Small Business Sunday: The LivingSocial Experiment

Social buying has been a big phenomenon over the last year. It seems like all of a sudden Groupon, LivingSocial, and various other clones have sprung up. The premise of this marketing model involves these marketers to develop a large list of subscribers looking for exclusive deals that run for a short period of time, usually just one day, but up to 3 days. Most of us have at least heard of these group buying sites by now, and have even probably purchased one.

The pitch is simple to consumers, a great deal on an item with limited supply. To the businesses that market their goods and services, the idea is to introduce yourself to a larger market and create immediate demand. As a merchant you have to give a deep discount, usually 50% or more. On top of that a marketing fee is paid to the discount site, again 50% of the revenue generated. So on average merchants will receive only 25% of the full retail value of their goods or services.

While these group buying programs have been popular, their has been some debate as to their long term value, and if they do more damage than good for small merchants. While the debate rages on we decided to jump into the debate and track our results to see if running a once a year promotion like this can help grow our brand and introduce our services to new consumers.

We went in with some very specific goals. We anticipated selling 300 certificates. In fact we sold 324. This equates to nearly $52,000 in cleaning services at full retail value. LivingSocial collected nearly $22,000 in top line revenue from the promotion, and of that we received $13,654 in revenue from the promotion.

That sounds good to start with, but our direct labor costs are 40% excluding all other costs. If you assume that everything else for the most part are fixed costs excluding a small percentage for supplies then then we can use that number alone. We are also for this example excluding transportation as we are very efficient in scheduling and are only booking the homes by zones where we already work on certain days of the week, so added driving time, and driving related expenses should be minimal.

So using labor alone, we are paying out $20,800 in labor for this promotion. So we would in effect lose at minimum $7000 for running this promotion. In and of it self not good for business. Redemption rates of 75% lower that to a labor expense of $15,600, so we have narrowed the gap slightly here as well.

If that was the end of our relationship with these clients it certainly would not be a good opportunity for us. So what do we need to do to make this promotion work. First off, make sure we clearly spell out what they have purchased and what it will and will not cover. We did a 3 or 4 labor hour promotion, not enough to clean entire home for most people, but enough to accomplish quite a bit. Our goal is to average out an additional $10 in cleaning services from the entire 324 certificates. So about another $3250 in add on sales. In the first week having redeemed 22% of the certificates, we have already added $1750 in additional services, so this seems to be a very likely goal. That takes the promotion into the black as the saying goes.

All that is well and good, but still would be a tough way to make a living for us. What we want to do is impress our new LivingSocial clients. Perhaps they have tried a few other cleaning services with discounts or coupons, but were otherwise unimpressed. We want to create a long term impression that carries over to potential future purchases from Better Life Maids. We want to convert as many of these new clients, to become recurring ongoing clients.

Our stated goal is 30 new recurring clients from this promotion. That will probably be on the high side, but that’s what goals are for. To do this we need to give each LivingSocial client a 5 star experience, the same experience we would give each and every other client we service. We leave behind a folder further explaining our services, and referral collateral that gives them a $25 gift certificate when they refer out our services. The referral program is all tracked electronically, and also give the referral a $25 gift certificate to use toward a first visit.

If we are able to convert 30 new client from this promotion, that would add upwards of $85,000 in annual revenue. Even if were only able to convert 10 new client from the promotion, that would still equal over $28,000 in annual revenue added from a single promotion.

So for our business, the model of a short term discount with the goal to introduce our services to new clients appears to make sense. We believe with strong follow up and educating these new clients as to the benefits of our services, we can grow our client base and especially build brand awareness. We realize that to reach these goals we will need to execute well. We will follow up this initial post in 4 weeks and then again once more. We want to share real data that will allow other small business owners to decide if running a similar promotion would or would not work for them.