Great Businesses Still Build One Customer at a Time

Are you familiar with Groupon? If you are a savvy Web shopper, the answer to that question is probably “yes”. Groupon was founded in late 2008 in Chicago, and for a couple of years grew like mad and was a red hot Internet company.  At the end of 2010, Google offered to buy Groupon for $6 billion. Amazingly, Groupon turned them down.

Groupon is essentially an online coupon company. It works something like this. Let’s say I own a beauty salon. I could make a deal with Groupon where they advertise to their email subscribers a one day sale at my salon where Groupon coupon holders can get a massage for half price. I then pay a portion of the revenue generated by the coupon back to Groupon. Those repayment rates vary, but can be as much as fifty percent of the generated revenue.

Groupon’s immediate appeal to merchants is fairly obvious.  Its online presence expands the merchant’s target market exponentially. The steep discount promises to bring in hordes of new customers. Finally, there is no cash outlay for the merchant.  The hope is that in the end these new customers will stick around and use the merchant’s services at normal prices.

But as my old high school football coach used to say, if wishes were horses then beggars would ride. It seems that the bloom may be off the Groupon rose. The company has been attempting to go public for a number of months, but the deal keeps getting postponed. Indeed, the New York Times pointed out in its October 1, 2011 edition that for merchants, “coupon fatigue may be setting in”. Groupon is now being labeled by some experts as nothing more than a fad. Those founders may rue the day when they told Google to keep their $6 billion.

So why is Goupon’s business declining? There are a number of reasons. First, its business model can be easily copied. A number of competitors, from big companies like Amazon, to small online startups, have jumped into the online coupon game. But the real reason for its decline may be something more fundamental: offering deeply discounted services online tends to bring in one-time customers. It turns out that most of these folks do not, in fact, return to patronize the business at its regular rates.

Merchants just don’t seem to be benefitting in the long run from doing business with Groupon.  Groupon helps to create brand awareness. But it tends to attract one-time, bargain basement shoppers. To make matters worse, these shoppers also tend to publicize their negative experiences with retailers online.  The New York Times article cites a study by researchers at Boston University and Harvard that analyzed thousands of Groupon and Living Social (a Groupon competitor) deals. They found that the deal chasers were hard to please. After they ate at a restaurant or visited the spa, “they went on Yelp and grumbled about it.” This double whammy of one-time customers who tend to complain online will no doubt drive merchants away from the Groupon model.

The fact that Groupon isn’t good for small businesses in the long rung really shouldn’t come as that much of a surprise. As most small business owners can attest, there are no shortcuts to building a sustainable enterprise. Most successful small businesses are built in painstaking fashion. Contacts are made. Relationships are nurtured. Business is conducted. Relationships continue over time, and loyalty is created. Success follows.

This approach is the one that works for our most successful clients, and it is the approach that has helped our firm stay in business for so many years. We have never really bought in to the sort of lawyer advertising that is designed to appeal to a large number of potential clients who don’t know who we are. The vast majority of our clients come through referrals from existing clients. We work to earn our keep and build long term relationships based on trust. We could not sustain our practice by providing discount services to one-time users. It takes longer to build a business in this fashion, but it is much more likely to engender longevity and success. The Groupon approach is a different one entirely.

The relationship approach to building a business has been around forever, and it is every bit as relevant today. And the nice thing is that the approach is hardly incompatible with the proliferation of the Internet and technology in general. Social media in particular can be used efficiently by growing businesses to foster and grow relationships. Services like Facebook and Twitter give business owners the opportunity to shape and control their online presence, and to direct it to their existing customers and clients on a regular basis. It may be electronic, but it’s still about relationship building.

Of course, there is still no substitute for good old fashioned human contact. Most of us would well served by spending more time seeking face to face, in person contact with our best clients and customers. Quality time remains the best tool for cementing relationships, be they business or personal. If you own a business, rest assured that it still pays to get out there and interact.

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