December 3, 2009

Game On With Groupon

groupon-logoAs co-owner of Savvy Cellar Wine Bar & Wine Shop, I get to experiment with promotional services that are designed to help local businesses.  Over the course of several years we’ve tried (in no particular order):  Google Adwords, Yahoo! Local, MerchantCircle, local newspapers, local magazines, email, Twitter, Facebook, FourSquare, Peninsula Shops, Movie Theater Advertising, Rumbafish and now Groupon.

An online coupon site, Groupon is organized by major metro markets in the U.S.  Each day, the company features unique offers in the local market (restaurants, spas, entertainment, etc.) at a special “group” price.  There is a minimum level set for each offer – meaning that a certain number of people have to sign up for the daily groupon in order for everyone to get it.  This drives sharing among friends on social networks.  If enough people opt to take the offer, then the offer is “on”.  At the end of the day, everyone who took the offer is charged.  Then Groupon takes its cut of 40-60 percent and pays the merchant the balance.

Savvy Cellar is today’s Groupon in San Jose, CA.

I’ll let you know how it goes.  For a small merchant this is an interesting option.  The pain is the cost of promotion – in Savvy Cellar’s case it was a 58 percent discount on wine flights, basically eating up the margin.  In addition, we will lose another 40-60 percent of what’s left in the form of Groupon’s take.  So if we get 100 takers of the groupon for wine flights, we will see approximately $4 each or $400 total from the promotion.

If an average wine flight is $16, then 100 flights at full retail would be $1,600.  So one way to look at this is the promo cost us $1,200 in gross margin, which is a money loser.

So why bother with Groupon?  Well, the flip side of the analysis is we received branded exposure on their full mailing list (the size of the San Jose list was not disclosed), reaching people we typically would not be able to.  When people come to the shop they are likely to enjoy more than just a single discounted wine flight – possibly another wine flight, a glass of wine, food and retail bottles on the way out the door.  Plus, if we provide good service and a positive experience, some will return, some will take classes and some might become wine club members.

Additionally there is the “breakage” aspect of coupons – some customers who pay for the groupon won’t actually redeem the service.

Time will tell whether Groupon is worth a small, local merchant’s while.  As a business, however, Groupon is a great idea with phenomenal momentum – growing rapidly, profitable and well funded, having just received $30M.

Comments

26 Responses to “Game On With Groupon”
  1. Which company has given you the best results thus far with the least amount of effort & cost? How did your groupon go today? One of our members saw nearly 3x in pages viewed on her website from 400 to 1150 in one day thanks to a http://www.PeninsulaShops.com campaign. Curious to know if you were able to review your analytics in relation to Peninsula Shops Campaign and has your membership translated into $.

  2. admin says:

    Jason:

    I’m going to work through an analysis looking back on all our initiatives over the past 4 years and assess each against results, time/effort and cost. The short answer is there is no silver bullet. Despite all of the great access to online marketing tools, for businesses that are selling extensively online, I’d say the best marketing is a good product, quality of customer service, word-of-mouth and a visible, high-traffic location.

    A quick look at web traffic indicates Savvy Cellar got about 2x the typical traffic yesterday as a result of Groupon. I don’t have a final count on groupons sold – likely 65-80.

    Cheers,
    Brent

  3. I wonder says:

    I wonder two things. First, what was the return on your investment for essentially $1200 in marketing? Was it worth placing your brand beneath Groupon’s brand? Second, what will your redemption rate be? Do you think Groupon is paying you a higher amount so it can claim higher sales? You have no independent verification of the number of deals purchased.

  4. admin says:

    In the future please use your name – this is an open not anonymous forum.

    First, can’t calculate return on investment (likely for a couple of months). Second, can’t calculate the redemption rate (also likely for a couple of months). No I don’t think Groupon is paying me a higher rate – I set the price of the promotion, not them. I have verification of every individual who was charged via a master list I cross-reference when people come into the store to redeem their offer.

    Brent

  5. Oliver says:

    Hi Brent,

    i just came across you article about Groupon. I hope i may ask you some questions:

    1. Who sets the number of buyers to be reached before a deal is on?
    2. How quickly do you get paid by Groupon?
    3. Did you approach Groupon or did they contact you? Or how did you find out about them?

    Thank you very much for your help and time.

  6. admin says:

    Hi Oliver,

    Thanks for the note.

