Friday, February 25, 2011
No doubt most of us have read about the 2 year old Groupon rejecting a $6 billion offer from Google, and closer to home the 10 month old Spreets accepting a $40 million offer from Yahoo!7. Those are incredible numbers for such small businesses and hats off to their founders and employees, but I wanted to write a post on whether these sites are good for retailers. Harvard Business School professor Benjamin G. Edelman has been conducting research into the group buying space and his research provides some interesting insights.
Professor Edelman discusses 2 distinct benefits that group buying websites can provide retailers:
1. Price Discrimination
A discount offer on a group buying site allows a retailer to target with a lower price new customers who may not have shopped with them, while maintaining the standard pricing for existing customers who are willing to pay it. Airlines have been doing this for years charging different prices for different seats, but this has traditionally been much harder for retailers to achieve.
A deal on a popular group buying site is broadcast over the web, email and social media to many thousands of potential customers, many might take up the offer but even more hear and learn about the business. There is no cost to this except providing the voucher.
Those can be very good benefits but what are some of the problems?
1. Drastically reduced margins
The major group buying sites all require discounts of 50% and above, then they take a share of the revenue earned on the site. For Groupon this share is reportedly as high as 50%, from our understanding of the Australian market group buying sites generally take around 20% and keep the benefit of unredeemed vouchers. So that's essentially at least a 60% drop in the retail price a retailer receives for their product. For a restaurant or spa that has a perishable product and the marginal cost of the ingredients is 30% or less a group buying deal can still be profitable, however for a retailer like Shoes of Prey where our gross margins are less than 60%, we would be running an offer like this at a loss. We would need a reasonable percentage of the new customers to come back and buy from us at full price for it to work. This great post from Posies Cafe in Portland, Oregon provides an insight into the damage to gross margins that a poorly planned group buying deal is capable of doing.
2. Upsetting existing customers
I like yoga and love Body Mind Life in Surry Hills where Jodie and I have a membership that costs us $110 every 2 weeks as a couple. Body Mind Life recently ran a deal on Spreets which was $49 for 3 months membership. That's an enormous discount off their standard pricing and the deal wasn't available to existing members. I love Body Mind Life so much this didn't bother me too much and I actually promoted the deal to some friends I had been encouraging to try the studio, however seeing other people pay a much lower price than regular customers are paying could be an issue for a lot of customers. The other issue that could affect the existing customers of a business like Body Mind Life is if too many people take up the offer and the studio becomes very crowded. Paying a high price for a suddenly very packed yoga studio could be enough to make me unhappy.
3. Damage to brand
We don't discount at Shoes of Prey because we want to build a strong mid to high end women's fashion brand. We've also gone with more reasonable retail pricing as opposed to a higher standard retail price that has room for a percentage of sales to be sold at a discount like many retailers do. Offering a deal on a group buying site would change this approach and potentially damage our brand. We also have a strong social media presence including over 19,000 Facebook fans. A group buying deal would no doubt be posted by customers straight to our Facebook page, so many customers taking up the offer would be our existing customers and we would have then started training them to shop for discounts. This issue isn't applicable to all brands, particularly if they already discount. GAP sold 400,000 vouchers via a Groupon deal in a single day in the US and they wouldn't have done that if they thought it would damage their brand too much. The jury appears to be out though on whether that deal was a profitable one for them.
Whether a group buying deal works for your retail business comes down to your business, your strategy and how you can structure the deal. We actually did a deal with Spreets in their first week of operation back in February last year. We ran with a $50 Shoes of Prey gift certificate for $5. We were hesitant to do the deal at first because we were worried it was misleading - you can't actually buy anything on the Shoes of Prey website for $50, but we made sure that was clear in the offer details and we sold 25 or so vouchers and had no complaints. Another group buying deal we could consider doing would be on our ready made shoes. It's cheaper for us to make lots of the same shoe so that could give us a better margin to work with, however that deal would be off brand in that it doesn't allow the customer to design their own shoes and it goes against our strategy of not discounting, so I'm not sure that would be appropriate for us either.
Have you considered or actually offered a group buying deal for your business?
Cross posted to Power Retail
Posted by Michael Fox at 2:58 PM