The REAL data on Groupon’s performance

by Dylan on June 7, 2011

While half the Internet spent the weekend poring through Groupon’s S1 filing and raised a lot of questions (and concerns), I called up a friend of mine for an extremely interesting chat instead. Ronan Perceval is the CEO of Phorest, the leading beauty salon appointment software company in the UK and Ireland. Their products are used both in salons (appointment management and CRM) and online (for consumer booking). So whenever a salon in the UK or Ireland runs a deal with Groupon, it most likely ends up being processed by Phorest’s software. Here’s what he had to say:

Only about 1% of Groupon users become regular customers.
 Groupon represents about 50% of the deals run by our clients. It’s easily the most effective way to get hundreds or even thousands of people through the door of a salon with one day’s advertising. The problem is that the cost of sale doesn’t really add up for the salon owner. Generally a salon only needs to convert about 10% of Groupon buyers into regular clients for it to make financial sense but based on our internal data we’re only seeing conversion rates of about 1%. Think about that for a second. A salon with three staff sells a thousand deals and only ten of these come back again and pay normal prices. That’s over a thousand man hours (at least two months) of loss-making treatments to gain seven new clients.

Groupon’s churn rate could be as high as 90%.
 Out of all our salons who have run a Groupon deal, only about 10% are either planning to (or have already) run a second campaign. However, this 10% actually needs to be qualified as an increasing number of smaller salons now survive solely on Groupon deals. This phenomenon happens when a salon runs a very successful Groupon deal but spends so much time servicing it that they lose all their original clients. They then have no choice but to go back to the well and run another Groupon deal just to ensure their survival. These salons are then caught in a deal-loop where they can’t escape Groupon!

Most established salons simply will not run a second Groupon (or other daily deal offer)-the conversion rates are just too low.

Is Groupon actually becoming a virtual salon business?
 A typical salon business is built on word of mouth – where friends recommend a stylist who does a great job and therefore is willing to pay a decent price. Groupon clients couldn’t care less about the quality – they just want the deal. And they know there will be another deal next month for the same treatment. This has led to an interesting phenomenon where Groupon will offer certain types of treatments on a regular basis but in different salons e.g. you can get a spray-tan deal in Dublin usually once a month. So for a material percentage of users, Groupon has effectively become a virtual salon, using actual salons to carry out the service in question for users.

What should Groupon be doing to fix this?
 They need to start looking hard at the ecosystem below the consumer level. Like right now. Groupon and LivingSocial must both get better at helping their clients be more productive with their deals, the same way that Ebay has done.

 

End-note
Three things struck me from our conversation. First, Groupon’s bankers are earning their money. Second, there’s a huge market opportunity in deal optimization coming down the line (similar to what Ronan and the team are doing here). Third, I have the strangest desire to find a sun-bed.

 

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  • Justyn

    If any business, through any marketing channel is only getting 1% of people to come back, they need to do a better job with customer experience, customer engagement, booking the 2nd appointment after the first visit, etc. If 1000 people loved their haircut and got great service. a lot more than 10 would be back. People have to get their haircut, it’s every salons job to win them over.

  • Anon

    @justyn it may be the case that the people attracted are just about the deal. So they will never actually convert, because they are attracted to the X% discount, not the service or product itself. There is a fairly large segment of the market for which this type of behaviour applies.

  • dylan

    @Justyn I have to agree with @Anon on this one.

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  • Nigel

    The problem is, as I have discovered, a lot of these deals provide a substandard experience. Like the Cuban in Camden providing a very small unrepresentative menu specifically for Groupon Customers In my case they actually put me off the place. If I hadn’t have had the Groupon experience I would definitely have gone back.

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  • Paul

    A key part of any group buying site is in educating the businesses of how to manage such a volume of customers. The low conversion rate to repeat businesses in this case can be put down to that the business just wants to push through the volume of people instead of giving value add.

    Some data points I have seen in other markets show me that there are deals that generate net profit for the business and others that are just marketing related. Salons/Spas etc have large margins and as such Groupon is the perfect model for them to bring in the customers.

