Consumer Collective Buying Power & Your Business

Online collective consumer buying power is a hot trend for many retailers across the United States right now. Websites like Groupon, Twongo and Living Social all provide business owners the opportunity to offer deep discounts via email to thousands of potential customers, hopefully encouraging an increase in foot traffic and, over time, revenues from new, recurring business.

Because specialty coffee and beverage operations like cafes, smoothie shops, etc. rely so heavily on repeat business, group buying is an exciting opportunity to get new people to buy more and come in more often.

Let’s take a quick look on how these websites work and evaluate the pros and cons. We’ll use Groupon as our example.

1. How does it work?

As a business owner you can sign-up your shop and a deal to go with it (e.g., $4.00 for $10.00 worth of goods or services). Groupon puts your deal in their queue and you wait your turn. A current customer told us they had a lead time of around six weeks. When it is your turn, Groupon sends out an email to their existing database of people in your area that includes not only the discount, but information on your business (background, product offerings, location, positive customer reviews, etc.). The discount “tips” when a set number of people purchase the coupon and is made available online for up to three days after the initial email is sent.

2. What does it cost?

We’ve been told from another current SGC customer that Groupon takes 50% of each purchase, so if you are offering $4.00 for $10.00 towards drinks and food, Groupon’s cut is $2.00 for each one sold. If your discount doesn’t reach the predetermined tipping point, Groupon doesn’t get anything.

3. Is it worth it?

Collective buying can be extremely beneficial, but relying on revenue generated by the selling of a Groupon alone is a false hope. Many times retailers get enticed by seeing quantities of discounts sold, which doesn’t paint the full picture. For example, a local restaurant sold 1,721 Groupons at $15.00 apiece, which equals a whopping $25,815.00! Fantastic, right? Well, remember that Groupon takes their half, leaving $12,907.50. Still impressive nonetheless, but taking the operating and product costs and additional overhead into account, that total is probably a lot closer to break-even in reality.

What isn’t a false hope is the potential long-term effects of this kind of exposure. Considering the hundreds of new people that will be visiting the restaurant and the thousands of people who at least saw the restaurant’s name in their inbox, the business opportunity is huge! How much would it cost you to run a direct mailer out to a few neighborhoods with no guarantee of success?

If you decide to post a group discount, make sure you are prepared for an increase in sales and be ready to offer these new guests an outstanding experience that will turn them into regular customers. Don’t miss the opportunity by not putting your best foot forward. Look at every customer coming in as a $1,000 bill, which is roughly how much a good regular is worth per year in our industry. Also, don’t be afraid to make the discount attractive, but at least cover your costs.

Mike Adams
Stockton Graham & Co.