9 Reasons Why Deal Sites can be CRAP for your Spa Business
By Frank Pitsikalis
Before I begin this post, I would like to get something out of the way immediately – we do not recommend that spas use daily deal sites such as Groupon, Living Social et al to generate new business. For many reasons, and I will touch on a few now, deal sites can be extremely damaging to your business and should only be utilized once you have fully considered their pros and cons.
In some very specific situations, with closely managed and understood factors, some spas may realize some intended benefits. In the vast majority of cases though, spas widely report that their experience with deal sites was negative, and for some, simply devastating.
If you have weighed in all the factors and decide to move forward with a deal site to promote your business anyway, there are a few strategies you can implement that will give you some control over what, when, and how the deals will be honored.
DOING THE MATH
It may sound incredibly enticing to offer a deal through a deal site that requires no up-front cost and promises to bring hundreds, or even thousands of new customers into your business. It sounds like a pretty low-risk proposition, doesn’t it? Wrong.
Let’s start by segmenting the customers that sign up for your daily deal promotion as [C]ustomers [R]esponding [A]fter [P]romotions, or CRAP. Let’s also designate your loyal customers as [G]uests [O]ffering [L]oyalty without [D]eals, or GOLD.
Before I touch on many of the unintended side effects caused by CRAP, we should first explore the basic math of these promotions.
Typically, deal sites (i.e. Groupon) will recommend you offer your product or service at 50%-90% off your retail price and the deal site takes a 30%-50% cut of this promotional price. A simple example (which is pretty much the norm) is 50% (off retail) and 50% (commission). From the spa operator’s perspective, a deal site promotion essentially gives customers 75% off retail!
Now, let’s look at how that may break down for a typical spa service. Let’s say you offer a popular 60-minute massage that costs $80 at retail. For simplicity, let’s say your variable costs (i.e. not including fixed costs such as rent or electricity, etc.) to perform this service are $40 (including labor, products used, towel/sheet washing, etc.) which results in a gross profit margin of $40 at retail. Since you are earning 50% of the 50%, or $20 on each deal sold, you are losing $20 on each 60-minute massage sold. If you sell 2000 services on deal day, your potential loss is $40,000!
The deal sites position themselves to you as a new marketing vehicle or as a rudimentary advertising expense. They guarantee that your spa will quickly be exposed to thousands of local subscribers who are ready to buy. They also propose that your new customers will be easily up-sold. Most importantly, your new customers will be loyal to your business and provide you with a steady revenue stream for years to come.
THE HARSH TRUTH
Unfortunately, the types of customers (CRAP) that subscribe to deal sites and take advantage of these offers are not necessarily the customers (GOLD) you would hope to attract.
Here are just a few of the unintended consequences that can have a devastating effect on your business:
1. CRAP will typically not spend a penny more than the promotional rate (this can be as high as 90% of them).
2. CRAP will typically not return unless another promotion is offered through the deal site (an average 10% return business is what you can expect and hope for).
3. CRAP will typically not tip your service providers. If they do, they base the tip on the promotional price which will result in an unhappy spa service team.
4. Your spa staff may be overworked and underpaid during the promotional period. If their compensation is also tied to KPIs like retention of retail/service, they will be even more disappointed.
5. CRAP will clog up your phone lines while booking their services and overbook your spa affecting availability and service levels/satisfaction for your GOLD. Frankly, you may permanently lose a proportion of your GOLD customers during the promotion period because the level of service you usually provide will decline so dramatically.
6. GOLD customers may also take advantage of the promotion but wonder why they have been paying retail all along when you have such high margins and have been gouging them (ouch!). These customers may turn into CRAP.
7. GOLD customers may discover in speaking to CRAP customers that they have paid double for the same product or service. These GOLD customers may turn into CRAP customers, ask for the CRAP deal, or abandon your business permanently.
8. Your brand image can be damaged irrevocably.
9. In many cases, deal site promotions can result in hundreds and even thousands of customers purchasing the promotion on the same day. Your spa will not be able to handle the deluge of appointment requests for many weeks to come – thereby starting a potentially CRAP client relationship on a very CRAP-PY note.
CAN YOU MAKE A DEAL LESS CRAP?
If none of the above has deterred you from using a deal site and you are still committed to taking the plunge, let’s look at a few ways you can squeeze some positive value from these promotions:
1. Low Variable Cost
When designating the product or service as the candidate for your promotion, choose something with a very low variable cost. A great example, provide access to one of your spa amenities (i.e. pools, baths or hammam) or your fitness club. This approach will limit the impact on your spa’s bottom line and will be much less disturbing to your staff and their schedules since no staff would be required to treat the customer.
2. Shorter Services
If you do offer a discounted service, make the duration of the treatment shorter (i.e. express facial). Shorter treatments will be much easier to accommodate during busy periods. Again, also pick services where the variable cost can be minimized (i.e. assigning a junior esthetician to perform the treatment will be more cost-effective than booking a registered massage therapist). Product consumption and laundry impact should also be considered.
3. Use and Declare Restrictions
Analyze your business cycles ahead of time. Determine your low demand periods (i.e. weekdays between 10 am-4 pm) and offer the discounted service during those times. This will minimize the impact on your GOLD and allow you to accommodate CRAP when your business is slower than usual. (The ONLY ResortSuite plug in the entire blog post – you can also use our automated revenue management software to ensure the services are not bookable via web, mobile, Facebook, phone, or front desk during your high demand periods).
4. Upgrade Services
Pick services that have a higher probability of being up-sold. For example, an express facial that is often accompanied by an eye treatment or Vitamin C boost. Once the deal site margin (or lack of) is locked in, any additional revenue from additional services/product sold, then swings 100% in your favor.
Conclusion – Deal or No Deal?
As you can see there are many things to consider when looking into a deal site promotion. For most established spas my advice is, don’t do it, unless you have considerable control over the factors mentioned above and you go into it with eyes wide open.