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Should A Health, Beauty Or Wellness Practitioner Do Groupon?

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Should A Health, Beauty Or Wellness Practitioner Do Groupon?

  1. 1. mindbodyPARTNERSHIPS Mind Body Partnerships White Paper Spring 2011 Should A Health, Beauty, or Wellness Practitioner Do Groupon ? A White Paper Randy Marks CEO, Mind Body Partnerships Groupon® is a registered trademark of Groupon, Inc. © 2011 Mind Body Partnerships ®
  2. 2. mindbodyPARTNERSHIPS Table of Contents 3 Introduction 4 What Do Practitioners Want? 5 Discovering Distance-To-Discount Ratio 7 What Do the Daily Deal Sites Offer? 11 Financial Postmortem 12 Conclusion 12 About Mind Body Partnerships 12 References
  3. 3. mindbodyPARTNERSHIPS Introduction American retailers of goods and services have long understood how to drive impulse purchasing. Combining an attractive price and the “call to action” of limited availability is a time-honored mechanism to drive traffic and increase sales. However, it is now so commonplace in America that we have all become desensitized to it. The rapid proliferation of “Daily Deal” sites, led by Groupon and countless others, promoting drastically discounted goods and services has changed all that. Instead of the “BIG SALE” discounts off artificially inflated retail prices offered by most retailers, they offer massive and easily verifiable discounts. Millions of people all over the world have signed up and look forward to the “Deals of the Day” in their inbox. People are actually purchasing all kinds of things they really don’t want. As a network of health, beauty and wellness practitioners, Mind Body Partnerships (MBP) has examined this phenomenon very closely. Many of our practitioners have experimented with these sites. The results have been decidedly mixed. It’s easy to cite the well- publicized instances where things went horribly wrong. That is not the intent of this paper. We are here to examine how this recent phenomenon impacts the health, beauty and wellness market segment both positively and negatively. Health, beauty and wellness services are used and appreciated by everyone. We all go to salons to get our hair cut. And who does not love getting a massage or facial from a skilled practitioner? These services are routinely offered on the Daily Deal sites. We don’t pretend to have all the answers. But we do know some of the right questions practitioners need to ask. What is it that practitioners are looking for? We look at this from two perspectives. What is it they want in the near-term, and then, what is the desired long-term outcome? First, we will examine what a service practitioner wants, and then we will look at what the Daily Deal sites are delivering against these criteria.
  4. 4. mindbodyPARTNERSHIPS What Do Practitioners Want? The simple, short answer to this is a new, high-quality client that converts to a long-term customer at a high percentage rate. However, after eight years of marketing our practitioners to the general public, we know it is more nuanced than this. We can more precisely define a high-quality customer as someone who is accustomed to paying a fair price for services rendered. If a customer cannot afford the regular service price but is there because it has been marked down by 75%, then the practitioner will likely never see them again. We also know that geography plays a major role in whether or not someone comes back for a second visit. If someone drives 25 miles to get a $39 facial, will that person travel the same distance again if the price is $90? Our experience tells us they will not. Service practitioners understand the fundamental truth that the first-time client experience is always an exploratory visit. Was the salon conveniently located for the customer? Was it easy to get an appointment? Were they treated courteously? Did they like the setting? Did they like the practitioner and service? And most importantly, were they pleased with the outcome? Assuming the answers to these questions are positive at the conclusion of the first visit, then we are now at the moment of conversion. Unfortunately, few practitioners have the tools to take full advantage of the opportunity to convert that customer at the moment they are most receptive. If conversion of a first-time client to a long-term customer is in fact the desired long-term result, then how does a “Daily Deal” initiative drive this outcome?
