Friday, January 27, 2012

The Groupon Debacle

I don't have good photos for this post, so here are some
awesome tie-dye rockstar nails.
 The professional networking forums that I frequent have been alive lately with talk about Groupon-- and its various clone companies-- and how it works, or rather, totally fails to work, for small businesses like salons and salon professionals.

Upon hearing so many negative-- and we are talking about vehement, spitting, cursing, angry negative here-- personal accounts of how devastating a Groupon-like deal can be for a small business, I, naturally, was skeptical.

I balk at any input on any subject that seems too one-sided. But in the case of this subject, many of the stories I heard came from people that I have known and respected professionally for many years. These were first-person accounts of how these deal sites personally affected them.

I had to admit... it's difficult to look at the information as it appears on the surface and then look at your friends and your peers and tell them they should have known better.

So. I have spent the last few days researching from a lot of different angles. And now I'm left feeling sort of unsatisfied and disgruntled.

I really need to write a comprehensive article aimed at fellow professionals within my industry, but I try to write this blog for consumers.

So here is what I'd like you to know about these "deals" if you are going to purchase them and redeem them.

hand painted camoflouge nail art
 Small businesses offer discounted deals because they want to attract more customers. So, if you see a great deal-- whether it's for a coffee shop, a salon, or a car wash-- that business ran that special in hopes of getting new customers. New regular customers. They hope that you will redeem your half-off a latte deal and also buy a bagel. Or redeem your half-off spa pedicure and also buy a matching manicure, or a bottle of lotion, or-- even better-- book another spa pedicure (and hopefully a matching mani) before you leave. Or that you will redeem your half-off luxury car wash and opt to buy the "buy 10/get 3" package deal.

At the very least, they hope you will have a great experience with the business and recommend them to your friends, leave a positive review on Yelp or Google or Merchant Circle, etc; follow the business on Twitter, like them on Facebook, sign up for their mailing list.

What they do not want is to be bossed around by self-centered deal-hoppers who saunter into the business like the business owes them something... at least, not more than the deal they purchased.

Businesses do not want one-hit-wonder customers who try to get more than the deal they purchased; who try to use multiple coupons all at once, who try to use coupons that have expired, or try to use an already-redeemed coupon again.

That makes you a crappy customer for any business. And if you are a crappy customer already, do not spout off about how the "customer is always right" on top of it. That was a slogan attributed to Harry Gordon Selfridge, that is largely associated with Marshall Field and Company from the early 1900s and it is not the axiom that customers would like to believe it is.)

Nevertheless, it's my opinion that the consumer should not be burdened with any more responsibility for the fiasco that Groupon has been for small businesses, than to be a considerate and ethical customer overall. And that applies to all of us as consumers, and not just in cases of redeeming coupons and gift certificates.

But what many consumers don't know, is how Groupon works. Most people think that when a business runs an offer with Groupon that Groupon takes a percentage of the price and pays the merchant the rest.

Well, you're right.

Miner Ed: local high school,
El Diamante mascot--
I can do other high schools too.
 What you may not know, is that the percentage of the price that Groupon takes is 50%. Which means that if you get a certificate for $20 worth of food from a local diner that only costs you $10, the diner gets $5 and Groupon gets $5.

So any deal you get on Groupon (and this split is very common, so the math applies to most of these types of deal sites) means that the business that offered the deal is only getting 25% of the regular price.

So what? Right? A lot of people argue that businesses run "loss leader" advertising all the time. These businesses knew that they were going to be taking a loss on these deals when they agreed to the offer. So why should the customer feel bad about buying the Groupon, right?

Well. I don't really think you should. I'm just saying-- go into it aware of exactly how big a discount this really represents to the merchant. And be a polite customer.

You know what? Be a polite member of your community. At all times. It's just one tiny thing you can do to make the world a better place.

OK. So anyway: I would totally be with you on that whole "loss leader" thing except that what's happening is that small-- and by "small" I really mean "tiny" like neighborhood cafes and salons-- businesses are finding that they negotiate to run a deal and then Groupon runs the deal and they sell like 1,000 of the certificates!


