The draw is obvious: they have huge email databases of known buyers in exactly the locations you serve. At their best, But, getting access to that list and targeted offer comes with a cost and just generating sales isn’t enough to guarantee success.
Pick Your Vendor Type: National vs. Local Vendors
There are two basic types of group buying vendors:
- Those who primarily target offers to a local audience.
- Those who focus on national offers.
Groupon, for example, primarily serves local markets. Their lists are targeted at the city and sometimes the neighborhood level (NYC Midtown vs. NYC Downtown). Their national deals are usually local deals run in multiple markets.
Contrast that with Fab.com, which only sells nationally. That works well for an ecommerce company or local vendor, but wouldn’t serve a neighborhood bistro.
Understand How They Get Paid
Most group buying sites work on a revenue sharing model. They take some percentage of the discounted price of every offer you sell. It looks like this:
The highlighted cells are the values that will vary by offer. In this example, I assumed a $100 retail price, discounted 40 percent and with a 35 percent revenue share.
In that scenario, customers pay $60 for $100 worth of goods or service. Of that $60, the group buying site gets $21 and you keep $39.
Revenue share is always negotiated. In general, the max a partner will quote you is 50 percent and it goes down from there.
Learn How You Get Paid
Group buying sites are essentially ecommerce sites. They handle all aspects of offer marketing and checkout, while you handle fulfillment.
That means they’re getting the revenue first and will later distribute your share to you. In most cases, it works in a tiered system:
- Period 1: X days after sale concludes, percentage A of total sales
- Period 2: X + 30 days after sale, percentage B of total sales
- Period 3: X + 90 days , percentage C of total sales
Some partners distribute the entire amount up front. Others do it based on offers that are actually redeemed, in which case you have to report back the specific offer codes that were used.
The timing of your check and how much you receive varies, so it’s important to understand the impact to your cash flow and revenue recognition before you get into the offer. This is especially true if you’re going to have some incremental cost of goods or headcount to satisfy the buyers.
Some vendors will create redemption codes for you to use in your system, such as with an ecommerce company. If this is the case, make sure you’ve coordinated with your tech team and factored their work into the timeline.
Know The Basics of Offer Structure: Product, Discount & Quantity
There are three fundamental variables to any offer:
- What you sell
- How much you discount
- How many you sell
What You Sell
Ideally, your offer is one that:
- Is profitable after the discount and revenue share
- Attracts potential buyers
- Doesn’t diminish the brand
- Appeals to the type of customer who is likely to become a repeat purchaser
For many businesses, that takes one of several common forms:
- Excess Inventory: If you sell hard goods and you have excess to unload quickly, group buying sites offer a channel beyond your physical or virtual presence.
- Dollars for Credits: By far the most common deal offer, here you are offering $X to use towards any good or services for Y% of $X. Starbucks recent $5 for $10 of credit offer is a prime example.
- Discounts on Specific Goods or Service: A common variation of dollars for credits is a discount on a specific good or service, for example $40 for a massage, regularly $80.
This allows a more targeted discount, particularly useful you want to exclude more upscale or in demand experiences. A restaurant might discount a three-course lunch deal, more than most people would spend, but purposely exclude more popular dinner and weekend options.
- Significant Discount or Loss Leader: Some businesses may take offer a product near or below cost with the hopes of upselling customers to more expensive or continued purchases. Think of dermatologists who discount the first Botox treatment as a way to acquire new customers for regular treatments.
How Much You Discount
Most of the local sites start their discounting at 30 percent and go up to 90 percent, depending on the deal and product.
Setting the discount percentage is tricky calculus. The less you discount, the more revenue you and the partner retain. The lower the discount, the more accessible you make the offer.
You should aim to at least break even after the discount and rev share.
Another way to look at it is customer acquisition cost (CAC). If you’re losing money on the deal, but you generate enough repeat customers such that your CAC is lower than other channels and you can project their lifetime value to be greater than your CAC, it may be an efficient channel.
The trick, of course, is to estimate how many people will become repeat purchasers and know your CAC limits, based on your likely lifetime value (LTV).
How Many You Sell
The most important regulator of how many units to sell is the number you can satisfy with a good customer experience (more on that below).
Most businesses have some physical cap: either the amount of inventory on hand or the maximum number of customers you can accommodate in a reasonable time period after the sale.
Some partners have a target revenue per deal that they sell, as determined by Units * (Rev Share percentage * Discounted Price). This will generally be more applicable for the largest sites and markets. It’s worth asking your vendor early in the discussion, because their targets may not match your limits.
Getting People To Trade Up
One of the ways to attract price conscious buyers but increase your revenue and profit from sales is to have a tiered offer.
Tiered offers are usually a range of 2-3 products or services at increasing price points and different quantities. For example, imagine a spa with an offer structure like this:
- Massage - $40 for a Swedish Massage (Retail $80). 50 units.
- Pampering Package - $80 for a Swedish Massage, mini-facial and champagne (Retail $125) 100 units
- Ultimate Spa Day - $150 for a Swedish Massage, 60 minute facial, champagne and chocolates (Retail $225) 100 units
You create an easy entry point to get people to pay attention to the deal and ensure good sales, but a compelling upsell option.
Anticipate Offer Redemption and Customer Experience
We’ve all read the horror stories of businesses that sold thousands of deals only to be inundated with unprofitable sales and upset customers.
You need to think through all aspects of the post-sale experience. Here is a starter checklist:
What’s the maximum number of people your business can handle?