    1. The number of buyers is set through conversation between Groupon and the business. In my case, I took Groupon’s recommendation. They set it very low (10 buyers) as San Jose is a new market for them.

    2. That’s a good question – I haven’t seen the check yet!:) Our deal just closed on Friday so I’ll have to get back to you on that – should be fairly immediate.

    3. I approached them as I had heard about them from a former colleague. When I first contacted them I was interested in San Francisco. They recommended we wait until San Jose was launched. Our challenge is that we are located in Redwood City which is 25 miles from each city.

    Cheers,
    Brent

  7. Henry says:

    Hey Henry

    Thanks for the detailed post! Have heard of Groupon and have considered talking to them about a possible promotion for my restaurant.

    Had a question about your conversation when setting the details of the deal. You mentioned that you had dictated the cost of your promotion (58% off) and they had recommended the # of buyers (10).

    How did you arrive at Groupon’s take of 40-60% of the revenues generated?

    One concern I have, which you may have also considered, is the staffing issue. Since the expiration dates are so far out, how can appropriately staff your wine bar when unsure when exactly all these new customers will be coming to your store for the first time?

    Thanks again,
    Henry

  8. admin says:

    Hi Henry,

    The 40-60% I mentioned was my recollection of the “fee” that Groupon charges.

    I too was concerned about the staffing issue. Groupon coached me to indicate that not all people show up day one and, in fact, we’ll see incremental lift over the next 2-3 months. We’ve only been open 3 days since the promo closed and I don’t think the first day really counts. We saw a handful of people with their Groupons on the first full day after the promo ran, but nothing we couldn’t handle with normal Saturday night staffing levels.

    Cheers,
    Brent

  9. Oliver says:

    Hi Brent

    any updates? Have you received the check yet? ;) How many people approached your business with a Groupon voucher so far? How high was the fee in the end?

    I am sorry for asking you so many question at once but the answers are vital for our business, if we should give Groupon a try.

    Best regards

    Oliver

  10. admin says:

    Hi Oliver,

    Here’s the update:

    70 groupon’s purchased – pretty good given we are 25 miles from San Jose, the city in which we were featured.

    Payment comes in thirds – 1/3rd immediately which we’ve received. 1/3rd after 30 days and 1/3rd after 60 days. Fee was 50%.

    I don’t have a firm count handy on how many redeemed the groupon to date – it has been moderate, with no single massive surge.

    Hope that helps.

    Brent

  11. John says:

    Hey Brent,

    Quick question on the 50% fee. Earlier, you had mentioned that they told you it would be between 40-60%. Did this final fee percentage depend on the # of coupons purchased?

    Thanks,
    John

  12. admin says:

    Hi John,

    No the fee didn’t have anything to do with the #’s sold. The 50% was fixed up front. (The 40-60% reference was just my recollection – not specified by Groupon).

    Cheers,
    Brent

  13. Lucy says:

    Hey Brent,

    congrats to the 70 new customers! We are thinking about opening a new restaurant soon and also think about groupon as a possible marketing channel to get attention in the beginning.
    Just to get it right. Value of the voucher was e.g. 100 bucks, you gave 40% discount. So 60 bucks purchase price for the customers. You will redeem 30 $ (the 50% you mentioned) then right?

    Did you have your own sales rep at Groupon? Did he come along personally or all on the phone?
    Do you get the money no matter if the vouchers are redeemed at that point? Or do you need to show them that 66% are redeemed after 30 days?

    Thanks a lot for your help.

    Best,

    Lucy

  14. admin says:

    Lucy,

    The 70 purchased groupons haven’t translated yet to 70 new customers – hopefully that’ll be the case.

    Please go back and read the original post – it outlines the offer, discount, etc. Your numbers are incorrect, with the exception ofthe 50% take of Groupon – that is accurate.

    Yes, we had an account rep. All interaction was via email and phone.

    Yes, all money is paid regardless of redemptions. Customers paid for these up front.

    Sincerely,
    Brent

  15. Rob says:

    Hi Brent,

    I was looking for an article just like yours for a while… I really wanted to hear the story of someone that actually used Groupon.com … My family has a small / mid biz (restaurant) and they are seriously considering Groupon as a marketing initiative…

    I have a few questions:

    Why did they suggest you 10 buyers? … Why did you accepted 10? … For the margin you are sacrificing why didn’t you ask for 30 or 40 persons to justify your expense?

