A recent story reported in Boston.com highlights a new Fine Print issue in Daily Deals.  It appears that the Massachusetts Alcoholic Beverages Control Commission has weighed in and challenged Daily Deals that offer drinks, as a violation of the state’s “happy hour” regulation, that essentially prohibits selling drinks to anyone below the prices available to the general public.

From Boston.com

In a February letter to Groupon, the commission said that a $100 Groupon coupon that a consumer could redeem at a Massachusetts restaurant with a liquor license appears to be an “example of discounting activity that fails to comply with all laws of the Commonwealth and the regulations of the Alcoholic Beverages Control Commission.”

Like many Fine Print issues in this new space, state level regulations appear to have been thoroughly vetted, and vendors tend to be begging forgiveness instead of thoroughly researching and getting permission prior to selling a small business on Daily Deals. this point was put much more eloquently by the legal counsel for the Commission!

I am hopeful that the long-established, clear, bright lines of the boundaries of legality have not vanished in the rear-view mirror of entrepreneurism driven by unbridled and imprudent, if not reckless, enthusiasm.

The business will likely be viewed as being “on the hook” for the violation, it’s probably best when designing a deal that could involve drinks to receive formal confirmation from your deal provider that this is a non-issue in your state.

Alternatively, simply show restraint and design your offers to be dry until the dust settles!

Greg Sterling is a Contributing Editor at Search Engine Land. He writes a personal blog, Screenwerk, about media and the connection between online and offline. He also posts at Internet2Go, which is focused on the mobile Internet. Follow him @gsterling.

In 2010 Groupon reportedly made $760 million according to documents obtained by the Wall Street Journal. However the unprecedented growth of the daily deals segment and Groupon in particular has left some casualties in its fiery wake.

In early 2010, just as Groupon was gaining national visibility and momentum, anecdotal stories emerged of small businesses that couldn’t handle the customer volume or for whom the Groupon promotion turned out to be highly unprofitable. There were also gripes by some business owners about the type of customers Groupon delivered – bargain hunters who don’t repeat.

There have also been many success stories. Groupon claims more than 90% satisfaction among its merchant customers. And an independent study of about 100 small business daily deal marketers found a similar satisfaction figure.

However, a Rice University sponsored “Groupon Effectiveness Study” (September, 2010) among 150 small businesses found that satisfaction levels were considerably lower than these deal site surveys suggested.

Among the respondents with negative experiences, the Rice study offered verbatims about undesirable customers using Groupon. “One restaurant owner observed that ‘Most of the Grouponers were what we call ‘deal- seekers’; they felt entitled to special treatment, didn’t spend more than what the Groupon itself cost, they didn’t tip, and most won’t be repeat customers.’”

The Rice Study also reported that two-thirds of merchants using Groupon found it to be a “profitable” experience. What’s more, the general appeal of the business model continues to grow.  The idea of paying for customers rather than clicks is compelling to most small business owners because it effectively eliminates risk and opacity from the online marketing proposition.

A 2011 Opus Research-MerchantCircle small business survey of 8,456 merchants found that the Groupon marketing model – paying a percentage of a sale – was the most popular among a range of choices, which included search PPC and pay per call. A similar Opus survey in Q4 2010 found the same result by an even wider margin.

Yet more than 50% of those who had some experience with daily deals in the 2011 survey said they would not repeat. Similarly the Rice study found 42% of respondents would not run another Groupon or daily deal promotion.

There’s a curious contradiction here: businesses love the idea of the daily deal but often the experience is disappointing. The model as it’s presently constituted is in need of some tinkering and alteration. Education and proper expectation setting are also important in overall merchant satisfaction. Small businesses need to understand what they’re getting into and how to make the most of it. Deal providers need to offer “best practices” and guidance to business owners so they can take full advantage of the opportunity.

Yet regardless of how it evolves, the Groupon model has already had a significant and probably lasting impact on the future of local online marketing.

Daily Deals present a unique set of issues regarding consumer redemption rights and merchant obligations.  While a Daily Deal Voucher is a new instrument, leading vendors (notably, GroupOn) assume the most stringent “worst case” scenario, treating a Daily Deal as the equivalent to a Gift Card.  This article explores the implications of these regulations.

