Groupon Lost to LivingSocial this Year
Up until now, it seemed that both would bend over backwards to get my restaurant on their list. They were heavy competitors and I knew it. I also made sure they knew they were competing with each other.
It came down to relationship. Unfortunately, one awesome sales rep played games this year when he was always very helpful in the past. The other was a partner trying to help me find a solution. I chose the partnership.
Setting the Stage
In even years I went with LivingSocial and odd years with Groupon. Last year my restaurant finished another successful voucher campaign. This year it was Groupon’s turn and they knew it. They were chomping at the bit with frequent emails and calls.
The Miracle Tool
My primary business is a consulting firm. The restaurant is a whole other world. I did what any good business analyst would do, I built a spreadsheet to figure out exactly what my total profit would be at different levels of sales, redemption rates, and use of expired vouchers at their face value. Then I could manipulate offers, prices, and percentage cuts that I could negotiate with the voucher vendors, etc. It is a very cool spreadsheet, really it is.
Another One Bites the Dust
The sad thing about vouchers is that most businesses do not truly understand how they work. My niche restaurant is going on 12 years at the time of this writing. When we first opened, there were 12 niche competitors in the valley. When the economy tanked, they started dropping like flies.
The saddest thing I witnessed was when they jumped to voucher sales. It was like inexperienced sailors drinking ocean water to hydrate their bodies! Sure it might quench their thirst for a short time, but the salt in the water does the exact opposite of what their body needs, and it actually dehydrates them faster and kills them quicker. My competitors ended up drowning in debt. Here’s why…
Let’s say they sell a product for $20. To get a deal with a voucher vendor, they have to offer it close to half price, thus, $10. The voucher vendor estimates that they can sell 3,000 vouchers. The business owner does a quick calculation and sees that $30,000 in vouchers will be sold in two weeks. Sweet deal, right? Where do I sign up?
Wait a minute. If the business owner doesn’t catch it in the contract (many don’t), they may not realize that they don’t get that money. Instead, they have to split the sales with the voucher vendor. That means $15,000 goes to the voucher vendor and $15,000 goes to the business owner, right? Well, not quite. The voucher vendor will often try to charge you for credit card fees, which vary widely depending on whether a buyer uses Visa, Platinum Visa, American Express, American Express Gold, etc. To keep things clean, let’s assume that an average of 4% is built into the deal, 4% that comes out of your portion. In fact, let’s pretend that you negotiated it away so you don’t have to pay it.
Unfortunately, many business owners don’t think through this very well. Think about what the business owner just agreed to do. They are selling a $20 product for $10. But they only get to keep half of the sales price! That means they are selling a $20 product for $5. That’s a 75% discount! Very few businesses can profit with a 75% discount. This business just sold 3,000 of them and they have to provide that deal when the unexpired vouchers are brought in, else face penalties or even a lawsuit.
Yes, some voucher holders forget to use them before they expire. But in many states, the law requires that the price paid for the voucher never expires towards the same deal. That means the voucher holder, in the example above, can used the expired voucher for $10 off the $20 product, which is 50% off. Now, if the business owner is good at budgeting his money, he might still have that $5 he received from the original sale of the voucher and would realize he now only provided the product for 25% off.
The business gets paid over several months, not all at once. The voucher vendor retains sales dollars in case they have to refund vouchers out of your share.
Desperate businesses use vouchers as a quick funding to pay some bills, pay down the loan, or pay off the credit card debt. A few very inexperienced sole proprietors might see an extra $15K in their bank account and decide to take a draw on the money and go on a vacation…a vacation before the financial drought comes.
Then come the masses! The business is sizzling with customers and things are looking great…until the business owner can’t make payroll. Like I said, I’ve seen my competitors drop like flies because they didn’t run the numbers. The resulting failed businesses occur nationwide.
Back to the Story
This year was Groupon’s turn to partner with me. Because of restaurant cost increases, I needed a percentage adjustment to make my numbers work. In the past, the Groupon sales guy was always eager to help design an offer that fit my needs, but this time, he drew a line in the sand that I needed him to remove. I double checked with my LivingSocial rep, who was quick to say he’d meet that need. I took the info back to Groupon and threatened to do a second year with LivingSocial if they couldn’t match what I needed.
Groupon didn’t think I’d leave and wouldn’t budge. To bad, so sad. Therefore, it was LivingSocial who served me two years in a row. It’s getting to be that time again where I start looking planning for next year. Let’s see who wants my business this time around. My business comes before vendor loyalty in this case.
This post wasn’t intended to be an advertisement, but because so many businesses fail as a result of using vouchers improperly, I thought it might be wise to offer you some help so you don’t make a huge mistake. If you are interested in getting some qualified professional help in designing a voucher program for your company, you should consider contacting Advanced Development Concepts for expert business consulting in the area of Groupon and LivingSocial voucher plans.
#LivingSocial #Groupon #Vouchers #ADC #Marketing #BusinessPlans
Copyright (c) 2015, R. Scott Alvord