On My Mind – In Defense of Social Buying
By Jay Karen, PAII CEO

While I haven’t done a scientific study of this, it appears that nearly every trade article written about social buying sites is chock full of caveats and criticism of the phenomenon that is GroupOn or LivingSocial or (enter name of daily deal site du jour here). Often mentioned or questioned are things like the sustainability of GroupOn as a company or the detrimental impact such buying sites have or likely could have on small businesses. There is often a nod to merchants’ “potential” of picking up new and repeat customers, but at what cost? There were early anecdotes of some merchants going out of business on account of discounting their goods way too much and not capping the number of purchases, thereby putting the merchants in an untenable position of losing money on every transaction.

I’m here to offer up a bit of a defense of the social buying phenomenon as it pertains to our industry and my own observations. Bed and breakfasts would seem to be fitting representatives of the small, mom-and-pop world of merchants that risk everything when entering into a social buying deal. They are among the smallest of small businesses (the average 6–room B&B brings in about $150,000 per year), and the outside perception might be that innkeepers lack the marketing and finance savvy to craft a successful deal with a predator like GroupOn (to the contrary, our folks are pretty darn smart business people). Despite the caveats plastered across trade and consumer rags, innkeepers have been diving into social buying at a pretty impressive pace, and the results are telling. Well, they are telling a story that might be different than what spas, cleaning services and some restaurants might be telling.

You can’t make money when you’re only getting 32.5% of your rack rate

I can’t speak for other industries, but the fact is most innkeepers who have participated in social buying deals over the past 18 months have crafted their deals in ways to make money on every transaction. Let’s do the math. If your rack rate for a two-night package with all the accoutrements is $400, the package goes for $200, and you receive $130 for each package, how on earth can you make money? You make money if your variable costs add up to less than $130 per package. Plain and simple. Now, the fact is you will have to work just as hard to take care of a $200 guest as you would a $400 guest (I say $200, not $130, because the guest perceives this as a $200 investment…to them, the value equation has nothing to do with how much you, the innkeeper, nets on the voucher they bought). Innkeepers have gotten pretty crafty with keeping the perceived value of a deal pretty high, while keeping the actual costs pretty low.

So, you can make money – maybe not a lot per voucher, but small dollars can add up to large dollars. If you sold 200 vouchers and made $130 each, you’d net $26,000. If you determined each voucher cost you $80 in food, labor and other variable costs, then you should theoretically be able to put $10,000 to the bottom line. The average 5-to 9 room B&B has a bottom line of about $27,000, according to 2010 industry data. If that’s true, a $10,000 bump would mean a 37% bump to your profit. Make no mistake, you will have to work hard for that profit bump, but the extra $10,000 might mean a makeover of all of your rooms…or remodeling the common room…or an extra few mortgage payments.

It’s not my job to tell you if it’s worth it or not – that’s up to you, your business objectives and your ability to absorb the increase in business without sacrificing quality or your well-being. I’m just saying, the math CAN work, if you go about it with open eyes and a lot of input from experienced innkeepers.

It’s training consumers to shop exclusively for discounts

I do buy this argument. But not for the B&B customer. I’ve been a member of both GroupOn and LivingSocial since almost the beginning of each company’s existence. I have bought goods and services with both. What I have found is that I’ve been trained to wait for a deal on certain goods or services, but not others. Case in point – I am in the market to buy manicure, pedicure or massages for my wife as gifts throughout the year. I can almost guarantee that either GroupOn or LivingSocial will feature a deal for such services nearly every week of the year. So, I will just wait for a local deal. My wife doesn’t mind moving from spa to spa for such treatments, so in a way, this service has become a commodity. In these cases, the social buying companies have not created new demand, but have met an existing demand at a lower price, thank you very much.

Occasionally I have purchased deals with local restaurants, but in every case it has involved a restaurant we’ve wanted to try. The deal pushed us to make a reservation. Sometimes we need such prodding to take the time away from the kids and have a date night. Deals on great restaurants have been a great stimulus for that. In this case, it moved “latent demand” into a purchase.