This informative guest post is from Seth Gardenswartz, VP of Business Development and General Counsel for SpaBoom, a leading marketing solution provider to Spas, Salons and Restaurants.

Article:

Pop Quiz: how long must you honor your gift cards? For extra credit: how long do you have to honor a Groupon? Think you know the answer?  You are likely wrong or a very rare exception.

If you’re lucky the answer is generally 36. That’s 36 months; the new minimum imposed by the CARD Act last year. However, it could be longer or shorter depending on your state law and the type of gift card you delivered. Here is a simple way to figure it out.

If the card or certificate has a “$” and a number on it (like “$50” or “$10”) then it’s subject to the CARD Act. To be precise, if it states a specific monetary value, it is covered by the CARD Act unless it qualifies for an exception. The minimum time you must honor gift certificates covered by the Card Act is five years from the date of purchase. However, the CARD Act sets a floor, not a ceiling. If your state has a seven-year minimum or prohibits expiration dates, you are subject to the longer expiration date.

The reason for the dollar sign and number short cut above is that the federal law does not apply to gift cards that are good for “experiences.” If your card is good for a “couples massage,” rather than a specific dollar amount the CARD Act simply does not apply. This is where your state comes into play again. For example, if you sell a card redeemable for $50 at a restaurant in Dallas, you must honor it for five years (since it is subject to the CARD Act).  However, if you charge $50 for a card entitling the holder to “Chateaubriand for two,” it can expire in a year since 1) the CARD Act does not apply, and 2) there are no minimum expiration requirements for gift cards or certificates under Texas state law.

Aside from the experience exclusion there are six exceptions to the CARD Act regulation. However, only one of them applies to most small businesses; the promotional or loyalty exception. Essentially, if you give gift certificates away, sell them below face value or provide them as part of a reward program they are not subject to the CARD Act’s five-year minimum but are subject to its disclosure requirements.  While each state law is different, many retailers allow consumers to redeem the purchase price of promotional gift certificates for the longer of five years or the state’s minimum expiration term even if a promotional value expires sooner.

What about Groupons?

The first thing to understand is that Groupon tells its clients that

“[t]he Merchant, not Groupon, is the seller of the Voucher and the goods and services and is solely responsible for redeeming any Voucher you purchase[]”and that you (the “Merchant”) are “fully responsible for any and all injuries,” including claims “for any unclaimed property liability arising from unredeemed Vouchers or portions thereof.”

Therefore the liability for Groupons sold is yours, not theirs.

Groupon takes the approach that the full promotional value of a Groupon can expire in a few months, but the value paid by the purchaser is valid for the minimum required by state law. They are requiring you the merchant to honor the coupon for the time frame required by state law. Furthermore, Groupon is covering their assets with an express policy of refunding the purchase price paid by consumers if a merchant fails to honor any Groupon.

Furthermore, a recent lawsuit is a perfect example of how Groupon’s one-size-fits-all fine print may create trouble for Groupon and its clients.  As described above, Groupons bear an expiration date, even if the purchase price is available for a longer period of time. That may be fine in many states, but in California it is “unlawful for any person or entity to sell a gift certificate” with an expiration date.  One enterprising Californian, with the other members of his class, has noticed this transgression and sued Groupon and one of its clients (Nordstrom’s) for the sin of using the “e” word.

Best Practices

First realize that this document is not legal advice. After that do your homework! You should know your state law regarding gift card and gift certificate expiration, including quirks like the California’s prohibition of the word “expiration.” The National Conference of State Legislatures has published a handy guide, which makes a great place to start your research.

A good practice is to assume that you are liable for any money the customer spends for the longer of 5 years or your state’s minimum time frame for gift certificate expiration. Note that if you sell a Groupon that amount will be approximately double what you receive after Groupon takes its cut.

If you are a sucker for in-depth analysis of the CARD Act you can read more about it in scintillating detail at our Guide for Businesses Selling Gift Cards. If you are reading this and feeling worried, seek guidance from the right advisors ASAP! They generally have Esq. or CPA on their business cards.

An often cited problem with Daily Deals it the heavy traffic effects that can overwhelm staff, and lead to an inferior customer experience.  Consumers increasingly seem to be shopping via daily deals and buying for future consumption, creating a new “desk drawer” of pre-purchased products/service.

