Local businesses have a problem, and it is huge. The problem is that their customers have been hijacked. Interlopers have positioned themselves between the customer and local businesses and make no mistake, this is a stickup. What else would you call a 50% take on a 50% haircut just for sending out an email.
I think Brian Clark of Copyblogger said it best.
What secret sauce does Groupon have?
Umm, email? Basically, what Groupon does is send out daily emails with straight-out pitches for local deals.
So how did it come to pass that you (I’m assuming you own or run a local business) gave some Internet company control over the conversation, nay, the relationship between you and your customers and why is it that your customers, your neighbors, probably your kids maybe even you agreed to that arrangement? Well, it’s complicated.
Before I get too deep into this maybe we should first ask, so what? Is this even a bad thing? If you can get 1,000, or 2,000 people through your door maybe it’s OK that you’re getting 25 cents on the dollar …. is it?
Have you really done the math, I mean have you put in a spreadsheet and looked at what’s really going on? If you haven’t why don’t we do that now.
Let’s assume you offer a $50 value for $25. OK now you split it with your daily deal provider, let’s call that 50% because that’s what the 800lb Gorilla is charging. So you get $12.50. Hmmm awesome. But wait there’s more.
A certain percentage of people will spend more than the $50 (for which you got $12.50) but there’s also a good percentage that won’t. Of those who spend over $50 the average might be a total bill of about $75, more or less, minus the people who don’t spend another dime… let’s call it $70 for a total bill. NET to you so far $32.50 for $70 worth of product.
OK, maybe it’s looking a little better than how it started out but wait. There are really 3 types of customers here aren’t there?
- Your regular customers, they were coming in anyway now they just got a smoking deal – 40%.
- New customers, people you’ve never seen before but now you have an opportunity to win a repeat customer 30%.
- Deal Whores sure it’s crass but this is what the daily deal industry (yes it’s an industry unto itself) people call those customers who buy deals exclusively and never spend a penny more 30%.
Now depending on the type of local business you have this could mean different things, but let’s look at restaurants. Restaurants are tricky and some would say that the math isn’t very straight forward but ;et’s give it a try. Your food costs are probably somewhere between 25-35%, add your employees and now you’re talking 50-70% boil it down and profit margins are typically less than 10%, let’s say 7%. That means that your true cost of providing $70 worth of product is about $65. You just paid your customer $32.50 to come eat with you.
OK, fine it’s part of marketing costs, you have the staff in their anyway, but do you? What about the cost to the regular customers who’ve been inconvenienced by the surge of business and the resulting decline in service, or else you ramp up your service but now your labor costs skyrocket. Oh wait, you sold 1,000 of those, that campaign cost you $32,500, and what did you get? You got a shot at making new customers out of 300 potential new regular customers. A number of things have to go right and rest assured this post will sprawl into several I’m sure and if you want to challenge me on the numbers in the comments I welcome you to it (more on this later).
How many more times do you need those potential new customers to walk through the door to make this campaign NET positive? Let’s say that the average bill is still $70 but now you’re actually collecting $70 now you’re making $5. OK so now we’re trying to make up a $32,500 deficit $5 at a time, that’s OK, it’s more doable then it sounds but what it means is that you need 6,500 transactions to break even. If you have 300 potential new customers that means you need to get them each in the door about 22 more times.
Another question though, what is a ‘regular customer’. Sources say that although some restaurants believe it’s a customer who comes in twice a month the truth is the bulk of your regular customers probably come in 6-9 times per year. That means that you will see not a return ON your investment but a return OF your investment (the daily deal) in about 2.5 – 3.5 years if you successfully wow the potential new customers and they become regulars.
Now I’m not saying that doing a daily deal or a Groupon is always a bad idea. There are times when this kind of marketing makes sense. When you’re a new business and you have no real customers a daily deal can be a boom to your business. But if you have customers coming through the door and you have maybe even for years, is this the best possible option?
I know I know it’s hard. It’s hard to get customers to give you their personal information to fill out those little cards and it’s hard to get your employees to ask for personal information and it’s hard to setup some kind of system of follow up…. but it is necessary. What are you going to do to get those 300 potential new customers back in the door as regular customers, again and again for the next 2.5 – 3.5 years….
more daily deals?
That reminds me of the change bank.