The group buying frenzy—some advice

By the time you finish reading this paragraph, another daily deal or group buying site will have been set up in New Zealand—or at least that’s the way it feels at the moment, with so many recent launches overwhelming our senses. We’re reminded of the days shortly after Trade Me was sold to Fairfax, when something like 70 new auction site operators clamoured into the marketplace, hoping for a similar nine-figure payday. Where are they now, we wonder?

We’ve already given our view on the Deal sites (in the Business Herald)—great for consumers and for the website operators, not necessarily such an attractive option for advertisers (depending on the marginal cost of your products and your ability to upsell and cross-sell low-price customers). Still, the Deal sites are the current ecommerce hot button. GrabOne, the granddaddy of the genre in New Zealand (est. July 2010), dispensed its one millionth coupon last week, so the deal is on.

Retailers are joining in the game as well (though nothing is officially happening locally yet, watch this space). Wal-Mart was quick off the mark in the USA, and Harveynormanbigbuys.com.au launched a couple of weeks ago across the ditch.

What sort of deals are currently hot on these sites? Here’s a breakdown of the most common product categories on offer via Australian deal sites, courtesy IbisWorld:

  • Travel and accommodation 29.3%
  • Retail goods 29.2%
  • Beauty 14.0%
  • Dining out 10.6%
  • Leisure activities 8.0%
  • Fashion 4.0%
  • Professional  services 3.0%
  • Sport and fitness 1.5%
  • Food 0.4%

We thought we’d give you a little advice on how to proceed if you’re approached by a deal-site seller (and if you haven’t been already, you will be):

So what are the characteristics of a worthwhile Group Deal offer?

1. The offer needs to be one that will appeal to the sorts of people who are much like your current best customers — and who, demographically and geographically, are potentially repeat purchasers. There’s no point offering up a deal that will attract customers who normally wouldn’t darken your doorstep. You should also realise that the first people to grab the deal are most likely to be your existing customers — and why wouldn’t they, they already love your brand and are keen to purchase at the lowest possible price. Cannibalisation is a fact of life — deal with it.

2. Ideally, the offer should be for something you don’t usually sell (or at least not in that exact configuration). If you want to maximise your revenues, minimise the damage to your brand and try to avoid the commoditisation of your products, be inspired by the practices of major retailers and bring in sale-only products (or create unique product bundles) exclusively for the group deal promotion. That way, existing customers won’t feel they were ripped off by buying the exact same product at full price last week and should be more willing to pay the asking price on your normal product range once the deal is over; and new customers won’t be comparing your full price offerings to the same products bought on a deep discount through the deal.

3. Look for an offering with the lowest possible marginal and servicing cost. You want to avoid deep discounts on products such as $1 pizzas or burgers which not only attract ingredient expenses but also incur assembly and labour costs.

4. Look for offerings that attract natural add-ons. Do you want fries with that $1 burger? How about a drink? This full-priced necklace has been especially designed to complement those (discounted) earrings.

5. Can you build a repeat visit into your offer? Your spa visit today includes a complimentary massage as part of your next (full price) visit. This Warrant of Fitness special includes a free 12-point safety checkbefore your next warrant falls due. Engineer repeat custom wherever you can.

6. The offer must be the very best possible deal you can put forward. Your goal is to (a) attract as many purchasers as possible; and (b) make the deal so good that they want to share the offer with their friends. Yes, the deal needs to make economic sense for you — but understand that you are looking for long-term customers, people who will return to your facility again and again — so you might be able to afford to just break even on your offer (or even make a loss, especially if you have the opportunity to sell customers additional stuff when they visit your premises or use your services).

7. Set your price point carefully. Make your offering as attractive as possible — and competitive with what else is out there. Both the deal site operator and the consumer will be filtering your deal through their own knowledge of what’s on offer, so be real. And if you’re spelling out the discount (was $X, today only $Y), be honest and factually correct — regulators (and competitors) will be watching you.

8. The offer needs to be time-restricted in terms of when purchasers can use it (eg valid for six months, with appropriate high-season blackouts) — and even though those purchasers have actually bought and paid for the service, your terms must require that they liaise with you to confirm when they can actually use the deal (otherwise you risk being inundated with too many discount customers at once).

9. If your offering is service-based (eg restaurants, accommodation, hairdressers) decide on an appropriate percentage (eg 20%) of your customers who can claim the discount offering at any one time, and police that limit rigorously. Otherwise (a) you could find yourself spending all your time nursemaiding new discount visitors while your most loyal frequent customers are fatally neglected; or (b) you’ll be surrounded by too many newbies, all demanding, and you won’t have the time to give them the sort of customer service that will convert them into returnees.

10. Once you’ve decided on the percentage, that will determine the maximum number of potential purchasers for your offer. For example, if you are offering a weekend stay at a 50-room lodge, valid for six months (with no blackouts), then you should restrict the total number of special packages you offer to 20% of 50 rooms times 26 weekends = 260 rooms max. Also satisfy yourself that you could handle 15% of the total in the last month of the promotion (as you’ll see below, that’s a typical last-minute redemption rate).

11. Keep the redemption process simple. Don’t make the consumer jump through hoops to get your deal — you want a happy, enthusiastic customer raving about your product, not a grinch.

12. Before the deal launches, explain all the details to your staff first. On launch day you can expect your phones to be ringing off the hook, with a mix of (a) those who want to know more before they purchase the deal, such as what’s included, what’s excluded and any fine print; (b) those who have purchased and now want to book; and (c) those who want to book but also want to argue about inclusions and exclusions and break the rules for their benefit. Expect your online facilities to be similarly clogged; if you want to avoid chaos on the day, it’s important that everyone in your organisation understands what’s going on and knows what they can and cannot offer.

13. According to group-buying pioneer Groupon (expected to enter the NZ market any time now), when you offer a deal (eg one that’s valid for six months), typically 10% of those who buy the deal will want to redeem it in the first 10 days after the deal is offered; a further 20% will want to do so in the first month. Then redemptions will slowly trickle in for the remainder of the eligibility period, with a 15% surge in the last month as the offer expires.

14. You should attempt to manage the flow of redemptions where possible (especially if your capacity is limited and you successfully sold most of your packages) by communicating regularly with those who purchased the deal but haven’t yet booked to take advantage of it. You don’t want to face capacity issues if too many rush to claim the deal in the last month of the promotion (nor do you want to end up with a whole lot of unhappy campers if you can’t honour the deal because they left their redemptions too close to the expiry deadline).

15. Track everything (on a spreadsheet is fine), including:

  • How many visited the offer page and viewed the offer
  • How many purchased
  • Redemption by day/week/month
  • Percentage of new customers vs existing (track by offering a little something extra to returning customers)
  • Average additional spend by discount customers
  • Average percentage of newly-acquired customers who return post-promotion (compiled over time)
  • Total cost of promotion (including discount component versus usual pricing)
  • Average cost per new customer

Once you know these numbers, you can compare the cost per customer with your usual customer acquistion and marketing costs, to determine whether the exercise is worth repeating or not.

These deals don’t always work. Sometimes you’ll make what you think is an unbeatable offer, only to find you get little business as a result. That’s another reason why you need a minimum acceptance threshhold. You should also ask the deal website operator for stats from past sellers, to find out what were their most appealing offers and to understand the demographics of the site visitors (Groupon, for example, skews young and female, so Health & Beauty offers do best there).

Read more form Michael Carney at marketingweek.co.nz.

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