Now… before we get too far along here; let me state that what you are about to read are my own personal experiences and should most definitely not be expected results for anyone else. Just because it happened to me; doesn’t mean that it will happen to you.
But it could.
I own a small business in the Nashville area. For the purposes of this article; lets just say I sell “widgets”. In particular, I was selling widgets for $90.
I’ve seen emails from Groupon, Living Social, Amazon Local, etc for some time now. They flood your mailbox promising services and goods for over 50% off their regular selling price.
It’s kind of like bringing a yard sale into your home instead of having to go out and find one.
I was curious about how such offers worked for the businesses that offered them. So I wrote emails to Groupon & Living Social to find out.
The first to reply was Groupon; who quite frankly wanted nothing to do with me or my business. This response surprised me; but in retrospect I guess it was the luckiest thing that could have happened to me at the time.
Living Social wrote back and expressed an interest in talking to me. So a phone call was quickly arranged for the following week.
Now; I’m not going into everything that was said on the call, as I don’t have a recording to fall back on – just my memory.
But on the call; one thing was repeatedly stressed : the voucher would yield clients that would be ripe for up-selling. Indeed; up-selling is so much a part of their sales pitch that when you redeem a single coupon it actually asks you to enter in the amount that you were able to up-sell.
So the first thing they want you to know is that every person who buys a voucher will be a prime target for up-selling and making more money for your widgets.
The second thing that they do is show you someone else’s offer who was selling a widget similar to yours. In my case I was shown an offer where a business sold a total of 88 widgets over a 3 month period. This was held up as an example of a successful campaign.
When they do this; they set what you perceive as a reasonable expectation of what to expect when you run your offer.
They also mention at this point that vouchers can be turned off and on at will; as well as having the ability to limit the number of vouchers sold at any time.
What they don’t tell you at this point is that both abilities do not kick in until after you have run your first deal. During your first deal; it’s like trying to drink from a firehose with no way to turn it off and throttle the flow.
As soon as they have your interest; then they move of to crafting the deal itself.
The deal begins with your retail price. In my case I sell a widget for $90. They immediately want you to off a 50%+ discount to people who buy their vouchers. That means in my case the $90 widget is now free with a $45 voucher.
And now the real negotiating starts. You see, Living Social wants to keep some of that $45 that they collect.
The first deal they offered me was they keep 60% of the $45 and I get 40%. It’s best to think of them as used car salesmen at this point. As they will really try to get the best deal they can for Living Social. I am convinced that this is because they get commission based off the amount of money that Living Social actually nets on your deal.
So the back and forth begins and after a lot of discussion; the agent agreed to a more equitable 50/50 split. I was happy because I got 10% more than he initially offered. But I should have kept pressing as I have since found that some people have been able to get as much as 70% of the deal.
So at this point I was congratulating myself on my 50%; when it was then revealed that they also take another 2.5% off the entire amount ($45) to cover credit card fees.
You know; I take credit cards in my business… I can’t imagine the many millions of dollars Living Social does each month on credit card transactions. If they are paying 2.5% per transaction with their volume; then someone needs to be shot.
So now my 50% is down to 47.5% .
Then it comes out that they actually pay out the amount in two lump sums : 70% within two weeks of sale, and the remaining 30% after about 6 months. The remaining 30% is to cover any returns from customers who ask for refunds.
I really should have paid more attention at that point as they clearly laid out for me that the expected refund rate was 30%.
So for those of you without a calculator handy; this means that I am paid $14.96 within two week and then another $6.41 after about 6 months.
So even when I’m talking the deal; I suddenly get nervous with the agent. You see the cost of my widgets is $40.50. So I’m taking a loss of $19.12 per widget.
The agent explains that I shouldn’t look at it that way; what I am getting for my $19.12 loss is a bonfa fide client who I will up-sell to. And I get to keep anything that I up-sell.
It gets even more convincing when I am asked how much I spend in advertising to sell my widgets.
He had me there. You see, I had just spend about $500 on Facebook advertising that netted me a grand total of 6 widget sales. (Note to self – Facebook advertising is EVIL).
So he helped me discover that I had paid Facebook $83 per widget. (I told you Facebook was evil!)
So see how much a better deal this was? When compared to the cost of selling a widget on Facebook, it was $64 per widget cheaper to sell via Living Social.
How could I possibly refuse?
So the deal was locked and loaded. All I had to do now was to sit back and hope that I would do as well as the other seller they showed me. You know; the one who sold 88 widgets in three months.
Now… before we go too far; I need to tell you that the widgets I sell require installation. In particular; it takes three hours to install this widget. That means I can get two widgets installed per employee, per day. So I figured to handle the load of installing 88 widgets over a three-month period I would need some extra help.
So I hired a new employee just to do the widgets installation. I wasn’t too concerned about cost as labor was factored into my per widget cost already.
So fast forward to the big day. I was over whelmed when we sold 27 widgets on the first day. Now…. an intelligent business owner may have been startled by selling about 30% of the total expected sales volume in a single day.
But not me…. I was completely unprepared for the trial I was facing ahead.
Today… I’ve had the Living Social deal set to inactive now for about three months. I did so not long after I was finally given the ability to “pause” my deal.
So; you are probably dying to know how the deal turned out? Right?
How many of the widgets did I sell?
Yeah, you read that right. I sold 473 of these over about a 6 month period.
Now before you go out and grab a pen and paper; let me save you the trouble.
It takes a total of 236 consecutive days to install 473 widgets. That’s over 10 months (not counting weekends).
Sooooo….. Guess what happens when you have 473 customers and you can only satisfy about 45 of them within the first month?
Returns…. Lots of them….
And very angry customers….. Lots of them….
The final return rate was 33%. Which is really telling since they held exactly 30% in payments to cover returns. So they obviously expect as much as a 30% return rate.
I should have seen it coming.
So out of the 473 vouchers; 301 of them either already have or are expecting their widgets. The last of them are expected to be installed within the next 30 days of writing this.
So what did I get for my money? I got 301 new clients. At the end of the day; it still came out far much less expensive than Facebook advertising (I would have spent about $25K on Facebook to get the same results; based on my ad performance so far).
Now I can’t speak for everyone who buys a Living Social deal. I am sure that if she were still alive; even Mother Theresa would have purchased a Living Social deal. I’m sure that some of the very nicest people who have ever lived buy Living Social deals.
I’m sure that Living Social appeals to the very finest of us. The most tolerant and most empathetic.
But somehow, I got the short end of the straw when it comes to voucher clients.
Over 45% of my new clients make over $100,000 a year. Another 21% make more than $76,000 per year. They are also 75% female. These are the clients that every business wants. They are the definitive targeted demographic.
But with very few exceptions; they are also the rudest, most hostile, uncooperative, cheap-skate bargain hunters that you will ever meet.
We’ve all know “coupon clippers”. We’ve seen them on TV. These are the people who clip so many coupons that they go to the grocery store and don’t actually have to pay for groceries.
And we’ve all know the “Scrooge McDucks”. The ones who got all their money by ensuring that they never spend any of it. The ones who will ask their friends to pay for their dinner because “the smallest bill I have is a hundred”.
Guess what you get when you combine them both?
I don’t need to guess…. I’ve lived with them for the best part of the past year. It’s like serving a prison sentence.
I get paroled in about 6 weeks.