Now... there are a lot of tales on line from retail businesses that explain how Groupon was a bad idea for them, and then these business owners go on to say that they think these deals would work better for service-based businesses like salons.

No, No, No.

angel wing nail art on rockstar nails.

 It's true that the bulk of the price of a service-- like a set of nails-- is for labor. The cost of product is pretty low. But I don't just have to cover the cost of the acrylic, cotton pads, file, buffer, that I use to create the nails; I also have to make sure that I make enough money to pay for my rent, my utilities, my insurance, my advertising, etc. AND that's just the money that I have to make to stay in business! On top of that amount of money, I also have to make a living! The amount of money that I need to take home, so I can pay for my car, my car insurance, my rent/mortgage, utilities, groceries, etc-- you know, the reason we work.

So, as a tiny business owner, I effectually have to cover 2 salaries: one to pay for the business, and one to pay for my life. In the long run, just because I am a service-based business does not really mean I have a significantly lower overhead than other types of businesses.

OK. So a set of nails costs $50 (basic pink and white acrylics here at the Art of Nailz.) If I did a Groupon deal for a set of nails, you'd be able to buy a set of nails for $25. I would get to keep $12.50 of that, and Groupon would get $12.50.

By the way-- it takes an hour and a half to do a full set of pink and white acrylics.

That means I'd get $8.33 per hour. Yes, that is less than I need to cover my expenses.

When a business runs a standard "loss leader" promotion, they carefully calculate what it'll cost them, how much they can afford to lose, and then control the promotion so that it doesn't bankrupt the business.

stars on rockstar; is that "double rockstar?"

 But when a salon runs a Groupon deal for a $25 set of nails and they only get $12.50 and it takes 1 1/2 hours AND Groupon sells A THOUSAND of them-- well... the problem is that it'll take 1500 hours to redeem all those Groupons! It would take one person, working 40 hours a week, 37.5 weeks to do all those sets! And she still has to work in her regular customers who are still paying full price-- you know, the customers who represent a profit, which means it'll take more than a year to redeem all the Groupon deals sold. Which is one of the factors that many small businesses have run into, and one of the things customers don't understand that leads to angry, demanding customers, and weary, equally angry workers.

Maybe, in a large salon with enough technicians, being tasked with redeeming 1,000+ deals would represent less of a disaster. But several of the salon workers who are running these ads are small salons with fewer than 5 technicians available at any given time to provide services, and I see even more ads that are run by sole operators. That means, just one person, to redeem hundreds of services that run in the red and still do enough services in between to keep the rent paid.

In many cases, the Groupon ads (or Living Social, Daily Deals, etc etc) are wildly successful. They really do sell hundreds, or even thousands, of certificates. And on top of that, most of those certificates sold actually get redeemed-- or attempt to get redeemed.

We're used to advertising that sees very little return. Like, you might get one or two customers for every 1,000 copies of your ad that get seen. So when a Groupon deal suddenly opens a flood gate of new clients trying to get in all at once, it can be a big surprise and businesses can be caught unprepared.

Suddenly, you realize that you may have wanted 20 new regular clients (mind you, I do nails, I tend to speak from the perspective of a nail business, I should think that a local cafe might be delighted to have 250 new customers) and you may have time in your schedule to accommodate 5 to 10 of those new clients in any given week. But now you have 800 rabid fans clawing at your door insisting on redeeming their deal in the next 48 hours.

Yes. It's true. Many, many, small business owners are bad at math. Or at the very least, lazy at it.

Savannah: neice, polish duster.

 Almost every story I have heard or read ultimately comes down to, "that was stupid, why would you do that?" Even my 13 year old niece came to that conclusion when I tried to explain what I was writing about today. And she does not pay attention to my business ramblings very intently.

But there are a few more factors at play: for one thing, businesses with employees and/or independent contractors (common in the salon industry) who don't get a say in the decisions that the owners make about advertising. And alleged accounts of shadiness on the part of Groupon sales reps.

If you agree to run a deal, and you HAVE done the math, and you decide it would be a good thing for your business IF you can limit the number of deals that get sold-- say, you have 3 people working in your salon, so you decide 100 deals is all you can afford to do. OK. Then what happens when your sales rep tells you that's "totally doable," sends you the contract, all is set and ready and then, an hour before the deal goes live, you get a call that says, "Oh, by the way, we decided to sell 2500."