    Its all down to the experience the customer has at the end of the day, whether they came from a coupon or not – that is what will gain loyalty.

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  • http://www.phorest.com Ronan

    @justyn – the thing about the 1% conversion rate is that it is an average across all the salons doing deals. Some have lower. A lot lower – maybe 2 out of 800 deals coming back. The ones with amazing customer service are only getting slightly better – maybe 12 out of 800. Its basically because the majority of people who use deal sites are only interested in deals – only a small minority are open to coming back. Compare that to the usual way a salon gets business which is word of mouth. If someone books into a salon because they receive a personal recommendation – the salon has on average a 45% chance of that customer coming back.

  • http://www.cshsia.com/blog CS

    Very interesting article. Considering the basic natures of salons, people will need return visits to a salon either weekly or at least monthly. Yet only 1% is returning to the same salon after a Groupon deal.

    The problem is potentially greater for other types of merchants. A plastic surgeon I do SEO consulting work for would have absolutely no chance of turning a profit running a Groupon deal. It’s not something that’d generate recurring business to start with (outside of botox once every few months), and to bet on cross selling is a stretch.

    Unless the merchant has setup a whole slew of marketing assets to re-engage previous customers, either via email campaigns or snail mail, Groupon’s going to become effective for only a few niche industries.

  • X

    Conversion rates at the spa’s and salons is always going to be crap.

    Groupon routinely feature these types of deals because these businesses have very low overheads and great margins. The main overheads at Spas and Salons are their staff and they don’t want their staff hanging around *waiting* for customers. It’s better to keep them busy.

    Margins dip but there’s clear economies of scale involved. Those becoming dependent provide a valuable service. It’s worth noting Groupon’s cut ranges from 30-50pc. I’ve heard 10pc on the grapevine.

    It’s in other sectors where real loyalty can be achieved their long term success will depend on their ability to see beyond the short term profits, high margin deals and BIG % discounts.

    They need to build a brand, work on greater personalization, undertake a UI overhaul, push hyperlocal & international deals and create reactive mechanisms to cater to emergent consumer trends.

    Groupon will create a pure free market economy.

  • PCinSF

    The 1% metric is absolutely useless unless we know what the conversion actually means. It’s a number pulled out of air.

    For example, CS seems to imply that regular customers would be weekly or monthly. Is this true for salons? I would think that there is a large pool of regular customers who go once a quarter to pamper themselves. Some women only cut their hair every 6-9 months. Is that not a regular customer?

    I’m inclined to agree with Justyn. On average if you’re only converting 1% I think that says more about your business than the audience you’re bringing in. This is simply more believable than the assertion that 99% of people are simply dealhunters. People who believe this are in more denial than those who think Groupon is perfect for businesses.

    Of course, Groupon will work for some and fail for others. What really matters is which business/situation it does work for and which it doesn’t.

    Based on what I’ve seen, Groupon is effective for new businesses because no one knows about them. It also matters how one structures their deal relative to the average spend per customer. What’s also important is whether the business can upsell the customer such that they spend more than the deal. Lastly, customer service! I’ve read reviews for businesses that use daily deals and many of them have complaints over customer service. This is an onus on the businesses not the consumer or Groupon.

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  • http://www.clearconversions.ie/ Hugh

    Interesting points, with great input from Ronan. However, I do have some questions to get my brain around those figures.

    @Ronan – Looking at the Phorest Product, it has a field for ‘Where did you hear about us?’. Do you have any data that might suggest that some salon staff might get a little lazy and not select ‘Groupon’ as a lead source, or do salons use payment method as ‘Voucher’ in redemption cases?

    From my own personal experience of sales teams and CRM systems, it’s sometimes an uphill battle reminding staff just how important the right data in the right place is.

    Another question @Ronan – do you have any figures at your end on non-redemption rates on vouchers. I had heard from other sources it was running at about 10%. If so, it could slightly change those figures as it’s essentially ‘free money’ and there are no staff costs to get it.

  • http://www.phorest.com Ronan

    @Hugh – with the Phorest Groupon Connect (phorest.com/groupon) feature where people redeem the voucher and book online – this field is automatically tagged as Groupon (or the name of the deal site) so we try to take that out of the staff’s hands.

