much weight. A lot of people, I think, end up coming out the other end of running a Groupon deal a little upset at that process.

Ashkahn: Right.

Graham: Even if the deal goes well, just the amount of red tape you have to cut through or amount of conversations with totally different sales leads or things like that, I think ends up grating on people.

Ashkahn: Yeah.

And another downside is the people who come in off of these Groupons — it’s harder to turn them into your regular customers. These people are coming in off of a huge discount, so the idea of buying a second float at full price is a much bigger pain point than someone who just already paid full price for something. They’re probably used to finding things on Groupon, and they try new things because they try them on Groupon It’s just a little bit more difficult for that person to become your customer.

This is one of the downsides, I would say, that you do have some control over, right? It’s up to you to figure out ways to solve that problem as best as you can.

Graham: For sure.

Ashkahn: And we would do that. We had a membership pitch when people came in with Groupons where it was you could apply the full value of your Groupon towards a membership if you wanted to, so it felt like you got to use that deal twice if you wanted to become one of our members. Basically, you just need to go into it with that mind, find some sort of upsell or way to have them continue to kind of turn into your customer rather than just being this person who came in once off of a Groupon.

Graham: Yeah, if you go blindly into the process, and this is hearing from a lot of float centers who have been through this as well, if you don’t have a concrete conversion plan of turning those Groupon customers into regulars, or even just getting them back for that second float at all, they’re going to come in and just evaporate. Disappear into the ether. It’s so hard to rely on your normal systems to bring people from Groupon specifically or, not just off Groupon, off of any big discount back in for full price as their next float. You need some kind of plan to funnel them a little more gently.

Ashkahn: Yeah, and other downsides to Groupon?

Graham: I guess I just wanted to end by sharing some tips that we’ve taken away from our time interacting and running our own Groupons. So, number one that I can think of is just everything is negotiable.

Ashkahn: Right, for sure.

Graham: You get thrown into a pretty aggressive sales process as part of dealing with Groupon, almost all the time that was part of that changing salespeople that I mentioned earlier. Just know going into it that every single thing, almost, that you’re talking about is negotiable. Nothing on the contract is that firm and all the terms can be changed or adjusted a little bit depending on what you need for your own center.

Ashkahn: And pretty much the biggest thing you’re negotiating is how much of a cut they take from your selling price.

Graham: Yeah, absolutely.

As part of their contract, they don’t allow you to share what your own cuts were. But, I will say that’s one of the biggest things that you are negotiating. Other things include when your deal launches, when it expires. We’ve done deals as short at three months in expiration where they buy floats and have to use it within three months, just over the course of a summer. And we’ve had ones that last over a year. Usually, I think the best things that we’ve done with that is launching a deal in our slowest months, which for us ends up being in late June, July kind of area, beginning of our summer, and then having them expire at the exact same time next year. Being able to set it for a year later. Because the redemption rates you see on Groupon are a ton of redemption at the beginning, a ton of redemption right before it expires, so you want to make sure the beginning of your deal and the end of your deal both line up with the slowest in your own center. That’s making the most use of the customers who are coming in.

Ashkahn: Yeah, definitely that, having that kind of upsell strategy in place is, I think, definitely a really good tip with Groupon, otherwise you’re squandering it a tiny bit.

Graham: Yep, and you can also adjust the max that you want to sell. So, if you want to sell a certain number of Groupons and then shut it off, you’re worried about flooding your business … This is especially true for one and two tank centers out there. You maybe don’t want to sell 1,000 or 2,000 Groupons right out of the gate. The idea of capping that at a lower number might be in your favor.

Ashkahn: Which would be harder to do. The very first Groupon we ran I think we sold 2,100 floats?

Graham: 2,100, yeah.

Ashkahn: We’ve never even approached that number again in the years that we sold other ones.

Graham: It’s very true.

Ashkahn: I think it’d be pretty difficult to sell a couple thousand floats nowadays with how Groupon’s system runs.

Graham: For sure. But you can even cap those per month if you end up doing something recurring. Knowing you can set a limit on the Groupons that you sell is a good thing to keep in mind.

Ashkahn: Yeah.

Graham: Doesn’t have to be unlimited infinity out there.

Ashkahn: I mean, I guess another tip is just really thinking about whether you should run one or not. You know? If you are going to run a Groupon, sit down and contemplate for a moment. You’re kind of chasing your tail running a Groupon, and then running out of customers, and running another Groupon and getting stuck into a cycle.

Graham: Yeah, and this goes beyond just Groupons too. I’d advise anyone who’s even in that habitual cycle of discounting to really think about if that’s the business model they want because the more often you offer discounts the more you’re training a certain base of your customers to expect those discounts and be less and less likely to pay full price. It is something to be very wary of for sure.

Ashkahn: Or at least to just know what you’re doing. That’s really it, if you want that to be your business model, go into it knowing that’s your business model, and that you’re often not going to make a full cost of your float in terms of what you’re selling. That’s fine too, if that’s your business model.

Graham: Yeah.

Ashkahn: But don’t go into it thinking you’ve got this full price number people are going to pay and then inadvertently getting stuck into a discount loop that you’re unaware of. Just know what’s going on in your business, I guess.

Graham: Yep, and if you do want some more advice or you want to talk to people who have run Groupon’s before, feel free to reach out to us, or if you hop on Float Collective and do a little search for Groupon you can find some spirited discussions on there that are probably worth reading as well.

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