    Weren’t you able to negotiate the 50% cut of Groupon?

    What’s the reasoning that Gropon used to tell you why they pay in 3 installments?

    Aren’t you hurting your brand by participating in this kind of promotions? … I tend to see many comments of the internet in regard of the damage that these kinds of promotions do to brands… What’s your take on that?

    Sorry for asking to much… I do love what Groupon does for customers, but then I stand in my father’s position and start thinking if there’s actually some money left for the biz… Thanks in advance for your answers!

    Rob

  16. Brent says:

    Hi Rob,

    They suggested 10 buyers as they wanted to keep the threshold low for a new market (San Jose). We got over 70 so at this point the question of the threshold is moot.

    I didn’t negotiate the 50% cut – lemme know if you are able. My impression is they have more companies interested than available so they hold leverage in this regard.

    Payment is spread over time to coincide with redemption.

    Without the continual influx of new customers I do not possess a brand. If Groupon provides me exposure and incentive to customers that wouldn’t have found us or tried us, then the cost is worth it. It is incumbent upon us to provide a good service to those customers in the hope that they become regulars.

    Cheers,
    Brent

  17. sfguido says:

    Hi, Brent–thanks for sharing your input as a Groupon customer.

    Your last posting said “It is incumbent upon us to provide a good service to those customers, in the hope that they become regulars.”

    Well. that’s it, isn’t it. Do you have any idea yet how many of those new customers you aquired through Groupon have become REPEAT customers. That’s the name of the game, both for Savvy Cellar, and for Groupon. Will you do Groupon again, and if so how many times a year. do you think you would do it?

  18. admin says:

    I don’t yet have a sense of how many of these customers have become repeat customers – still a little early to tell. Redemptions have actually been lower and more of a trickle than I expected. I’ll post again with actual metrics.

    I still would strongly consider Groupon again. Especially as we open a second location closer to San Jose (in Mountain View). I don’t really control how often I good participate – Groupon does. I don’t imagine they’d want to consider the same business too often, say 1-2 times per year (but I’m just assuming).

    Brent

  19. Francisco says:

    Dear Brent,

    I have a Mexican restaurant in Spain and I will soon be opening one in Miami. I thought about using Groupon to promote the business but I have the following questions and I was wondering if you would be so kind to answer them for me. A sales-rep contacted me with some questions, I answered them all but I am still waiting for them to get back to me again…

    Anyhow, these are the questions in case you can find some free time to answer them…

    1. If you were to get, let´s say 1.000 buyers, would you be concerned about being able to honor the coupons? How about with 5.000? Would you set a maximum next time you work with them?
    2. Did they have to sign any contract with Groupon? Did you do everything over email? did they ask for exclusivity to work with them on daily internet deals?
    3. How long did it pass since they agreed on all the terms and conditions and your daily deal came on the air? Did they give an exact day?

    Thanks in advance,

    Francisco.

  20. Brandi Cheffro says:

    I have used CoupMe in the past and their CS is great! I love their deals and hope to see them in more cities soon!

  21. Brent and everyone on this board,

    Thanks for the insightful analysis and comments on this post.

    We operate a similar model for daily deals and are currently live in Pittsburgh. We are looking to launch in the SF Bay Area shortly and would love to work with Merchants that are interested in promoting their business.

    OfferMint launched in December 2009 and over the last two-three months we’ve worked with Merchants and have seen some great results. The key point that we bring to Merchants is our ability to convert THEIR existing user/fan base, besides introducing them to our users. Given that we are just starting out our fees are in the 10-15% range (enough to cover the transaction costs+ some overhead). We also payout immediately after the offer closes.

    Here are some quick things I would encourage each Merchant to do (on their own or with some help):

    - Set up a presence on Facebook (fan page) and Twitter. These social media channels are a key to building a relationship.
    - Provide your fans true value by engaging them in a conversation. You can see one of our Merchant’s examples here http://www.facebook.com/pages/Pittsburgh-PA/Dozen-Bake-Shop-Dozen-Cupcakes/25721167653
    - Start getting email IDs from your users and sign-up for an email marketing tool. Mailchimp.com offers a free tool for sending 3000 emails/month. The conversion rates for targeted emails are really really good.

