Why Living Social, Groupon, and other Deal Sites Are Bad For Business

KENNESAW, Ga. - June 12, 2013 - PRLog -- I was previously the CEO of an Inbound Marketing that worked closely with companies like Living Social, Groupon, and Half Off Depot.  I developed a very intimate knowledge of the industry relationships from local vendors level and above.  We created markets by building websites and optimizing them to be #1 in Google results to which we built a $16-30 Million annual company, 30% of which was deal site sales.  Deal sites proved to be a very quick way to earn profits but what I found was it was at the expense of the local company.

Our business was to use Groupon-like services to rapidly collect capital from local vendor’s services that we represented as a national brokerage firm.  What I learned was that local companies were being killed by the revenue shares they are forced to accept by the deal sites and Living Social and other sites were leveraging huge email lists to force companies to participate.  Our company protected the local businesses by negotiating national level revenue sharing rates to get the business owner 60-70% of the value of their product, instead of 25% (50% of 50% value).  

The marketing exposure gained from Living Social or Groupon gives you is a business form of a "Trojan Horse" due to several reasons; the extreme discounting required, lack of loyalty from the deal site, and the devaluation of your market.  These all lead the local business owner to a co-dependent relationship with running deals eventually hurting their market share.

The first problem is that deal sites focus on customers that are only concerned with the saving or couponing instead of building a relationship with the business.   The relationship gained is short lived in most cases and many business owners are finding themselves addicted to deal sites to a point of near co-dependency causing many businesses to not be able to cover operating costs over a sustained period of time due to low margins or losses from coupons sold.

My experience with these companies led me to leave my former company to dedicate myself to helping small businesses that were being taken advantage of by deal sites.  I felt the companies that we were making money on were stuck in the middle of these business models and many see no other option but to participate.  So I co-founded Zepol Optimized (http://www.zepolmarketing.com/) as a result and today we work hard to help local businesses thrive.

THE PROBLEMS WITH DEAL SITES:

In my opinion, discounting is the wrong way to build a business.  Dropping your cost takes your quality product or service and destroys the perception of what it is worth to the customer.  When you run a deal site advertisement the revenue share of 50-60% is in actuality 25% or less revenue for your business after Living Social or Groupon takes their commissions leaving your business with only 25% of the value of the product or service sold.  Also Living Social and/or Groupon take no responsibility in the overhead costs of fulfilling the product or service leaving the business owner at a 75% loss on what is sold and 100% of the liability.

The extremely low price also sets a precedent in the minds of the customers who saw your product being sold, potentially for the first time, and sets the value in their mind for what your service is worth.  People will view your product or service as "cheap" and not quality so there is very little value for what you sell.  I have discussed this with hundreds of customers who have literally told me “come on you sold it for that cheap before” and expect the same saving.  I have also lost hundreds of previous deal site customers who refused to pay normal prices and in turn would seek out our weaker competitors for comparable deals.

The final reason why Living Social and Groupon deals are not smart business is the customers you receive through this service are less likely to return to your business unless they receive a discount.  The deal sites will tell you it’s your responsibility because they get them in the door and your sales team has sole responsibility for continued business and this is half true.  You may get some retention if you customer service is exceptional, which in today's business world is the exception not the rule, but customer retention will be a lot lower than your other methods of advertising.  The problem is that the customer is not loyal to the business that the coupon was purchased from the loyalty is to Living Social as the broker for the discount.

This lack of loyalty the reason why deal sites are not good for business because those customers gained will always seek the deal over quality.  The fact is that the deal sites are only loyal to profits and as soon as you sign a contract with a company like Living Social they are immediately contacting your competitors to set up the next deal.   In fact, the next deal may just be your biggest competitor.

I have personally had Living Social use another company’s data as a sales tool to try to get me to sign up.  This “profit over building business relationships approach” further drops the value for doing a deal because there is no exclusivity for your business.  If they continually run deals back to back then Living Social will dictate your market value of your product or service and many companies become hyper-dependent on this marketing source at the expense of their company.  In the end, the price you can expect for services will deteriorate and overall profits will drop costing some business owners their entire investment.

So what I do is evaluate companies’ online presence to see what is causing their business to need a service such as Living Social.  I evaluate the "Whole Business Concept" for online success and I give them free feedback about their business from overall online content, social media, reviews, and several other factors.

I have assisted small businesses in getting full profits for the products and services they sell by helping people find them online.  We have large clients that are seeing huge returns on investment because we have designed an online presence where they have over 2,000 #1 ranking on page 1 of Google.  Studies show being #1 in Google searches will bring you 30+% of the business on that market if you have a professional sales strategy in place (Ref: Chitka (http://chitika.com/insights/2010/the-value-of-google-resu...)).

In summary, small businesses should invest less time in “get-rich-quick” marketing solutions like Living Social or Groupon and focus on long-term options like a well-defined combination of search engine optimization, social media, other traditional marketing solutions, and outstanding customer service.  This will build the value for your product or service, increase customer retention, promote referral marketing, and grow your business properly.