  5. 5. mindbodyPARTNERSHIPS Discovering Distance-To-Discount Ratio The good folks at TechCrunch and Jiwire help us understand the role of geography in consumer purchasing behavior. If the price/value perception is strong enough, consumers will travel great distances. As the price rises, the conversion rate lowers very quickly. Discovering The Distance-to-Discount Ratio When it comes to deals, the bigger the discount, the further people will travel. While this may sound obvious, mobile advertising company JiWire has some numbers to back it up. JiWire has released a new study that evaluates consumers; behavior when it comes to location-based deals and discounts. In a survey of more than 3,000 respondents, JiWire’s results show that the greater the discount, the further people will travel to redeem a coupon or promotion. For example, for a $100 item, 55 percent of consumers are willing to travel 15 minutes for a 10 percent discount. But 40 percent of respondents will travel an hour for a 50 percent discount, and 28 percent will travel two hours for a 75 percent discount. Essentially, higher discounts motivate consumers to travel farther. But there are limits to how far people will go. Even if you give away a Leena Rao | Feb 4, 2011
  6. 6. mindbodyPARTNERSHIPS Discovering Distance-To-Discount Ratio product worth $100 for free, only 31 percent of people would travel more than two hours to get it. While many location-based promotions generally target customers in an immediate vicinity or neighborhood, JiWire’s data indicates that the opportunity to reach new customers goes far beyond the check-in and can draw new customers, even from more than an hour away, into stores, This isn’t surprising data but it does suggest that location- based deals can be targeted to users beyond just an immediate vicinity.
  7. 7. mindbodyPARTNERSHIPS What do the Daily Deal Sites Offer? It’s understandable why businesses are taking advantage of Daily Deals to sell their services at drastically discounted rates. The siren song of a quick burst of revenue and new customers is very tempting, especially when you see your competitors having apparent success. From the practitioner’s perspective, the “Daily Deal” might be better referred to as the “Once A Year” deal. If you are a practitioner, you are usually told you can only run on the site once a year. The value proposition for merchants is as follows: “We will do all the work and bring you hundreds or even thousands of new customers with no money up front, and no cost or risk if the deal doesn’t sell.” It sounds very attractive. It certainly seems less risky than spending money on newspaper ads or sending out a direct-mail piece that you cannot track or measure. Let’s face it, we all love a bargain ourselves, and it’s hard to see the downside risk. For the health, beauty and wellness practitioner, there is the inescapable fact that personal services are not readily scalable. You can only do one massage, haircut, or facial at a time. This is one of the first and most common adverse impacts. Capacity planning is imperative. Look at the performance of others on the site as a guide to determine if you can handle a significant number of new clients in a very short period. The old adage rings true, “Be careful what you ask for because you might get it.” With Daily Deal marketers, here is what you are really signing up for: The Daily Deal marketers come into your business once a year. They conduct a sale on your services at liquidation prices. They promote it throughout the entire region and bring in hundred or even thousands of bargain hunters that snap up your services. They tell you that 50% of the proceeds are going to them because that’s their business model. They also deduct their credit card expenses off the top, and most have a 25% hold back for 30-60 days to cover potential refunds. The practitioner is left to immediately start servicing large numbers of bargain hunters, akin to a “basketball going through
  8. 8. mindbodyPARTNERSHIPS What do the Daily Deal Sites Offer? a garden hose.” Very often practitioners must also deal with their unhappy existing clientele who suddenly cannot conveniently get an appointment. All this effort and disruption is based on the expectation that some of these new customers will become long- term clients at regular prices. A spa owner recently reported their Groupon results publicly. Out of 400+ Groupons redeemed they had only a dozen people come back after a four month period. A 3% conversion rate! Does it make economic, strategic, or tactical sense for practitioners to essentially subsidize 388 free spa services to get twelve new customers? Using this example, let’s look at the math on a typical transaction. A very common offer is for a facial, normally priced at $90. The deal would typically be priced at $39. The 50-50 split means the salon would receive $18 for each service. If Groupon sold 400 at this price, they would pocket $7,200 for simply sending out an email and processing the online payments. Even if the salon had a 70% profit margin on the retail price of the facial, it still cost them $27 to deliver the service. At our estimated profit margin, it cost them about $9 out-of-pocket times 400 redemptions to run the campaign. So they incurred roughly $3600 in out-of-pocket expenses for 12 new customers. That equates to a “cost of acquisition” of $300 per new customer. This is ferociously expensive given what must occur to recover the investment. At a $63 dollar gross profit margin on a $90 facial, the salon will break even on this promotion at roughly the 5th full-price facial each new customer purchases. We see it a little differently. Think about it this way. They elected to spend $3600 in cash and forego $25,000 in gross profit to produce 12 new customers. They really invested a total of $3,600 in cash and $25,000+ in uncompensated labor. We think it really costs them $2400 to produce each new customer. If this is a more accurate depiction of the true economics, then at a $63 dollar gross profit margin on a $90 facial, they will break even on each new customer after their 38th facial purchase. The likelihood of this occurring is very small.
