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:
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.
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?