Blog - Business Strategy

Flash sales are all the rage these days, companies like Gilt, Groupon and Totsy, along with the many others including ideeli, Beyond the Rack and RueLaLa have a similar business model.  Essentially, these companies bring the sample sale online by offering super short-term sales with very discounted prices to their “members,” basically anyone who signs up for the newsletter.  The sales can feature anything from clothes and accessories to baby products, furniture, spa services and restaurants.  The “flash” part of the sale are that the sales are usually 1-3 days in length and the best products and services may sell out quickly.

As we watch these companies multiply, the model is clearly working as can be attested by all the copycat companies popping up in each vertical from home furnishing to food.  As they become a more viable distribution channel and marketing tool, many companies are including them in their plans.   But are they good for your business?  Is it smart for your business to participate in flash sales?  While there may very well be some great advantages like increased sales and brand exposure, some call these companies the “discounting devil,” and there are clearly some disadvantages with discounting your products or services to such a degree.  I think the answer lies somewhere in the middle especially if you can find a way to use them to your advantage.  In this series, we set out to research these flash sale sites by going directly to some of our Collective-E members who have participated and discover some pros, cons and strategies for making them work in building your brand.

We’ll start this series with a look at Groupon.

Groupon is a simple model which I admire (I always admire a simple, effective and clear business strategy), started by a young hot shot entrepreneur Andrew Mason in Chicago. Each day Groupon sends out an email with a “deal of the day,”  a heavily discounted (at least 50% off a product or service) in a variety of cities across the US.  They started in Chicago and are growing like wildfire, now in 40 cities.  This is a local angle focusing on “the best stuff to do, see, eat and buy on a local level.”  The offerings can be products or services. 

What surprised me most is that I thought a business might participate in Groupon for the traffic that it provides, but according to my sources, Groupon sells vendors on an impulse purchase strategy, they only expect a small percentage of those who purchase to actually redeem the “coupon”.    Groupon encourages you to offer a 50% or more discount and takes 50% of what they sell plus processing costs.  So think about it, if you have a $100 service that you discount to $50, you will make less than $25 per sale. Is it worth it? 

As always, lets go straight to Collective-E members to find out their experiences:

“I have tried it twice”  
Alycea Ungaro, founder of Real Pilates was approached by Groupon to do a deal with her Pilates studio.  She decided to do it as an experiment shortly after they launched in NYC, but only as an offer for new clients to Real Pilates.  “We offered $100 worth of Pilates or services for $50, on the first try they sold around 80, so we made around $2k.  Of the 80 sold only 5 came into the studio, and the certificates are good for one year.  If all 80 came in it would be tremendous loss, but in this case it did well for us, however, none of those 5 became ongoing customers.  The second time we did the Groupon we offered $42 for a 55 minute Pilates session, 51% off.  This was more successful, we sold 150 and more actually came in and actually became new customers. Still, nothing close to even 100 actually showed up.  According to Alycea, another Pilates studio in NYC offered a similar discount and sold over 700, but they also opened the offering existing customers, we feel that could be very dangerous and slippery slope.”

Will you do it again?  “Yes, I plan to experiment and play around with it, in total we have made over $5k from Groupon and we think that it has been good for exposure.  However, we will continue our policy of only offering to new clients.”

“I was a side deal”
Bara Sapir, founder TestPrep NY was a Groupon “side deal.”  On every Groupon email there is another offer on the bottom right corner that is called a “side deal.”    Bara loves Groupon as a customer and wanted to participate with her business, she reached out to them herself.  As a test prep company they choose to put her as a side, they said it was based on feedback from their experience with another test prep company.

According to Bara, “it took a long time to get hooked up and get the deal up and going, but I think that next time around it would take less time.”  She offered 70% off services, of which she would split the remaining 30% 50/50 with Groupon.  She did not have any sales from the Groupon.  
Will you do it again? “Yes. I think that the visibility potential was great, even though we were on the sideline. From other people I've spoken with, the 'side deal' items get much lower hits because people don't always open the email if they aren't interested in the main email. Also, I was told that our item follows what some other similar niche markets experience. So whether it's so niche or so hidden, I'm not sure what didn't work, but I still think it's a great opportunity for potential brand exposure.”

Conclusion

Here is a three step process to determine if Groupon is right for you:
1.    Does Groupon fit your brand image?  If you are extreme high end luxury, it might not and you might look to someone like Gilt Group.
2.    Determine your goal:  revenue, brand exposure, traffic, attracting new clients
3.    Design your strategy:  your offering will include the pricing, product/service and if you are offering to new or existing clients.   Look at is as an experiment and be willing to adjust.

Last bit of advice, proceed with caution, be aware that it is hard to recover from indiscriminate discounting; you train your customers to expect a discount. You might consider selling some of your overstock, focusing on attracting new clients or driving traffic during off hours.

Have you tried Groupon?  Please share your experience.