  9. 9. mindbodyPARTNERSHIPS What do the Daily Deal Sites Offer? What is wrong with this picture? If you are Daily Deal provider, absolutely nothing. Practitioners should understand that Daily Deal sites are completely aligned with the consumer. They have no stake in the long-term success of their merchant partners. They simply move on to the next merchant willing to make the same “Faustian” bargain. The relationship is essentially parasitic with the practitioner as the host. Now, there are probably lots of businesses that this kind of program works well for. We are only talking about its application to health, beauty and wellness practitioners who serve their clients one at a time. MBP believes the Daily Deal is an ineffective and very expensive strategy that will never drive the long-term success of your business. But we see a much larger problem with this, one that is far more insidious for practitioners. The Daily Deal sites are having considerable success in engaging the health, beauty and wellness practitioners in a “race to the bottom.” The Daily Deal sites don’t mind that the accepted pricing norms of this community are cut in half, or more, as long as they receive their 50% cut of the proceeds. What they don’t seem to realize or care about is that the pricing norms are becoming so debased in the minds of the consumer that millions of practitioners may be looking at a permanent reduction in the perceived market value of their services. We are seeing signs of a growing realization on the part of practitioners that this is a very slippery slope indeed.
  10. 10. mindbodyPARTNERSHIPS Revenue Split • 0 • 50/50 Customers • 300/yr. • 500/12 hrs. Conversion • 30% • <5% Discount • 50% • 75-90% Disruptive • No • Yes Frequency • Year Round • Once Per Year Local Promotions • 300+ • 0 Local Customers • 100% • 20% Secondary Referrals • Yes • No What do the Daily Deal Sites Offer?
  11. 11. mindbodyPARTNERSHIPS Financial Postmortem Service Price Gross Sales Cost Gross Profit[a] Conversion Standard Sale: Facials (400) $90 $36,000 $10,800 $25,200 30%[b] Daily Deal Sale: For Daily Deal Site: Facials (400) $18[c] $7,200 0 $7,200 100% For the Practitioners: Facials (400) $18[c] $7,200 $10,800 -$3,600 3% Cost of Acquisition Scenarios For 12 New Clients Scenario I: Out of Pocket Costs Only Cost Cost Per New Customer # of Full Retail Facials for Breakeven $3,600 $300 5 per customer Scenario II: Out-of-Pocket Plus Uncompensated Labor Cost Cost Per New Customer # of Full Retail Facials for Breakeven $28,600 $2,400 38 per customer [a] Estimated at a 70% gross margin [b] Estimate [c] 50-50 split against a $39 sale price
  12. 12. mindbodyPARTNERSHIPS Conclusion At MBP we know there are far more effective and lasting ways to build a sustainable, referral-based marketing system. To convert one-time “bargain hunters” into long-term customers requires consistent execution and focus. As we’ve shown, “Daily Deals” actually undermine customer conversion -- not to mention profit margins. More significantly, they devalue customer appreciation and perception of the high-quality services of health, beauty and wellness practitioners. MBP practitioners know that using best practices for lead generation, conversion, retention and loyalty over time is the only path to sustainable and profitable growth. Randy Marks is the CEO of Mind Body Partnerships, a lead generation, conversion, retention and loyalty program serving San Diego’s finest health, beauty and wellness practitioners. Now in its eighth year, MBP’s lead generation and conversion program delivers substantial and measurable results year-round with proven techniques to convert customers into long-term clients. MBP is currently opening in the Orange County and Los Angeles markets. TechCrunch Article: • http://techcrunch.com/2011/02/04/distance-discount-ratio/ About Mind Body Partnerships Reference

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