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Groupon Business Review Part 2: Horny For The Deal

[This is an excerpt from my new book, Groupon: Why Deep Discounts are Bad for Business]

Part 2 of a series of 11 on the perils of discounting for businesses.  Today’s post explores more about the financial costs of couponing, discounting and utilizing Groupon and their online clones, coupon blogs and their ilk.

Introduction

This is not a consumer blog. I’m unabashedly in the business owners’ corner. Whether it is as a multi-national manufacturer, a regional chain, a distributor, an established franchisor, a new franchisee or single store operator. My business is their business.

As a retail expert who speaks and as an information entrepreneur, I speak and write to help businesses be more successful and keep the engine of commerce profitable.

I said it ten years ago with my first book, You Can Compete: Double Sales Without Discounting, again in my newest book, The Retail Doctor’s Guide to Growing Your Business (Wiley & Sons) and it is a hallmark of my motivational speeches to business owners around the world: Discounting doesn’t build your business.

I haven’t seen anyone delve into this as deep as I’m about to so i hope you’ll stay involved, join my Facebook Fan page or sign up to the RSS feed of the blog, tell your friends, tweet, “like,” and let me know your thoughts.

Cherry Picking

When you use coupons, offer a Groupon, Entertainment Book, Bloomspot, you name it, you are more likely to be cherry picked because they’re typically a value of services for 1/2 ( or more!) Check out this one from last Saturday: $175 worth of furniture for $40.

That means shoppers are able to get the top 20% of your best selling, first run SKUs at a deal.  So you end up out of stock with the very things you need to be profitable.

Price Matching

Back when I sold western wear in the 80’s, we had a competitor regularly run coupon sales on lizard boots for $199 when the ones I was carrying were $269. Invariably the competitor wouldn’t have the customer’s size, they’d come to me and ask to price match and get the same deal. My response, “No dice.”

“Why not?” they’d ask.

I’d tell them, “Ours would be free if we were out of stock.  But we do have your size. And they fit. And you can wear them out tonight. Will that be a box or a bag?”

90% of the time I’d get, “Box please.”

It costs money to stock a store, staff a spa or run a successful kitchen for your restaurant.

Matching the price of a competitor takes everything out of your own business and reduces it to whatever unscrupulous, low-life, dirt-scratching competitor across town or down the block is offering. Often at a loss.

It ignores the probable fact the competitor’s parent purchased the land, building and merchandise eons ago and so their daughter or son has no debt load.

You, on the other hand might have taken out a home equity loan at the top of the housing bubble and now have more bills than receipts.

Further, when you price-match or sign up for an online “deal of the day” discount past your profitable price, you have fallen on your own sword.

Oh you may not feel it at first as the blood seeps out. You’re so horny for the deal you tell yourself, “I had to do it to make the sale.”

That’s like the Black Knight in the Monty Python movie, “Its not so bad, it’s only a flesh wound.”

But as you do it over and over again it gets easier. When such a shop inevitably loses its way after a pattern of this price matching or couponing, the owner realizes (too late) the path to failure was a determined effort to avoid the truth about what hand they had in the demise of their own profits.

The good news is that I am writing this series to warn you now.

Discounting to others who don’t know you doesn’t work! Profits do!

Profit comes from taking the risk of what customers will want to buy from you.

Rewarding Risk

Like some type of fortuneteller peering into a cloudy crystal ball, you (whether you are a manufacturer, distributor, franchise or mom and pop) are buying merchandise in anticipation of what your customers might want in the future.

It’s an inexact science for new merchandise since it is unproven. Its risky.

At least 50% of the time you are either wrong or the merchandise doesn’t turn at least twice to give you a good return on your investment. Of the remaining 50%,  20% are fantastic, barn-burner, stellar money-makers.  But you may not be able to keep them in stock because that first 50% that has taken up your open-to-buy are gathering dust on your sales floor making your ability to juice sales limited.

Without the reward from taking those risks, and the profits that result, you end up with stores filled with boat loads of boring merchandise.  You might have some very happy sales representatives but an unhappy spouse as a result.

Boring merch is what is wrong in a lot of stores these days.

So why would you reward another company’s customers with a virtual run on your balance sheet either through price-matching, Groupons or other discounts?

Good question.

Tomorrow: The Alien Danger To Business With Groupon (and their ilk)

Here are the previous posts in case you missed them:

Related posts:

Posted by Bob Phibbs, the Retail Doctor on August 31, 2010.

This entry was posted in Marketing and tagged , , , , , , , . Bookmark the permalink.

11 Responses to “Groupon Business Review Part 2: Horny For The Deal”

  1. John says:

    What if your closest competitors sell similar assortments to similar customers, but you are the new retailer on the block? Wouldn’t it be worthwhile to have an opening special to get noticed without having to rely on such deals indefinitely? And what if you’re a retailer with clearly too much inventory and don’t have the foot traffic to get rid of it? Wouldn’t it make sense to generate foot traffic, particularly new customers?

