Small businesses finally figure out how to use Groupon

For years, small businesses had a love-hate relationship with daily-deal sites. They signed up with the sites to boost sales volume—but grumbled that the sites imposed unfavorable terms that cut into their bottom line.

That’s no longer necessarily the case. Interest in the sites has been diminishing in recent years, experts say, so small companies have more leverage to push for better terms that can help them build a loyal customer base without costing them too much.

Businesses, for instance, can now land shorter-term deals than they could years ago, and they can offer discounts on secondary products instead of core ones—which means a much smaller ding to the bottom line.

At the same time, the experts say, small businesses have to rethink how they treat the customers who are lured in with coupons. The companies must do more outreach to coupon customers, offering them special treatment to make sure that they come back to the business once the discount expires.

“Most of the work from a Groupon(GRPN) deal starts after customers get through the door,” says Symon He, a Los Angeles-based consultant who teaches small businesses to run more profitable daily deals. “A lot of businesses think this is a one-and-done thing,” he says.

Tough deals

When deals sites first launched in 2008, they had the upper hand with small businesses. Firms were often pressured to offer large discounts on a regular basis, and the sites took about the 55% of returns their coupons generated. What’s more, they sometimes offered numerous deals in one area, pitting businesses against each other.

By 2012, though, companies began leaving the sites or cutting back on coupon offerings — so, these days, the sites are more flexible when structuring discount offers.

Nowadays, companies can secure deals that allow them to present smaller discounts with less frequency, and only about 25% of the revenue goes to the deal sites, says Utpal Dholakia, a marketing professor at Rice University in Houston who researches the sites. “You used to have these huge vouchers, [but] those values have gone down a lot and now [are] $20 or less.”

What’s the best way to navigate this new environment? Along with offering smaller, shorter-term deals, He suggests offering discounts on extra items instead of core products.

A spa, for instance, might offer a massage deal with champagne and chocolate for the price of just the massage—instead of offering a discount on the massage itself.

“They have to create the higher perception of value without incurring a lot of additional cost,” he says.

Businesses should also focus on hanging onto those customers with good service—something that was not always a priority in the past, when employees sometimes acted resentful to coupon customers. In some businesses, He says, only select employees know that the client has used a daily-deal coupon, which discourages any perceived bias.

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A nuanced approach

Michael Parrella, founder of kickboxing-club franchise Ilovekickboxing, says he has worked with Groupon since 2009, and over that time the coupons have generated more than $2 million in sales. But when Groupon started offering many deals in each city rather than a select few, his income dropped by $300,000, he says.

A Groupon spokesman says, “Our evolution into a local discovery destination has been a win-win for both consumers and local businesses as we’ve increased the number of active deals on our platform by [700 times] since we went public in 2011.”

So Parrella developed a system to follow up on the initial sale—something the company didn’t do in the past. Once customers purchase a pack of training sessions via Groupon, they are assigned to one employee at the gym who helps them settle into the facility. When their Groupon is over, they are offered another deal on classes. Finally, after two rounds of discounted offerings, customers are invited to join. By taking a low-pressure approach, the company turns about four out of 10 Groupon users into regular members.

Still, even with the possibility of getting more favorite terms, some companies have decided to drop coupon deals almost entirely. Brooklyn Boulders, a chain of Denver-based rock-climbing clubs with other amenities, started working with daily-deal sites seven years ago but has since ended most of their campaigns.

Initially, the coupon offerings helped to introduce the concept, says Alex Graziano, national marketing manager. But the company realized the cut owed to vendors was better spent on other marketing endeavors and executives no longer wanted to associate the brand with constant discount offerings, he says.

“We’re shying away from it,” he says.

Alina Dizik

The article first appeared in The Wall Street Journal.

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