Friday, 25 November 2011

Pardon me, do you have any Grey Groupon?

Have you ever heard of Posie's Cafe?  Their story is like a mini-case study in retail marketing.  How not to use Groupon.

What is Groupon?

So as everyone in the Internet probably knows, there is a new business model in town for advertising, and the biggest player is Groupon.  They just went public a few weeks ago in the biggest IPO since Google.  The idea is that businesses will offer a promotional deal, often deep discounts on things like food and drink, spa services, laser hair removal, or even bowling.  People sign up to Groupon's mailing list as a way of exploring their city and finding hidden gems or new experiences.  Groupon then takes a percentage of the revenue from the deal, usually half.  Other sites like LivingSocial, DealFind and Tuango offer similar services.

So what happened?

The story is that a little cafe in Portland, OR wanted to promote their business so they hopped on the Groupon bandwagon.  They offered $13 worth of cafe eats for a mere $6 in March of 2010.  The problem was that they sold a lot of these coupons.  Most of the customers tried to redeem them on the same weekend so this little cafe had a lineup of frustrated customers stretching around the block.  Posies lost a few thousand dollars, and their on-line reviews suffered because they couldn't keep up with the customer flow.  


In other news there was also a cupcake bakery who even more recently lost nearly $20,000 for similar reasons.

Lessons learned

I found a great article about this type of issue with social promotional tools like Groupon, and how to avoid the woes.  It's a good read.  But what I really am interested in is brainstorming the type of service that would really benefit from something like Groupon.  Is there a way that a business could not cap the number of deals, go gangbusters, and laugh all the way to the bank?
Laughing all the way to the bank

Criterion 1: Something different

Almost everything I've ever seen on Groupon is laser hair removal, weight loss, spa treatments or restaurants.  So probably our theoretical dream deal will be something that's not one of those.  It has to be something that lots and lots of people will like.  Nothing too niche like cultist robes, particle accelerators or tickets to an Expos game (I know... I know... they've been gone for years.  Only proves my point).  Also it can't be too expensive.  This is impulse buying, not investing in the future.  No cars, graduate degrees or buildings.

Criterion 2: Proper cost structure

So let's say you're selling gold nuggets.  You buy them for $499, and sell them for $500.  Doing Groupon is probably unwise because when you offer a discount and Groupon takes half, you'll be losing money on each sale.

If, on the other hand you've spent $15,000 to make a computer game or movie that people download on the Internet, this would work better with Groupon because if you sell more your costs don't go up.  This is called having a low Marginal Cost.

Criterion 3: Make people buy more!

Customers on these sites are like locusts.  They look around for a deal that looks fun and interesting, buy it up, and never return.  Think about it: It's what you would do isn't it?  So to make our deal a magic money machine, it has to entice people to buy more than just the deal.  It could have a strange price point, like a $10 coupon when most items are $8 or $12.  Or it could be a basic item that has lots of upgrades like a Kindle or a charm bracelet.  I think the upgrades option is more avant-garde

Criterion 4: Lots of customers all at once!

This probably goes without saying, but don't give a deal that will attract 10,000 people if you have a 10 square foot restaurant.  Ideally we won't have to keep a lot of inventory to make this happen, or hire a lot of extra workers.  So our dream deal is scalable.

Options:

Taking into account all our criteria, I've come up with the following possibilities to make piles of money on Groupon:

High fives:

 This will totally work.  It's different.  Low marginal cost.  Fixed cost is rental of whatever location you'll be standing in.  You can upgrade the high five for extra fees, and can easily handle a large number of customers at once.  The only problem is that people probably wouldn't pay for it in the first place.  Maybe if it were hugs?

Music:

If it wasn't for the fact that people don't buy mp3s from bands they've never heard of, this would be a great idea.



Build-a-bear

:  Sort of like Mr. Potato heads, you sell people a basic bear for a Groupon price, but have all sorts of upgrades like hats, glasses, little bear books, shoes, mittens, t-shirts etc.

Charm Bracelets: 

This one bears repeating (lol).  Great deal on prestigious charm bracelet.  Now go buy all the charms for $2.99 each.  This would have worked great a few years back when charm bracelets were all the rage.


MMORPGs:

I never got in to this style of game in the same way I never got into drugs.  Anything like this where people sign up and then just keep paying money is a Groupon dream.  It's especially addictive because people put so much time in building their character and advancing in the game, they don't want to give it up.

Memberships:

What you want is the addictiveness of an MMORPG in real life.  Memberships are good but you need a reason for people not to ditch them when the deal is done.  A gym membership isn't enough because people could just drop the membership and go elsewhere.  Maybe a gym membership where it keeps track of your toning level.  You have level 10 abs and level 9 biceps!

Membership in a model train club fits this description because of all the building of the tracks and sets, but fails the Groupon test both because it's niche and because most couldn't handle 10,000 new people at once.

Theatre/Ballet/Opera/Concert/Minor League Sports tickets:  

If the show is not the most popular, you put together a VIP package that includes dinner, drinks, meeting the stars, etc, and sell it at a price where after the discount and Groupon's cut, you break even or make a few bucks.  Then people buy it for the evening out instead of for the show they've never heard of.  This gets bums in seats, gets word out about your heretofore unknown show, and barkers can sell peanuts in the audience.

Harbour Cruises: 

Same deal.  Get them on board with Groupon, sell them drinks and snacks.

Anyone else have ideas?  Tell me in the comments!  Also feel free to sign up for regular updates on the right hand side of this page!

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