I’m writing this in response to a group buying sales executive trying to get my retail company to promote on their site. I’ve tried explaining my reasoning for certain chosen products and timings that I want to push, but being the sales representative of 1 single medium, he obviously doesn’t have much incentive to intentionally lower his sales quota does he.
I’ve personally used group buying sites to promote my business twice, and as a business owner, I’m here to share my perspective on the pros and cons.
As with any working promotion, the problem is whether the offer will cannibalize your existing profits, which is very commonly seen in group buying deals.
The main reasoning for group buying
Group buying sites will argue that it’s not about the profits in the short term, but in making your establishment look crowded so as to pull in more people, and build a buzz, which hopefully snowballs. They also state that when people group buy, there is a high chance to up sell, and also for trial so as to come back as a full paying repeat customer in the long term.
True, your new business can gain awareness very quickly, but are these group buy customers the right kind that you can build long term relationships with?
Conditions for group buying to be effective
Technically speaking, group buying can work based on several conditions.
Firstly, a business must not be already operating at maximum capacity: any further demand is just cannibalization of what could have been earned.
Secondly, the deal itself must be profitable. In the past where group buying was wild hot, large companies like Groupon would charge a 50% commission on top of the buy 1 get 1 offer that was commonly pushed. This structure pretty much left the merchant with either break even profit, or even a loss for each item sold. These days commission is closer to 20-30%.
However, if your margins are good enough to still ensure a profit per voucher sold, then by all means go ahead. Utilize the spare capacity. However, do make sure your business can sustain the mass volume that comes after, and not compromise on service and quality. You must be scalable.
Do not allow group buying redemption during peak hours
Why? Because during peak hour, your business is most likely already at maximum capacity, and you actually lose money by serving group buying customers. Here’s an illustration in numbers:
Let’s say at any period, a restaurant’s maximum capacity is 100 people, and you have to turn away customers if there are more than 100 people. Each full paying customer earns you on average $20 profit. On a typical peak hour weekend for example, at maximum capacity, you are earning $2,000 in profits.
So what happens if you sold a group buying deal valid for this peak hour? In a common scenario, about 30% of your customers will instead be group buying redemption. However, the profit you make on 1 group buying customer is probably only a fraction of your real profits, say $5.
Since you can still only serve 100 customers due to space, you now have 70 customers with $20 profit, and 30 customers with $5 profit because you have to turn away full price paying customers to accommodate the group buyers. Total profits during your peak period has instead, been lowered to $1400 + $150 = $1550.
$2000 – $1550 = $450 LOSS in potential profits
One group buying executive told me that they don’t want to restrict customers so that people who do not live nearby your business will buy over the weekend. By restricting accessibility to customers from afar, it ‘defeats the purpose of marketing’.
Let’s get one thing straight. The purpose of marketing is to make profits, not to attract as much one-time buyers who only come during an offer from strange corners of the country.
In the world of retail, do you think these faraway customers will turn into repeat customers willing to pay the full price, or most likely just travel the distance once for a good deal? The answer is obvious.
Don’t be muscled into an unprofitable deal
There are many other alternate group buying sites, so don’t feel pressured to sign on. I have to say about 80% of businesses I’ve spoken to will not do group buying deals again because of the type of customer it attracts.
The type of customers attracted are typically have very low customer lifetime value to the merchant, jumping from one group buy offer to the next. The easiest way to track repeat results of course, is to gather the information of customers who have redeemed a deal, and track with a followup promotion. Group buy sites however, don’t release this information on repeat percentage, as it is glaringly against their advantage to release this data.
Group buy sales people can be very aggressive and try to push your product to sell more, but it doesn’t necessarily mean a profit for you or operational efficiency. During the last 3 days till the deal expiry date, operations typically get so overloaded with last minute redemption, you’ll wish you didn’t do the deal in the first place.
As I’ve always advocated, look around for more options that can be tracked and proven to have positive return. A sales representative of one advertising product will only promote his own product, while his interests are not with the business. You have to look out for your own interests, and not give in to the advertiser.
Maximizing from group buying customers
Generally, I would say from client feed back as well as my personally experience, group buying sites do not create sufficient long term marketing that snowballs as they have been preaching. If you want to use group buying, make sure each short term deal is already profitable, and structured around a feasible product profit margin.
In addition, build your customer list from people who have redeemed a group buy voucher by asking for their email or contact number. Re-market to this group of people to take advantage of the huge group buying database.
Note that advertising and group buying agents will say whatever it takes to close the deal, and no matter how good it sounds, always look at the numbers. Ask them to prove the math, and they will tell you it’s not possible to show. Marketing is based on results and what works, not hypothetical dream situations.
Group buying can be used as a profitable tool limited to low peak periods to utilize spare capacity, but many group buy companies will be very reluctant to do so as it reduces their sales. So whose interests do you think they are looking after? As an awareness and word-of-mouth tool, it is also pretty acceptable, but don’t bang on their database for any long term customers.
As a consumer though, you won’t believe the incredibly low margins merchants have to tolerate, so take advantage of group buying deals definitely.