    Non-redemption rates are actually much higher than that – 30-40% in some cases BUT groupon keeps this cash in Ireland and the UK – NOT the salon who only get their cut if the voucher is redeemed. However some of the other deal sites do pay you this cash it is true.

  • http://www.clearconversions.ie Hugh

    Oh! I was always led to believe that the retailer got paid upfront from Groupon, a few days after the deal ended.

    Hmmm, I wonder if Livingsocial pay every penny to retailers then. If so, it’s only a matter of time before Groupon will have to do the same in order to keep up. Livingsocial are growing at a huge rate and seem to be getting great feedback from all sides.

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  • http://blog.agrawals.org Rocky

    @Hugh

    The terms are different in the U.S. and Canada. For Groupon, the business gets paid in installments within 60 days. They also get to keep the revenue from unredeemed vouchers. (But are also stuck with any fraud or duplicate redemptions.)

    Outside U.S. and Canada, you get paid as deals are redeemed.

    • http://www.google.com/ Trix

      Wonderful explatanoin of facts available here.

  • caragiven

    Hey guys

    This is really interesting stuff. I could have told you in two seconds flat there’d be no conversion into regular customers because the problem is lack of exclusivity – when there’s another salon next week that’ll do the same deal so why would anyone ever pay top whack? Groupon are effectively training consumers out of the notion of brand loyalty at all.
    What’s really interesting is that Groupon keep the revenue from the unredeemed vouchers which I didn’t know. I’ve actually bought a voucher for a salon in the UK then didn’t redeem it for two reasons. 1. Even though it was a good deal, I couldn’t bring myself to take a chance on a new salon I didn’t know, and 2. because the time limit was too tight – and I actually put myself off making the appointment because I could see how many deals had been sold and did the man hours calculation myself. I assumed I wouldn’t get in. Funnily enough that same salon closed down last month.

  • http://bendrix.me bendrix

    shhhh didn’t you know Groupon is a gimmick and it was never meant to pool in long term customers. Consumers are fickel and only want the deal. @Anon said it best :)

    - bendrix

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  • Mick O’Toole

    I really think Groupon, CityDeals etc will become unsustainable – there are only so many waxings one man can have! What used to be worth checking out is now just a list of discounts on discretionary services, zombie hotels/golf, bad food and intimate follicle removal.

    I want to buy Stuff and not just services!

    -micko

  • http://www.evbart.com Evan

    Interesting article and follow on discussion!

    I think it should be noted that salon’s end up in the category of business’s that have a high customer acquisition cost. People get attached to their salon and it’s viewed as a “risk” to switch to someone new. Most of this happens via word of mouth.

    I’m not sure if its because of these differences or for other reasons, but I’ve heard a couple of daily deal sites they avoid these type of salon deals… so I’m pretty sure they’ve figured out they don’t work as well as other deals. The number I’ve seen batted around for conversion to repeast customer is closer to 20%, so this just may be a poorly converting category.

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  • http://www.parksmartmpls.com Jon

    Full disclosure: our parking business has run 4 separate groupon deals, with conversion rates as high as 29% and as low as 18%.

    Personally, I think this is a poor conversion category – re: high costs of acquisition.

    What most businesses do wrong is fail to recognize that YES, these grouponers are, in fact, looking for a screamin’ deal. Giving someone a sizeable discount, and then expecting them to pay full rate for the next service is ridiculous, you need to step them up to full rate. What we do to encourage conversion is offer a tiered discount system. First deal (groupon deal) is 50% off, then we give them 25% off their next visit or long-term contract. Works like a champ.

    I would suggest maybe a tiered coupon booklet, with coupons for 40, 30, 20, 10, and 5% off, to be given to each customer. If the customer was at all satisfied with their original deal, they should also be satisfied with the value given them at 40% off. This allows for another chance for the business to shine, and will help to ween the customer off the high discounted rates.

    Also, with the stepped discount system, it allows the customer to see the light (or darkness) at the end of the discount tunnel, and helps to to really see and appreciate the value of the discount offered on Groupon.

    Cheers -

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