    We hope to hear from you in the future and will continue to work on tweaking our model. I would also encourage folks to look at others in this space – TownHog, FreshGuide, LivingSocial, BuyWithMe. Yup its a crowded space!

    Regards
    Pratik

  22. Another quick point:

    If you haven’t done so already – please make sure you CLAIM your business listings on all key local directories. Here’s a quick list:

    - Google Local Business Center is going to be hugely especially after the introduction of Place Pages important http://www.google.com/local/add/businessCenter?gl=US&hl=en-US
    - Yelp which continues to be the reviews darling of the web http://www.yelp.com/business
    - Citysearch
    - UrbanSpoon especially since they have a great user base on their mobile app (and are not part of Citysearch)

    I’m sure there are a lot more out there but a combination of social media channels and local directories should get you started on the right foot. Remember – just like in the offline world, building relationships takes time and effort but the rewards will be well worth it.

    Pratik

  23. Joey Martin says:

    A new company, coupon-bliss, will be launching its site later this week. I heard that coupon-bliss expects to produce more revenue than groupon or livingsocial. I’m not sure just how the company plans on doing this, but we shall just wait and see.

  24. Ken says:

    Hi,
    Do you know where I could get information about the Merchant Agreement form Groupon uses? What type of agreement is drawn between the company and Groupon and what are the restrictions if you can share?

    Thanks!

  25. admin says:

    Hi Ken:

    Thanks for the question. Unfortunately, I do not have my agreement handy and do not feel comfortable disclosing it into the public. I’m not sure Groupon does this, other than with the merchants it is working with.

    BTW, I wrote a follow-on blog post on this topic recently: http://smokejumperstrategy.com/archive/daily-deals-3-tips-for-small-businesses/

    Cheers,
    Brent

  26. XYZ says:

    Caveats when dealing with GROUPON

    - Not only do they usually take 50% of moneys collected but they also take about 3% for credit card fees We were able to “bring then down” to around a 60/40 deal with 1.5% CC fees

    - Even tough the Contract that they make you sign is long and comprehensive it usually does not stipulate the exact date/dates that your Coupon will be UP – they have been known to tell you one date/dates and then change it at their discretion after you sign the contract. (so your copupon might appear weeks after you tought it would)

    - A lot of their “terms” are word of mouth when speaking with Acct Rep but they do not put these agreements into the contract that make you sign. Make sure you get them to at least add the terms that you agree to in the contract that you sign

    Highlights in Groupon agreement that they make you sign:
    ——————————————————————————-
    d. Each Voucher will be subject to no restrictions other than as provided herein. Each Voucher will expire on the Voucher Expiration Date. However, after the Voucher Expiration Date, Merchant shall, for the amount of time required by applicable law: (1) continue to allow unredeemed Vouchers to be redeemed for the product or service specified on the Voucher or (2) allow the Voucher to be redeemed to purchase goods or services from Merchant for up to the amount the purchaser paid for the Voucher. Merchant is aware and acknowledges that the law may require Merchant to redeem Vouchers beyond their stated expiration dates, and Merchant agrees to do so (to the extent applicable law requires).

    e. Partial redemptions: If a customer redeems a Voucher for less than its face value, the Merchant will be responsible for issuing a credit or cash equal to the difference between the face value and the amount redeemed if required by law.

    g. Merchant acknowledges that Groupon may terminate the publication or promotion of the Voucher at any time. Groupon reserves the right to increase the Volume Threshold at its sole discretion.

    Merchant grants to Groupon a non-exclusive worldwide license and right to use, reproduce, license, display, distribute and transmit the Merchant’s name, logo and any trademarks (”Merchant Marks”) and any photographs, graphics, artwork, text and other content provided or specified by Merchant (”Content”) in connection with the marketing, promotion, sale or distribution of Vouchers, in any and all media or formats in which such Vouchers are marketed, promoted, transmitted, sold, or distributed, including but not limited to, on the Groupon Website.

    This Agreement shall be governed by the laws of the State of Delaware, without giving effect to any principles that may provide for the application of the laws of another jurisdiction. Any disputes, controversies, or claims in connection with or arising out of this Agreement, its negotiation, breach, existence, validity or termination, shall be referred to and finally determined by arbitration in Chicago, Illinois before a single arbitrator who is a member of the American Arbitration Association, from which arbitration there shall be no appeal.

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