    • bobphibbs says:

      I’m not sure I read you John. You can have a grand opening – that’s not what I’m talking about here. If you have too much inventory, you run a sale to get rid of the slow movers. If you use one of the get $50 worth of stuff for $25 you will probably be cherry picked and, while you might have taken in cash, you will have not made up enough to re-order the good stuff so you will more than likely end up in a downward spiral. Finally, if you were a new retailer opening with competitors selling similar merch and customers, how did you think you were going to compete and draw people to you in the first place. It shouldn’t be on price.

  2. John says:

    I just think retailers have targets that change from time to time. I agree that consistency is important to establish credibility with the customer but there are times when a retailer needs to prioritize cash flow and there are other times when margins are top priority. The month prior to Christmas certainly has different goals (margin and sales) than the month following (clearing inventory).

    With the hype that Groupon and its clones are getting and the current malaise in the malls, there is probably no more potent traffic generator at the moment. For all the “cherry pickers” there may also be a few “bottom feeders”. Which of these customers will be repeat customers and what they will expect of the retailer is anyone’s guess. But there is a chance that the extra awareness could generate immediate cash flow and acquire new customers that may also be of benefit in the long run.

    • bobphibbs says:

      John, I definately do not agree with you on this. You’ll find out as you continue to read the rest of the series. Using a Groupon-like program is a deal with the devil.

  3. Jim Poor says:

    This is all very interesting. I’m wondering if you feel the same about “loyalty” programs. I run a photography studio and have considered rewarding current clients for referrals to the tune of one free session for 3 referrals that become paying customers.

    • bobphibbs says:

      Hi Jim, no not at all! Loyalty programs are rewarding people who are loyal to you, have helped make you profitable and who probably like you a lot. What you are describing though is not a loyalty program where someone would get points for the amount they purchase or a discount for having given you their email address or other contact information. You are asking your customers to market your business for you with, what I would consider, a very high watermark to meet. I don’t think you’ll get that much traction Do you have a FB fan page you could engage them with?

      • Jim Poor says:

        Thanks Bob,

        I’ve had a FB fan page for a while but pretty much neglected it as I don’t like the way “updates” get hidden.

        I’ve signed up with a marketing coach in an effort to spin off a higher-end studio business from what I have going now.

        I’ve got a strong client base of about 1200 right now, but am looking to target a new market segment with this new venture. New FB page, website and all under development.

        The program I described is lacking a lot of detail, I know. The customer would actually get a credit of 1/3 the cost of a session for each successful referral, so even at 1, they would be getting more than $100.

        It’s obviously still in the brainstorming phase, which is part of what brought me here.

        I have to say the Groupon series has been an eye opener.

        • bobphibbs says:

          Feel free to comment on my FB fan page and ask any questions there Jim. I would say your website is the key, get listed on Google Local Business (free) and come up with relevant, interesting things to email out to your list. For example, “The 10 Things That Make Your Halloween Photos Look Frightful.”

  4. Daniel says:

    Hi Bob,

    Just stumbled upon your web. I was an independent toy store owner in Ontario, Canada, also had hardline experience with manufacturers and had always been in working with business model and Internet businesses.

    I think your advocacy efforts against Groupons are awesome. I too challenge the value that Groupon offers; For a manufacturer or a local distributor who had lots of stocks, they may be interested to blow some stock out. However, to independent retailers, the value that a local friendly store that can offer advise and service should not jump to heavy discounting. You are undercutting yourself if you do.

    Store owners that do that – are SHORT SIGHTED, as you are discounting below the cost of keeping those inventories. You are also pushing all the profit to Groupons and your store becoming the CS department for all their takings.

    The settlement process is absurd. cashflow is so important even on a weekly basis, back then when Amex wants 2 weeks clearing, i told them forget it. Other cards, i can get the money overnight.

    GROUPONS is blown way out of position. They hold no value and they are ripping retailers (especially independents)

    Daniel Chun
    Ex-Owner of BoyToys Canada store in Mississauga (next to current Walmart SuperStore at corner of Mavis/Matheson)
    When we had our store, it was CLASS LEADING as we offer services, we offer customers good service, advisory, learning experience, fun and our compelling tagline was “Today’s Hobby Makes Future Engineers”

    Phd Student (Lancaster)MBA M.InfoTech B.Sc PgDip Marketing Founder/CEO of ClassBooking.com with ArtGroup – a Red Herring Asia 100 Winner

    • bobphibbs says:

      Thanks for dropping by and commenting Daniel – and not just because you agree with me. I love your tagline – really more of a mission statement for the community and employees. So much of retail is now about the “deal” that the goal of improving the community and customers has devolved for many into, “We sell more stuff you can find anywhere for less.”

      • Daniel says:

        Moving merchandise at the fastest speed and turn them to cash is a corporate norm. However, when products that are not needed being pushed to consumers beyond their credit or ability to pay. That’s greedy for big corporation. Making a small profit as an independent shop owner is already tough enough and being outsmart in the game and had to learn new rules to play their game makes no sense. My 2 cents

        Play your own game ! Not Theirs !! Create your own loyalty building exercise and you will not need Coupons deals. You may offer your own gift certificates though.