Wins and losses in big-bang deals

Burger Fuel's $1 burgers were a marketing investment, not just a one-off deal, says James MacAvoy, of TradeMe offshoot TreatMe. Photo / Supplied

It is no surprise that the most popular deals so far on the group-buying sites have been the cheapest ones.

Nearly 3000 people signed up for $4 movie tickets when GrabOne launched last July, and more than 20,000 scored a $1 gourmet burger when TreatMe launched last month.

The movie deal appears to be a no-brainer. Cinema operators have fixed costs, so every extra person through the door is contributing to their profit - especially if they buy a snack while they're at it.

But how on earth does a company like Burger Fuel make a profit by selling $14 burgers for just $1?

The short answer is that it's the wrong question. It wasn't Burger Fuel that paid for the promotion - most of the money came from TreatMe, out of its own marketing budget.

GrabOne's Shane Bradley is quick to dismiss the burger deal as "quite a costly exercise", even though GrabOne had a similar arrangement for its movie ticket offer.

"That would have cost them about $130,000 just for that one big deal in Auckland, and they probably would have spent another $60,000 in Wellington," he guesses. "You and I could do that tomorrow by going and buying 20,000 burgers for $8 then selling them for $1, and selling them within three hours on stupidestwebsiteintheworld.co.nz. It's about what happens post that."

Burger Fuel marketing manager Alexis Lam confirms the chain was delighted with the promotion. Most of the negative feedback online was from customers who were miffed that it sold out so quickly, and most of them blamed TreatMe rather than Burger Fuel, he says.

"I think we got it just about right. We could have sold more, but at one stage they were selling 300 a minute. Even if we'd done another 10,000 it would only have lasted another half an hour or an hour."

Lam insists the chain got plenty of extra business out of the deal, but all the same, he says it won't be doing it again.

"I think there's always something better about a launch. To be a partner for TreatMe was a big thing for us, but for us discounting isn't a huge part of our marketing strategy. We're a premium product and we need to stay in that market. Discounting erodes the brand equity in the long run."

Event Cinemas hasn't been so shy about repeating its discount offer. This month GrabOne offered another movie ticket deal, this time at $9 each. Interestingly, it was even more successful than its first promotion, with more than 21,000 sales in just one day.

According to Bradley, redemption rates vary depending on the value of the deal, but are generally around 80 to 90 per cent. Obviously, someone is more likely to forget about a $1 coffee voucher than they are about a voucher for a half-price mountain bike, he notes.

Both GrabOne and TreatMe insist at least 90 per cent of their clients have been pleased with the results so far.

"Our biggest problem is people calling up the day after, saying: 'We want to do it again'," says Bradley.

James MacAvoy, of Trade Me offshoot TreatMe.

The model is particularly suited to businesses with a quality product or service that for some reason is experiencing a slump in sales, such as a restaurant that has opened a new branch, he says.

"There are restaurant owners out there who are really, really struggling, and they get a whole lot of clients coming through, and a big cash injection, and a chance to show off their wares.

"The people who it really works for are the business owners who really get it. They go: 'I'm spending this money on getting people in but I want to bring them back'. So it's not about giving them a half-price meal, it's about giving them a full-price-plus meal that will get people thinking: 'This is the best meal I've had in my life'. What we're really about is those local hidden gems."

According to TreatMe's James MacAvoy, businesses that approach group-buying deals as a quick way to make a buck are missing the point.

"Some businesses go into these group-buying deals and they want to make money out of it, so they're not willing to hedge their bets. So what that means is generally the deal won't be so good because you can't get the discount you want. So they don't get the volume they want.

"It's almost like the billboard company paying you to run the ad. I think a lot of businesses that have run with us, most of them will make a little bit or break even, but what they really do find is they do get that long-term value. The Burger Fuel deal, they didn't even count any of the transactions that TreatMe threw at them, and they were just raving about their sales numbers. There was a definite upswing in terms of people going in off the back of visitors, let alone any loyalty. It was really a marketing investment."

TreatMe and GrabOne are keen to offer more such big-bang deals in the future, to keep subscribers interested.

"A lot of other sites don't have the number of eyeballs that can justify doing that," says MacAvoy. "Again, it's just a long-term customer thing, to be able to keep that interest and engagement there. You don't want to do a bait-and-switch."

Both companies admit that getting the formula right is something of an art, and are keen to avoid the kinds of disasters that have already backfired on Groupon.

In one high-profile case in January, Groupon apologised to its Japanese subscribers after a Yokohama cafe served up a bento box that was nothing like the deal that was advertised. The president of the company that owned the cafe resigned over the incident, which he blamed on staff being unable to cope with the influx of orders.

And last year a Beverly Hills beauty salon almost went under after signing up nearly 3000 people for a US$2000 treatment package for just US$99. The salon vastly overestimated its ability to deal with so many bookings, and many of the vouchers had to be cancelled.

In an angry blog posting last month, the salon owner claimed she knew of many other businesses that had experienced similar problems with Groupon.

MacAvoy agrees it is up to the group-buying sites to ensure businesses are realistic about the volumes they can handle.

It is not uncommon for businesses to request unlimited vouchers, he says, so it is often up to the sites' own sales staff to help businesses figure out what they can manage.

"We've done really well so far. The thing for us is while it might mean that we forego revenue, it ensures the businesses don't get overwhelmed and the consumer stays happy too. As we get more data, we can get more accurate and not forego that revenue, but at the moment it's important that experiences are great.

"There's nothing worse than thinking something is too good to be true and it turns out that is the case and you can't redeem it."