What are the redemption patterns of Daily Deals, and how is the consumption pattern trending?  What are the real “breakage rates” – vouchers left unclaimed on expiration of the promotional offer?

The chart below was taken from a seminar put on by Greg Sterling, in which Yipit presented their analysis of redemption patterns with Daily Deals. The data represents a sample of 30 active deals, where each plotted point highlights the deal redemption percentage and the number of days since the deal was offered. While the sample is small, it gives us a glimpse into redemption patterns.

from Yipit Presentation at Internet2Go Seminar 8-19-2010

Yipit’s commentary highlighted that approximately 20% of redemption occurred in the first month, and 15% in the last month.

The redemption pattern is surprisingly even in its distribution over the life of the promotional offer.  To some extent this result is calibrated by the service delivery constraints of appointment-based deals.  For instance, salons and personal services represent a large share of deal activity, and the pace of delivery/redemption is constrained by available appointments. Anecdotally, we’ve heard that in categories such as reservations the usage clusters heavily to the first 60 day period – what has your pattern been?

A recent commenter on GroupGro passed along some sage advice for appointment-based businesses in dealing with a new Daily Deal, paraphrased below:

• Add temporary worker to deal with burst in booking requests directly after the deal vouchers is released.
• Try to funnel customer inquiries into email, to help organize and optimize the labor effects,
• Consider using a unique telephone number for Deal reservations, to avoid the problem of requests harming existing service operations.

This is sage advice, and the kind businesses too often don’t seem to be receiving prior to scaled Daily Deal activities. You want the Daily Deal experience to lead to maximum return traffic, and the first impression you make with reservations and appointment personnel will surely impact this success rate.

Expiration and Breakage: Misunderstood Deal Terms

Every campaign has some level of non-redemption – users who do not use the voucher prior to the expiration.  Techcrunch, an industry publication, commented that  breakage at GroupOn was estimated to commonly be in the range of 10%. Other industry sources have come in closer to 15%.

The whole issue of redemption liability and business obligations will be the subject of a future post.

]]> http://www.groupgro.com/2011/01/deal-redemption-usage-patterns/feed/ 1 http://www.groupgro.com/2011/01/to-groupon-or-not-to-groupon-a-harvard-business-school-guest-post/ http://www.groupgro.com/2011/01/to-groupon-or-not-to-groupon-a-harvard-business-school-guest-post/#comments Mon, 17 Jan 2011 15:58:38 +0000 Perry http://www.groupgro.com/?p=547 by Benjamin G. Edelman, Sonia Jaffe, and Scott Duke Kominers

[Reprinted for our readers, from HBR Blogs with author's permission.]

Hundreds of websites like Groupon, LivingSocial, Eversave, and BuyWithMe sell discount vouchers for services ranging from restaurant meals and museum visits to spa treatments and skydiving. Best known is Chicago-based Groupon: although only two years old, Groupon touts a ten-digit valuation and purportedly rejected a $6 billion acquisition offer from Google.

To consumers, discount vouchers promise substantial savings — often 50% or more. To merchants, discount vouchers offer possible opportunities for price discrimination, exposure to new customers, online marketing, and “buzz.”

To merchants considering whether to offer discount vouchers, the most important question is the basic economics of the offer: Can providing large voucher discounts actually be profitable?

Attracting new customers through voucher discounts can boost profits when those customers later return and pay full price. But vouchers can reduce profits if they prompt many long-time customers to use discounts.

Our recent paper “To Groupon or Not to Groupon: The Profitability of Deep Discounts” (link PDF) develops a model to explore how consumer demographics and offer details interact to shape the value of voucher discounting.

We illustrate two mechanisms by which a discount voucher service can benefit affiliated merchants:

First, discount vouchers can facilitate price discrimination, allowing merchants to offer discounts to customers who value the merchant’s product less than ordinary customers do.

Second, discount vouchers can benefit merchants through advertising, by announcing a merchant’s existence to thousands of consumers en masse.

Our analysis shows that merchants will find discount vouchers most profitable when the population claiming vouchers differs greatly from the merchant’s typical clientele. We explore two areas of difference: either voucher users must be more price-sensitive than the population as a whole, or they must be particularly unfamiliar with a participating merchant’s services.

