Let's Make a Deal: How Businesses Can Make the Most of Groupon, LivingSocial and Scoutmob

I'm David Eckoff. I'm on a mission to talk with businesses in Virginia-Highland that use social media to build their business and clients.

Last week in part one of our multi-part series on social shopping, we explored how local businesses use Groupon, LivingSocial, and Scoutmob to reach new customers.

This week in part two, we'll explore what merchants need to know to make the most of "deal of the day" services.

If you're a merchant, if you remember only one thing from this article remember this: with social shopping campaigns, failing to plan is planning to fail.

Here's what you need to plan.

Assess Your Operational Capacity

First, assess how much new business you can take on. For example, if you're a restaurant, how many customers can you serve? If you're a cupcake bakery, how many cupcakes can you make?

You want new customers. But imagine the operational chaos, service issues and cost if a large number of customers overwhelm your operational capacity.

How bad could it get? Let's talk cupcakes for a moment. 

Last March, a small bakery in San Francisco was bombarded with orders for 72,000 cupcakes from 3,000 people after a Groupon offer according to Bloomberg Businessweek. The small business couldn't keep up with demand, angering some customers. Staff had to make supply runs twice daily and three employees threatened to quit under the pressure, according to the local NBC affiliate.

What kind of demand are we potentially looking at in Virginia Highland? Could that sort of Groupon disaster happen here? 

Murphy's restaurant had about 12,000 people signed up for its Scoutmob coupons in 2010.

"Make sure your staff is ready to handle the extra volume of business," Carolyn Prebil, director of marketing at Murphy's suggests.

Listen to the voice of experience.

Use All Your Resources

And use all your resources. For example, Scoutmob helps merchants to plan.

"We have a dedicated person who helps prepare the business for the rush," Michael Tavani co-founder of Scoutmob told me. "The first day is always busy and first week it flattens. Then two weeks before expiration is another big rush."

Tavani adds that merchants should plan that 30-40 percent of people who request a free Scoutmob coupon will use it.

Groupon offers a tool to manage volume that is often overlooked.

"An important part of the deal structure is that merchants can always build a cap into their deal," Julie Mossler, Groupon spokesperson, said. "A cap limits how many can be sold, to ensure service isn't compromised and merchants aren't overwhelmed."

I generally recommend a cap on daily deals. Think of it like a stop loss order on a stock purchase.

And while each case is different, I'd suggest running your campaign during a slower time of the year, not during your busiest time of year.

Take Into Account Your Existing Loyal Customers

What if more new customers than you could ever imagine signed up for your deal of the day and started calling your restaurant to make reservations?

That might make you happy, until you realize that your regular customers - who likely generate most of your repeat business and profits - are going to find it hard to get reservations.

Consider this — in 2010, Fifth Group sold over 10,000 Groupons in a package that included Virginia Highland restaurants La Tavola and El Taco .

"It drove in a lot of people who had never been to our restaurants, which is fantastic," Michael Erickson of Fifth Group told me. "But it's a double edge sword. It brought in a lot of people."

"We had so many people coming in from the Groupons that it made it difficult for our regular customers to get reservations," Erickson said. "And you certainly don't want to anger them. Anyone who is considering doing it should be aware it could hurt your existing business by bringing in so many people."

As with Scoutmob, Groupon helps merchants to plan, including new capacity planning tools to calculate the optimal number of Groupon customers relative to regular traffic

"We offer a host of merchant services tools, from webinars to connecting prospective clients with merchants in the same industries who ran successful Groupon promotions," Julie Mossler, Groupon spokesperson, said. "You can see many of these tools on our Merchant Services page, including an ROI calculator, and tips to motivate and train staff. In the past year we've become more and more insistent that merchants review these, but ultimately it's up to them to take advantage of these tools."

Elsewhere in the industry, LivingSocial issued the first ever Merchant Bill of Rights, designed as a guide for local businesses. These rights and fundamental terms represent the minimum expectations small and mid-sized businesses should expect when they consider their marketing options.

Similar But Different

The three services are remarkably similar, but there are some key differences.

With Groupon and LivingSocial, customers purchase your coupon up front. And the services pay your business a portion of the proceeds.

"On average, we take about half and give the rest to the business," Groupon spokesperson Kelsey O'Neill said.

Scoutmob has a different approach. Customers request the coupon and receive it for free. And as a merchant, you pay Scoutmob a small fee per customer who redeems a coupon at your business.

"We charge the business a flat fee for a customer sitting in a seat, like (restaurant booking site) OpenTable," Michael Tavani, co-founder of Scoutmob, told me. "A couple of bucks per person in the seat."

Scoutmob is lower cost per customer acquired.

Planning for Profitability

If you're a restaurant and sell $20 of food for $10, and net $5 after Groupon's share, how do you make money?

First, your goal must be to win long term customers. But you don't need to convert 100 percent of new customers to succeed.

"If I can capture a small percentage of those people and get them to come back again, then it served its purpose," Erickson of Fifth Group said.

Second, many guests spring for high margin items such as wine and dessert. A real life example: we recently used a Scoutmob coupon at Harry & Sons in Virginia Highland. While we enjoyed a $20 discount on food, we spent much more than that on high margin items such as artfully crafted cocktails.

Finally, as with all coupons, you can plan for a certain amount of breakage (coupons purchase but not redeemed). According to estimates by deal aggregator Yipit, breakage rates can range between 10 to 20 percent.

Groupon pays the merchant upon purchase by the customer so the merchant retains their full share of profits whether a customer redeems or not. So for unredeemed Groupons, you're getting the revenue with no cost of goods sold against it. That’s pure profit to your business, which helps offset some of the discount to other customers.

Converting First-time Visitors to Repeat Customers

Once you get new customers in the door, job number one is to give them a great experience so they want to return.

While there's always the worry that discounts condition consumers to flit from one deal to the next, Virginia Highland resident and social shopping aficionado Liam Pelot says that a restaurant should be able to generate repeat business.

"If I get a bad meal or have a bad experience then I won't be back deal or no deal," Pelot said. "But, if I have a positive experience then I definitely return."

Your goal is to make sure that first time customers have a positive experience. And go the extra mile.

"The businesses who are more prepared to handle the first-time customer do better in terms of winning repeat business," Tavani of Scoutmob said. "At one local restaurant, the owner made it a point to personally introduce herself to every Scoutmob customer who visited. This won her more repeat customers."

The social shopping services can drive customers to your business. What happens after is up to you.

The Bigger Better Deal

It's exciting to know that you can build more into your deal than a discount.

Pelot, the Virginia Highland resident, offers this advice.

"If you are well established then use it in conjunction with a new menu or other change to attract new customers," Pelot said. "If you are new then don't be afraid to use it to generate some buzz."

The bottom line: With daily deals, failing to plan is planning to fail. Assess how much extra business you can handle without upsetting regular customers. Go the extra mile to turn first time guests into repeat customers.

Coming Next

In Part three of this report, I'll cover what consumers need to know about the different social shopping services to get the most from them.