E-mail offers from Groupon, LivingSocial attract buzz as a new marketing model
October 31, 2010 4:00 AM
Capt. Mark Schiller on his Pittsburgh Water Limo's luxury boat, which offers Steelers game cruises. "LivingSocial and Groupon are a great way to get very quick exposure," he said.
By Teresa F. Lindeman Pittsburgh Post-Gazette
Every weekday since mid-January, a different deal from Groupon has appeared in the e-mailboxes of Pittsburgh-area consumers who might jump on a short-lived chance to get a manicure at 50 percent off or a discount on dinner at a local restaurant or $125 worth of furniture for $35.
In late July, a competing business called LivingSocial entered the Pittsburgh market, and another competitor, Less.com, plans to enter the market soon.
Most e-mail deals are deleted. But the ones that aren't have attracted attention to a new marketing model that has in some cases produced shopping frenzies reminiscent of an early-bird special on Black Friday.
Now businesses and the marketing industry are trying to figure out what has given the model such pop and whether it will pay off in the long term.
"Your hope is that you're going to get new customers," said Robert Levin, of Smithton-based Levin Furniture, which had 948 takers for a deal it offered recently on Groupon's Pittsburgh network. "We just felt we wanted to experiment with it."
Lots of people are experimenting with it.
The best-known of the social media daily deal businesses is Chicago-based Groupon, which was founded by Pittsburgh native Andrew Mason and is widely seen as the trendsetter in the segment since its late 2008 launch. Groupon's website claims to have sold more than 14.8 million discounts in markets in the United States and internationally.
In the two years since Groupon sent out its first deal to Chicago subscribers, there's been so much interest that, in addition to a wave of imitators, the market has spawned aggregators promising to choose the best daily deals from the various companies for each customer. Even retail behemoth Wal-Mart last week began offering its own CrowdSaver deals on Facebook.
Just as a Groupon deal goes through only if enough people buy in, the CrowdSaver deals are offered only if enough people click the "like" button. That encourages people to help out with the marketing by promoting the offers to their friends and, in some cases, get rewarded with even more discounts.
In perhaps a sign that the trend has truly arrived, a Rice University researcher last month released a paper questioning whether participating businesses actually turn a profit on the deals or if only consumers are making out in the exchange.
In the Pittsburgh area, around 175,000 people have signed up to receive daily deal e-mails from Groupon, with new subscribers joining at a rate of about 1,000 daily. About 80,000 are part of the LivingSocial.com crowd. Typically one business is featured daily, and the deal expires in 24 hours. If not enough people buy in, the deal is canceled.
Both Groupon and LivingSocial report they have waiting lists of businesses eager to get in front of their subscribers.
Businesses that have tried the services say -- done carefully -- the format can be effective.
"You don't do this to make money," said Mark Schiller, captain and vice president of operations at Pittsburgh Water Limo. "You do this for the advertising."
Pittsburgh Water Limo has worked with both LivingSocial and Groupon as a way to raise awareness of a service added this year in which fans can eat, drink and cruise to Steelers games -- or, for those without tickets, during the games. Mr. Schiller said it was frustratingly difficult to make people aware of the service, so when a representative of LivingSocial called, the business decided to give it a try.
Although there are no upfront fees, typically the services require companies to offer discounts starting at around 50 percent. Of the money consumers pay, the deal sites can take as much as half.
Other rules vary, but Groupon breaks up payments to the participating companies into three installments, a system the deal service said protects against businesses that close abruptly or don't deliver as promised.
Participating businesses must also prepare for the craziness that can result from a massive one-day sale. "They get bombarded with phone calls," said Melissa Burnfield, one of LivingSocial's two Pittsburgh-based marketing consultants.
Mr. Schiller said his offer of an $80 Steelers "sailgate" cruise for $40 prompted 150 phone calls over two days.
Both services say they work diligently to choose strong businesses and then prepare them to use the moment to best advantage, including having enough help to handle the rush of customers.
After being stung by news stories about businesses losing money or demanding consumers using services without properly tipping, Groupon has been redoubling its efforts to show how it prepares participating businesses.
"If you do have any cracks in your business, they will be exposed in this model," said Groupon spokeswoman Julia Mossler, who said her company turns away about seven businesses for every one featured, because of quality issues. The service also lets consumers flag businesses that do a great job and lets businesses flag great customers.
Groupon's reputation is on the line, as well, Ms. Mossler noted. The company has learned a lot in the past couple of years. That includes the fact that doggie day care deals don't do well -- people don't want to experiment with their pets -- and that massage deals have to be checked to make sure no prostitution charges have been filed against a particular business.
Restaurant offers tend to be popular, as do spa and manicure offers. Experiences such as theater events or sky diving can do well, since people might use the discount as an excuse to try something new. The goal is to mix up the deals so there are different kinds of offers every day.
Despite the aggravations, Mr. Schiller at Pittsburgh Water Limo said the deep discounts had the effect he wanted. "LivingSocial and Groupon are a great way to get very quick exposure," he reported.
Cindy Opatick, at the Pittsburgh CLO, used Groupon to promote CLO Cabaret shows such as "Nunsense" and "S'Wonderful." In the first offer, she hoped to sell more than 200 tickets and ended up selling about 340.
An offer of 10 classes for $40, plus a free mat and towel rental, all of which was described as a $120 value, drew 435 purchases for Bikram Yoga Pittsburgh in June. Zeb Homison, who bought the studio earlier this year, said so far about half of the people who bought the discounts haven't claimed them. The offer expires in December.
At LivingSocial, Ms. Burnfield estimated only about 30 percent of purchasers typically use the deals within the first couple of months, and that about 20 percent never do.
That could, at some point, raise unclaimed property issues.
A spokeswoman for the Pennsylvania Treasury said these kinds of products are rather like discounted gift certificates, which can be considered unclaimed property if the buyer or seller has a Pennsylvania address or is incorporated here.
Over the years, the staff at Levin Furniture has tried many different forms of marketing from TV ads, to personalized letters sales, to newspaper inserts and radio spots. Mr. Levin said the immediate response to the Groupon deal and the fact that it seemed to reach a younger clientele was intriguing.
Still, he plans to wait to see over the next few months if the promotion reached mainly new customers and spurred new purchases or cannibalized buying that people were already planning.
If Pittsburgh Water Limo had been doing the cruises for six or seven years and had an established clientele, Mr. Schiller said this might not have been the right promotion. He's considering doing another offer next summer if the results of this year's discounts prove to build a good client base.
Groupon has polled more than 3,000 merchants and found 96 percent want to use it again or would recommend it to others, said Ms. Mossler. Those who look at the short-term hit to profits might do better to analyze the longer term payoff, in her opinion.
For now, the company isn't fazed by imitators who have followed it into the business, said Ms. Mossler. "I think what keeps us up at night is someone we haven't met yet who changes the game and comes up with something different."