Regardless of consumer demographics, vouchers are more likely to be profitable for merchants with low marginal costs (who can better accommodate a large discount) and for patient merchants (who place higher value on consumers’ possible future return visits).

Looking at merchants’ recent use of discount vouchers, we are struck by how few merchants measure the effects of discount vouchers. If a merchant intends its discount vouchers to attract consumers who return for future visits (paying full price forevermore), then that merchant should have a plan for assessing whether voucher customers return — if not a customer loyalty program, then cross-checking of credit card receipts. Likewise, merchants intending discount vouchers to bring in entirely new customers need to check whether that is actually happening — again, credit card data makes such analysis possible. We are working with merchants on implementing these analyses, and would love to hear from anyone who has tried these tactics or would like to do so.

The authors are:

Benjamin G. Edelman is an Assistant Professor at Harvard Business School. Sonia Jaffe is a PhD candidate in economics at Harvard University. Scott Duke Kominers is a PhD candidate at Harvard University’s joint program of Business Economics.

Comments and interaction directed to the Harvard team can be via the HBR Blog Comments page.

GroupGro intends to bring a collective dialog to the common topics, while supporting industry discussion where it’s useful. To that end, we plan to create and host industry-specific articles and invite guest writers/bloggers to contribute to the site. We also aim to create “birds of a feather” discussion forums.

If you’re interested in participating as a contributor to this site (with full accreditation, of course!), please let us know via the contact us page.  And, of course, ideas and commentary are welcome.

The question is, how important is it, really?

We wanted to gather some collective opinion evidence and at least capture a current conventional wisdom viewpoint.  We’ve provided three polls below, aimed at three different dimensions of the question.  We’d love to get your input!

Any additional viewpoints? Please add via the comment section below.

The Deal Purchaser List
Most Daily Deal providers do not share the contact information of the consumers who have purchased the voucher. While the name of the consumer may be shared for coupon redemption management, the business will not normally get contact information. Essentially you are “renting their list” as part of the service, and it’s your job to convert their consumers into return visits.

Service First
The single best way to convert a new customer to a return customer is, of course, by giving them a use experience that is top shelf!  Of the limited survey information done on Daily Deal consumers to date, the attitude and demeanor of your delivery team is the single biggest factor. This just makes sense, but it’s often overlooked.  How you approach tipping policies, how you prepare your team for a sudden burst in visit traffic, and how you handle issues such as reservations and supplies are critical.  Simply – communicate well, and be ready for the quantity shifts!

Techniques and Tips
One of the most common and proven digital marketing techniques is to use the consumer visit to gather their email addresses for future marketing purposes.  Increasingly, having a Twitter and/or Facebook account are the most effective means of having consumers “opt in”.   Anecdotal evidence suggests that consumers are more likely to agree to follow you on social media than to share their email address.  Most experience to date suggests that Twitter users tend to click through to an offer more frequently than Facebook users, but Facebook has a lot more users.  It’s free and simple to have accounts on both, use them!

Here are some examples of return visit marketing techniques:

1. Provide a “join our list” card with the check, to gather email addresses.
2. Provide a card for users to take home so you can remember to follow/fan the business.
3. Provide a point-of-purchase display soliciting consumers to follow the business to stay “in the know” on hot deals.
4. Require a consumer to have “Liked” an offer before being eligible to purchase it.
5. Providing extra deal incentive for liking or sharing the business offer.

What has your experience been – are there other techniques you have seen and liked, or that you’ve tried?

As a business owner, when you advertise your business, your ad spending benefits your employees by increasing the flow of customers.  All good!

So, what about the new world of Daily Deals?  The reduced margin of your discount offer is partly justified by allowing you to reduce your traditional advertising expenditure.  So, as a business owner, you can spend less on advertising and use Daily Deals to drive new customers. However, this time it gets personal to your staff!

Daily deals are a unique new beast, where the discount pricing approach directly affects your service team.  According to the August 2010 Rice University Survey on GroupOn effectiveness, the single biggest predictor of deal profitability is in the hands of your service team!

Gypped on Tips?

