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Cup and saucer on a table in a cafe (Stockbyte/(c) Stockbyte)
Cup and saucer on a table in a cafe (Stockbyte/(c) Stockbyte)

Part Four: Group-buying

Are daily deals destroying your brand? Add to ...

In this four-part series, we'll look at the group-buying landscape, and the opportunities and risks for small businesses considering offering daily deals

Nancy Gilmour was one of the first Canadian businesspeople to sign up for a Groupon deal. Almost a year ago, Local 4, her neighbourhood bar and restaurant just off Yonge St. in downtown Toronto, quickly sold out 500 coupons through the service.

"We weren't ready for the onslaught. For the first week, we would have the place packed, and every single table was Groupons."

Today, the promotion is about to expire - and Ms. Gilmour says she probably wouldn't do it again. For all the traffic, the coupons proved to be very costly, after the discount they offered and Groupon's own cut. Moreover, the patrons they drew didn't tend to come from places that would translate into the new business she was hoping for.

Online coupon-books like Groupon, and so-called clones like LivingSocial, TeamBuy and WagJag, are hot properties these days. It's not hard to find merchants who have been impressed with the number of customers a group-buying promotion can bring in. However, the online-coupon industry is still relatively young, and even some of its most enthusiastic adopters are still waiting to see if it will convert eager bargain-hunters into full-paying regulars.

Meanwhile, critics of the online-coupon model cast are asking whether coupons really benefit certain kinds of businesses - especially bars and restaurants, which feature prominently in coupon listings.

In many cases, the goal of a group-buying promotion isn't to make money. Unless the business in question has fixed costs, like a theatre, it's difficult to turn a profit on these coupon offers. Not only do coupon companies take a 50 per cent cut on top of already-deep discounts, but the coupons usually discount an establishment's flagship product, making it hard to structure the deal as a loss-leader.

Instead, its proponents say online coupons should be considered a form of marketing: A way of paying for publicity with product. The new customers who arrive will, in theory, be converted to full-paying regulars.

But introducing your company to new customers as a cut-rate proposition might not be the best way to keep a brand burnished.

"If your product has any degree of exclusivity or status associated with it, discounting is a zero sum game," says Gabe Zichermann, a New York City-based author and marketing consultant, who specializes in studying what motivates consumers.

While one line of argument suggests that consumers fixate on the "original" price of a product - thus maintaining the impression that it's valuable - Mr. Zichermann counters that the best brands don't offer deep discounts in the first place.

"It's not about the perceived price. It's the perception that you sell things at a discount," he says. "It's not about how much it costs, it's about the fact that you have to discount it."

And for businesses like bars and restaurants that serve clientele in a specific neighbourhood, coupon offers aren't the best way to generate crucial repeat traffic.

"You don't make your money on the people who come every now again; you make your money on the people who keep coming back," says Hugh Johnston, a Toronto-based consultant who provides strategic advice to the restaurant industry.

"If you do a coupon, and you drop it in one of these things, you're not talking to your best customers."

Mr. Johnston says that once a bar or restaurant has been established in an area for a few years, almost all of the people who frequent that area will have already tried it and made up their minds. Coupon deals, he says, tend to attract bargain-hunters who don't frequent the area, and therefore are unlikely to become regulars.

In fact, this was what Ms. Gilmour discovered in practice.

"We had a few [Groupon customers]that were local, but they come here anyway. Then we had people coming from Mississauga just to get the Groupon deal. When they come from Mississauga, they're not going to come back."

Ms. Gilmour shares a often-voiced skepticism about whether online-coupon-clippers are likely to turn into regular customers in the first place - especially with so many restaurants offering steep discounts on a regular basis.

"Once they're on the Groupon track, they're going to buy more coupons," she says. "They're seeking out the bargain, and I don't blame them."

The foibles that the Groupon model encounters in the restaurant market aren't universally applicable. Robert Kozinets, a professor of marketing at York University's Schulich School of Business, points out that coupons represent a great deal for businesses with fixed costs. Theatres, for instance, don't incur any extra costs for filling up empty seats at a discount.

Mr. Kozinets says that, if anything, the present fascination with online coupon sites is overblown: It's really "low-tech, old-science retailing," he says - the coupon books of yore, moved online.

Whatever their downsides, few observers see the popularity of online-coupon sites ending anytime soon. If anything, Mr. Kozinets says, the fierce competition between sites will lead to better terms for merchants - as well as an inevitable consolidation in the industry.

"I think the bigger players like Groupon will survive. They'll probably eat up some of the middle-sized players. A lot of the smaller ones will drop off the map."

In which case, there could be some deals for anyone looking to buy a discount site on the cheap.

Special to The Globe and Mail

The series continues next Monday with: Small businesses offering group deals: What to expect? Other Stories can be found on the Web Strategy section of the Your Business website.

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