If you’re a spa that can only accommodate 60 customers a day, but you sell 1,000 offers, you’re setting yourself up for a stressful situation. You need to have the products, staff, process and systems in place before redemptions start.
When will people redeem their offers?
You can expect that you’ll see a surge of redemptions shortly after the sale closes and then a continued, slow redemption over time. If your offer is seasonal, such as gifts, factor that into your planning.
How will people redeem their offer?
Can they buy on your website? Do they have to make an appointment? Will they bring in your gift certificate to your stores?
Put yourself in the buyer’s shoes and think through the experience. Is it intuitive? You can get ahead of some issues by making sure the offer is clear on the group buying site and that the actual gift certificate they receive (usually by email) includes all of the necessary redemption instructions.
The simpler and less manual the redemption process the better. If you’re a spa, for example, an online reservation system is going to be much more helpful to process a wave of redemptions than phone reservations.
Do you have an ecommerce website? Provide a link to where they can buy the product(s) you’ve sold and clear instructions as to where they enter the codes. Some businesses will create special landing pages or add wording to their site to make the process simpler (e.g., “Have a Groupon? Click here to redeem.”).
Make sure your staff and customer service team are well educated on how to redeem the offers and what the limits are.
What is the fine print?
Make sure you think through the limits of your deal. That can include blackout dates, limits to the day and time of redemption, non-combinable clauses, expirations, limiting deals to new customers, take out only, etc.
Specify limits clearly on the group buying site, repeat them on the gift certificate and educate anyone who will be handling redemptions.
What are the likely questions and issues?
Regardless of how specific you are in the deal and gift certificate, some people are going to make assumptions or miss key points.
Anticipate the most likely scenarios and develop policies before redemptions start. Can gift certificates be used for past purchases? Can they apply coupons to gift certificates? Can they give them as gifts?
The possibilities are endless. In general, the group buying sites will handle any refunds when issues arise. Know when that is the case and have their information readily available just in case.
You only get one chance to impress new customers. While it is ultimately in the best interest of group buying sites to steward you through these considerations, you can’t depend on them to guide you. In the end, your business will be judged by both the product and the process of getting that product.
Launching An Offer
The process of launching an offer is relatively simple. At a minimum, you’ll need at least two weeks between signed contract and sale launch. As with all advertising, the longer the lead time, the better.
- Find Your Sales Rep: If you haven’t been cold called already, you’ll need to submit a form on their website and wait for them to contact you. This can take 1 day to 2 weeks, in my experience. If you’re considering a group deal, it’s best to take this step early, so you have a name and number handy later.
- Determine the Offer: Here you’re figuring out the products, price, discount, number of units, etc. This is relatively straightforward if you know what you want, though they may advise you on what works best or push for a specific number of units and price if they’re trying to hit a revenue target. The rev share percentage is always up for negotiation and, as usual, the more time you have to negotiate, the better.
- Pick a Date: The date is a balance between when you want to sell the product/service, when you can be ready to handle the surge of buyers and when the group buying site can schedule you. Some sites have sale calendars and slot certain businesses in to certain days or try not to repeat certain offer types at certain times. The more specific the date you want, the longer out you’ll need to plan. My recommendation is to start the conversation at least six weeks before you want the sale to go live.
- Setup the Offer: There is a lot of backend work that goes into an offer. They require photography, either of your business or stock photography that represents what you’re selling. You have to approve the copy they write. Fine print is agreed upon, mostly specified by the vendor. Offer codes need to be set up by the group buying site and sometimes by the vendor as well. Anything you need to create for redemption on your site or in your store is finalized here as well. This is the longest part of the process after negotiating the offer.
The Importance of Reviews: Before and After
In many cases, a group buying site will be the first time these customers have heard of your business. The attractiveness of your offer reflects the value and discount as well as their perception of your business.
Most of the group buying sites will pull in reviews from Yelp or Citysearch. Even if they don’t, you can expect prospective customers to research your business before they buy. The better your reviews, the stronger your brand, and the less frequently you discount, the more likely they are to purchase.
I’ve emphasized the importance of customer experience in part because many group buying customers are both demanding and digitally savvy. Look at any business that regularly runs deals and you’ll see their reviews are often skewed, positively or negatively, after running an offer.
Reviews live on well beyond the offer period. Preparing for the surge is the best way to ensure good reviews. In the case of bad reviews, be ready to respond politely and with good customer service.
Converting Trials to Repeat Customers
Ultimately, the goal of any offer is to get new customers and hopefully ones who come back to buy at full price.
Aside from providing great service, the best way to increase the likelihood of repeat purchase is to plan for it. Generally, the easiest way to do this is to capture their email address for targeted follow-up offers and communication.
Other businesses structure an offer that is designed for repeat purchases, such as medical or cosmetic services, and have phone, direct mail and email.
Group buying sites don’t give you any contact information for your buyers, so you need to plan out the way you’ll capture their contact information and the messages you’ll deliver and when.
Finally, you need a way to measure the ROI of your group offer. The easiest way to do this is to separate them as a specific cohort of customers and track their purchased over time.
This will require some sort of customer database and a unique identifier to be able to segment all of your business metrics (revenue, profit, etc.) for these customers vs. other channels.
At the very least, every business can try to capture email addresses and add “Group Buying Site” as a field in their email database.
Making It Work
Group buying websites make local marketing at scale accessible to businesses. But, they don’t make them instantly profitable or ultimately worthwhile. You need to be smart about your offer, thoughtful about the customer experience and rigorous in your measurement.
Leave a comment with your experiences and suggested tips!