We all know that a Daily Deal can drive legions of new customers to try your products or services with a guarantee of a low price tab.  But the lower tab results in less tip income to the service staff. A 20% tip on a $70 bill versus 20% on a bill that deducts a $40 prepaid coupon represents a tip income “loss” of 43% from the normal price.

Service staff are increasingly aware of this issue, and how you handle a tipping policy will be watched closely.

Here are three paths you could take, along with a little pro-con discussion on each:

1. Policy Protect Your Service Team.

Some businesses have elected to require the consumer to pay a fixed tip on the full price value of the coupon, in order to “protect” their service personnel from the loss in tip income, and to give them incentive to view Daily Deal customers as valued new prospects.  In practice, this is most often calculated on check-out – if the customer is paying with a discount coupon with this in the fine print, the final bill would deduct the coupon amount and add back a tip percentage of the discounted value.

This can be viewed as the “safe way” to protect your service quality and prevent a backlash by your front line team who build up an attitude towards discount customers.

The downside of this practice is the sometimes visceral reaction of consumers to being forced to tip.  Some percentage of your new customers will be put off by this practice, and this can negatively impact their experience. In today’s world of consumer reviews, there is an increasing risk of these comments making their way to review sites like Yelp.

2. Do Nothing.

Most Daily Deal coupons simply are quiet on tipping, and adopt a “that’s business” attitude. After all, the math should be net positive for most businesses – if you double your base of customers in the short term, the net impact on service personnel income should come out positive. Not to mention the impact of a growing base of returning customers.

Will this come back to haunt you? Service teams are increasingly aware of the issue from past experiences and industry chatter as more and more of your peer businesses use Daily Deals.  Under any scenario, a considered decision to let the customer decide how to tip really deserves to be communicated.

3. Offer Suggested Tipping.

An increasingly common practice is a polite notice on the printed coupon to “please tip on the original value”, reminding the customer that their great deal shouldn’t come at the expense of the service personnel who often rely on tips as primary income.

So, this feels like the “safe middle ground” doesn’t it? Striking a balance between not irritating a portion of your new customers with forced policies and encouraging consumer behavior that is positive to service personnel seems logical.  The obvious question is whether it really has any impact on consumer tipping practices?

Any Creative Ideas?

When you do a Daily Deal that has a big impact on your staff, it’s worth getting creative. What did you do to prepare your staff – for the increase in business, longer hours, and tipping policy choices you have made?

We’d love to hear your ideas on how you’ve dealt with this delicate and critical balancing act.

A raging debate seems to flare up every so often that suggests that consumers who use Daily Deal coupons are very difficult to convert into returning visitors.  Let’s dig a little deeper into the evidence, and open up the dialog to capture your experience.

What’s a Tour Bus Consumer?

The analogy is a busload of consumers visiting your store for a burst of product consumption, followed by them rejoining the bus to head down the road to the next discount offer, never to return.  Some think that there is a danger in the trend – a trend where consumers begin to make their buying decisions increasingly around the best offers, thereby reducing customer loyalty.

The Tour Bus analogy is also an interesting metaphor when you consider how GroupOn’s CEO positions his business to consumers as a next generation city guide – a place to discover more and get out more.

Survey Says?

It’s early in the use of Daily Deals, so there are few real metrics to work from. The most definitive independent study was in an August 2010 survey done at Rice University, involving a survey of 150 GroupOn small business users.

While this is a small sample, it does offer interesting insights. The small businesses were divided into two groups – those who considered their GroupOn experience profitable, versus those who viewed it as unprofitable. The estimated ratio of returning visitors as a percent of Groupon store visits by these two clusters of businesses were 31% and 13% respectively.

One comment in the study author’s summary findings is poignant, and perhaps a little far-reaching as a conclusion from 150 survey respondents.

There is widespread recognition among many business owners that social promotion users are not the relational customers that they had hoped for or the ones that are necessary for their business’ long-term success.

The study does highlight that return visits seem to performing more poorly in segments such as restaurants, presumably where exploration is a part of the appeal, versus personal services, where a positive consumer experience could be more prone to result in a new recurring relationship.

Keep in mind this study is with only GroupOn. What about the host of other Daily Deal vendors – how do they stack up?

Tell us about your experience!