The Great Discounting Debate

In our September issue, I wrote a piece on the subject of Groupons. In addition to benefiting myself from the power of collective purchasing, I also found several spa owners singing the praises of this new phenomenon. However, in the last month or so, I’ve also come across several spa owners firm in their beliefs that such discounting ultimately undermines their businesses, or at the very least, doesn’t appear to deliver the boost in business that it promises. Earlier this week, I received the following email detailing such a scenario:

Hi Heather,

I was just reading your article under the heading “Let’s Make a Deal” in the September issue of American Spa magazine. Although I think that this column is eloquently written, I think some issues about Groupon should be explored in regards to profitability. Just as an example, if we offer a 60-minute Swedish massage regularly priced at $70 for 50 percent off at $35, and we pay commission on this amount at possibly 45 percent, which amounts to $15.75, that leaves a gross profit of $19.25. Now let’s not forget that we have to give Groupon 50 percent of the service selling price of $35.00, which is $17.50, which leaves $1.75 as net. If one does not mind this small profit margin, we need to think about how much are the cost of products (massage oil, etc) to perform this service. Also, we need to allocate a portion of our general overhead expenses (electricity, rent, reception, payroll taxes, etc). An additional concern should be that our experienced massage practitioners will not be too happy with a gross commission of $15.75 before income taxes. Also, take into consideration that assuming we sell 300 Groupons, which from our experience with gift certificates, 60 percent will be redeemed in the first 60 days, taking full-paying client spa capacity away, you have a logistical, a financial, and a staff dissatisfaction problem on your hands. Client retention from Groupons is also iffy, as this  offer can be found and repeated at other spas, making it unlikely that repeat business at full price will occur. Don’t forget that the customer who purchases a Groupon is a savvy consumer and could also be one of your previous full-paying repeat clients.

Regards,

Heinz Mikulka

www.pauleattar.com

We’d love to hear your thoughts about Groupons as well as any experiences you’ve had with the discount website. And feel free to also give us your take on discounting in general. Have you found ways to do it that aren’t at the expense of your bottom line?

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3 Comments so far
  1. Kathy Krakora September 15, 2010 8:18 pm

    Heather,

    I have offered a few ‘daily deal’ specials in the Phoenix area hoping to attract new clients. And while I agree that it can be an exciting way for the small business owner to advertise, I now feel it has become a ‘monster’. The Phoenix market is SATURATED with national and local daily deal companies, and I fear that it is the death knell to the spa business as evidenced by a $12 facial deal in my inbox 2 weeks ago!

    And when deal companies with national market share put up a deal from a mass marketer or chain spa, it actually takes business away from small businesses. The very business the deal companies were hoping to promote.

  2. Bruce Schoenberg September 15, 2010 8:42 pm

    Extra Read All About It! Spa Industry Cannibalizes Itself.

    Beware of Groupon or similar knock offs like Rue La La. The comments by Heinz are right on and should serve as a stern warning to everyone with an estabished business in the beauty and spa world.

    As far as I am concerned any established business that you see being a part of any deeply discounted offer such as Groupon is only publicizing their obituary in advance. See Spa Chakra or The Guerlain Spa at the Waldorf-Astoria which grasped desperately for one last cash out before heading into the sunset.

    The industry as a whole should reject out of hand any participation with these steep discount sites, as it will build an entire consumer base of people who only expect these prices as the norm.

    This model works best for fashion or retail items only that are being phased out of stock, discontinued, etc. This is a horrible model for any service oriented business and we as an industry should collectively shun it.

    Run your own sales that are discounted and encourage loyal customers to help you build your business.

  3. Seth Gardenswartz September 15, 2010 10:21 pm

    Heather:

    I totally agree with Kathy. Grupon, and its evil clones LivingSocial, Buywithme and Gilt are shredding the profits and dignity of our industry like a Death Star. Kathy’s story is a common one, well documented in most major news outlets and our humble blog. Grupon vaporizes your profits by replacing your regular clients with an army of bottom feeders who will never become your clients. Grupon’s own PR boasts a meager 22% of Grupon shoppers that become clients. Who needs to give away three months of profit (25% of a year) for 22% return rate? Grupon’s really big email list is comprised mainly of mindless deal-seekers who will graze from deal to deal. Grupon can only promote your price, not your quality or service, which is what gives you your edge. We have our own ideas about how to promote spas without bankrupting them. Spaboom will discuss the group sale phenomenon, the five steps to intelligent discounting and how to resist the dark side in a free webinar next Wednesday. You can learn all about it here http://preview.tinyurl.com/28m4k6w.

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