Well. I don't know what happens if you say, "Oh hell no!" Because I haven't heard any account of people doing this. I hear a lot of accounts of frightened, intimidated business owners who are afraid to tell Groupon "no" at the 11th hour.

And maybe for good reason. Because according to one source and his analysis of the merchant agreement, the contract includes a pretty harsh non-compete clause. Basically, it says that once you sign the contract, you can't do any other online promotions until your deal has run... even though the contract also says that Groupon doesn't actually have to run your deal.  The wording is very broad. It doesn't list any specific examples of what Groupon considers to be an "online promotion," which means that you could be considered in breech of your contract if you so much as Tweet a special in the meantime.

I have a lot of polish and a lot of glitter.
 That's a pretty convincing argument to not hold up the running of your ad.

Accounts of sleaziness aside, there's also that issue of the workers. What happens when your boss comes in one morning and says, "Hey! Guess what? We're running a GROUPON ad!"

What happens when you're a salon worker who gets paid on commission? And now you are expected to redeem 60 quarter-priced spa pedicures in a week? That the salon didn't profit from at all?

I got news: 60% of Nada, is Nada.

Some salon owners out there have found themselves in this "I wish I'd done the math first" conundrum and are doing all they can to step up and pay their work force the standard commission that they would make on regular price.

Some of them think absorbing the losses should be a team effort.

Some of them are looking for new team members now.

The truth is, small businesses have flourished over the centuries, even though their proprietors weren't good at math. Or didn't understand things like "loss leaders" and "yield management." And the fact that small business owners have continued to be successful, year after year, generation after generation, across a vast variety of markets and industries, proves that maybe math isn't as important to running a business as people with business and economics degrees want to believe.

The view from the salon, can't beat it!

 On the other hand, when you get caught in the pinch because you didn't do the math, it's best to just own up to the fact. Don't try to blame someone else and say they took advantage of you when all you had to do was say "no."

If you expect sympathy for not being able to stand up to the pressure, then don't go giving your teenagers any of those "resist peer pressure" or "just because all your friends are doing it" speeches when you can't lead by example.

If you buy Groupon deals, be kind to the business and it's employees. They might unexpectedly find themselves in over their heads. And be ethical, don't try to pull a fast one by trying to use the same deal twice or fudge the fine print. And buy a bagel, or a bottle of lotion.

One thing I learned from all this reading is that Groupon-- at its core-- started with a very noble goal in mind. They specifically wanted to promote small, local businesses. Not to take advantage of them, but to help promote them within their communities.

local business: the Art of Nailz, visit :-)
 Groupon still does that. The deals that you receive are tailored to your community. Those are local businesses, those are your friends', and your neighbors' businesses. At its heart, these deal sites give you an opportunity to participate in your community and build relationships with those businesses.

Hopefully, these deal sites will modify their business models in the future so that they offer a realistic advantage to the truly tiny business owner.

In the meantime, you are bound to start seeing a LOT more grassroots attempts at swaying your attention away from the shiny ad copy in your daily email, and toward genuine opportunities to support local business.


  1. WOW! Certainly didn't know the "background" effect to buying a deal....

    Very good read.

    Thank you for taking the time to educate us!

  2. Just reading your post, and a very good one it is, and realized your right around the corner from my studio, Roy Dressel photography. I have only bought one groupon, a stay in cambrea and when talking to the person at the front desk, they had done alright with it, but they counted on a good number of them never getting used. The room was half price, $50 per night, so the hotel got only $25. Not much and not nearly enought to pay expenses.

    1. Been there, done that, quit a salon where I was working on commission and they expected me to take 8-10 of them a day. I made peanuts! Only saw 1 re-book, well maybe 2 to be truthful,in the months I was there. The rest complained about the oddest things, bought nothing in the boutique area, most always tried to get more (scrubs, free french polish, extra nail art, wanted to re-book to get the deal again, etc.). The owner is now on her 3rd run of coupons, she's now working with two other sites simultaneously. I just don't understand why she does it, but oh well.

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