“You’re the Boss” blog posted an article about Groupon back in November 2010. It was extremely interested, and I’ve adapted the original post for day spa managers and owners.
How Groupon Works:
Groupon partners with local businesses (including day spas) and sends daily coupon e-blasts to members. Those who buy the coupon get 50-90% off on promoted products and services. Groupon then splits the remainder with the retailer.
Groupon has the potential of bringing hundreds (if not thousands) of customers to your door. The question remains, is it right for your day spa?
1. How many potential customers in your area don’t know about you? Depending on your circumstances,the answer is quite different. For instance, if you are an established day spa in a small town,the answer is most likely “very few.” However,if you’re a new spa in a populated area,then the answer is most likely “a lot.”
2. Do you have excess capacity? Do you have equipment and rooms that are under-utilized?
3. Can you handle a surge? Can your staff and therapists handle an onslaught of customers? Are they willing to work extra hours?
Discounting and Branding
How does deep discounting effect your brand? For many day spas, it’s quite possible that you will risk damaging your brand. Let’s face it, if you can offer a service at half-price and only collect 1/4 of the fee, what’s the message sent to the consumer? People assume that you are making outrageous profits when you stoop to deep discounts. When they see that, they often wait for the deal and only the deal.
Doing the Math on the Deal
That brings us to the dollars and cents of advertising with Groupon…yes – Groupon is advertising. “Instead of writing a check for an ad, you are choosing to lose money on sales.” And, with the Groupon model, you can really lose a lot if your customers don’t spend more than the coupon amount. That’s why it’s so important to go into this type of advertising with your eyes wide open.
The scenario or proposed deal: $75 Facial sold through Groupon for $37.
Below are eight calculations that you need to consider before you deal through Groupon.
1. Figure your incremental cost of sales — the actual cost percentage for a new customer. To figure this out, take the labor costs (hourly wage + commission) PLUS the cost of products. Do NOT use any of the fixed costs or overhead – because you are going to have to pay this one way or the other. Note that this number will differ for every day spa! For this $75 facial, labor + products = incremental costs($20 + $10 = $30). Therefore the percentage is 40% (30/75) for delivering the facial deal. Don’t confused this with the actual cost to deliver the service.
2. The amount of the average sale. If the coupon is for $75, will the customers spend more that that? Many businesses complain that few people spend more than the value of the coupon.
3. What percentage of people actually redeem the coupon. For this exercise, let’s say it’s 95%.
4. What percentage of coupon users are already your customers. This will vary based on where you’re located and how long you’ve been in business.
5. How many coupons does each customer buy? (The more they buy, the fewer people are exposed to your service.)
6. What percentage of coupon customers will turn into regular customers? Bargain shoppers abound and it’s likely that only a small portion will become regular customers. For this exercise, let’s say that 10% return; the remaining 90% only come back for the next deal.
7. What is the advertising value of having your business promoted to Groupon’s list — even if they don’t buy a coupon? This varies based on the location and number of recipients.
8. How much does it normally cost you to acquire a customer through advertising?
Let’s look at an example of how this might work for a day spa offering a deal on facials. For this example, we won’t consider product sales. Suppose you sell 1,000 coupons with a face value of $75 for $37. Then let’s assume the following:
1. 40% incremental costs.
2. $85 average ticket (Let’s be generous and assume each customer spends $10 more than the coupon).
3. 95% redeemed.
4. 35% used by existing customers.
5. 1.25 average number of coupons purchased per customer. (Let’s assume a few people buy more than one.)
6. 10 percent come back again — or send friends.
7. $1000 advertising value.
8. $83 typical cost to get a new customer through other advertising methods. (Could you conceivably get a dozen new clients out of $1000 spent with another ad medium? Sure.)
Now, let’s do the math:
Number redeemed: 1,000 x 95 percent = 950.
1000 x $37 x 50% = $18,500 (Groupon sends a check.).
950 x additional $10 = $9,500 (additional money spent by each customer).
Total revenue = $28,000 (plus, you also get the $1,000 advertising value of having all those people introduced to your product or service).
950 x $85 (average retail value) x 40% incremental cost = $32,300.
It works out that your day spa will take in $28,000 at a cost of $32,300. This means that it cost you $4,300 to run the deal.
Many of you are saying “Wow, that’s a lot of money to lose”…and it is. However, you have to consider how many of these clients will return to your day spa. If you divide the 950 (the actual coupons redeemed) by 1.25 (the average number of coupons bought by each customer), you get 760 customers. Multiply that by 65% (to exclude existing customers) and you get 494. Multiply again by 10% (the percentage of new customers who return), and you get 49 new repeat customers.
Divide the $4,300 cost by 49 new customers, and the day spa in this example would have paid $87.75 for each new “regular client” – which works out to be slightly more than traditional advertising. For practical purposes, let’s call it even.
Other considerations before embarking on the big deal!
On the minus side:
1. Sticking with our example, please consider how the disruption in service has affected your existing regular clients. Getting the additional 49 customers may have annoyed many of your loyal customers and you may have to get creative to find a way to make amends.
2. Has the deal damaged your brand? Are you inadvertently training clients to only buy on deal?
3. For day spas located in small cities and towns, these numbers will be much different. You’re likely to get a much smaller number of coupon sales.
On the plus side:
1. The onslaught of business has probably kept your employees busy during a slow time. That helps bolster morale!
2. The above calculations do not account for the lifetime value of the new customer, product sales, etc.
PLEASE NOTE: if you change any of the variables in this example,you’ll get very different results. Low incremental costs, high margins, and customers who spend a lot more than the ticket value will increase your bottom line. The point is: run the numbers before embarking on any daily deal site.
Let me know if you have tried Groupon and if you made money? Did Groupon bring in a loyal customer base? Would you use it again? If so, under what circumstances would you use Groupon again?