With the B&B product, I think we are in a good spot to avoid training travelers to wait for a discount – for a few reasons. First, one of our industry strengths is our diversity and fragmentation – no two B&B experiences are identical. Second, most B&B stays are not truly “local” in the same sense as a restaurant or a massage treatment. Due to travel requirements, the vast majority of people interested in a B&B stay aren’t going to wait for a discount; because they’re not sure which B&B will offer a deep discount. Will it be the kind I want to experience? Will it be close enough? Waiting could be futile. Third, most travelers seeking deep discounts are used to seeing such deals for last-minute specials. Because most B&Bs are on independent reservation systems and have such small inventory, facilitating last-minute deals to millions of people getting a social buying email would be incredibly difficult.

Therefore, I think that the lion share of people buying B&B deals through LivingSocial et al had no idea they were going to buy a B&B package before opening their email that day. Social buying is creating demand that wasn’t there, which is the sweet spot.

The guests are bottom-feeders who will not appreciate you and will not be repeat guests

I think this all depends on the pricing of your packages. If you offer a one-night stay for $89 that usually goes for $189, you might be inviting the cheapies. If you pull together a package worth $499 and sell it for $249, you might be inviting a more affluent traveler. As innkeepers, you know that some of your most affluent guests could be labeled as bottom feeders – sucking up every possible dollar or morsel of food during their visit, not tipping, complaining, etc. But, it stands to reason that the pricier the package, the less likely you’re going to attract the Motel 6 folks looking to milk as much as they can. I’ve heard innkeepers say they absolutely LOVE their LivingSocial guests, while others complain about feeling over-run. I don’t think we can categorically say social buying guests are not good guests. Many innkeepers will argue the opposite – they are the perfect guests. In fact, most innkeepers say social buying guests are first-time B&B guests, so they are amazed and appreciative of the new-found style of hospitality.

The system preys on merchants’ insecurities

This might be true in the cases of merchants who see social buying as a “Hail Mary” pass to survival or success. But for the savvy business person, participating in social buying should be seen as merely one tool in your tool box. You shouldn’t see social buying as something that takes the place of the tried-and-true methods of marketing, such as good search engine marketing and optimization. Even a successful social buying program should not be seen as a lone silver bullet that will fix your business, if you find yourself struggling. There may be stories out there of merchants who were either on their last breath or those who needed a kickstart to get their business off the ground and claim LivingSocial or GroupOn was the answer. My take is those would fall under the category of “These results are not typical.” But, a successful social buying deal can certainly give you a nice and needed boost in the arm.

Having social buying guests and regular-paying guests at the same breakfast table is a recipe for disaster

I think this argument has more bark than bite, meaning innkeepers shouldn’t worry so much about upsetting the full-paying guests. Today’s consumers know that purchase price can vary due to all kinds of situations. Most people flying on an airplane know the person sitting next to them did not pay the same price for his or her seat as they did. I also think small business get more leeway with running promotions that one guest took advantage of. People feel more “cheated” if larger corporations, which they might patronize a good bit, give better deals to one set of customers than another.

Here are a few other reasons why I think social buying and the B&B experience have been good partners thus far:

Source of short-term capital

Some say the short-term cash infusion compromises the long-term sustainability of your business (for all the negative reasons identified above), but those in our industry have to remember that the average B&B brings a pretty modest profit to the owners. With such modest cash flow and with a tighter lending market, it might be hard for innkeepers to procure loans for capital improvements, such as renovating rooms. Some innkeepers might be willing to put in a year’s worth of extra work for that $10,000-$20,000 (or more) bump in cash, rather than subject themselves to a loan for 5-10 years. I know a lot of innkeepers eager to make over parts of their inns. They might be willing to offer sweat and longer days for a while as interest payments, rather than real dollars.

 

 

Reaching a new audience

I continually hear from participating innkeepers how so many of their social buying guests have never stayed at a B&B before. As someone championing the Better Way to Stay campaign, this is music to my ears. As someone who has taught classes on pricing philosophy and management, I’ve always said that if you’re going to offer a discount, don’t offer it to loyal guests who are more willing to pay for the value they already know – offer it to those who have never experienced the product. I think back on my ten years in the golf business, in which avid golfers were the most willing to pay $75 for a round of golf. But the non-golfer (before he or she catches the golf bug) would scoff at the idea of paying that kind of money for a round of golf. They might try it for a really low price and subsequently get hooked. That’s obviously what I’m hoping for the thousands of social buying guests staying at B&Bs for the first time.

 

Did I mention, based on anecdotes from innkeepers, that social buying guests are younger than the average guest? As someone who thinks about the future health of our industry, I know the twenty and thirty-somethings are going to be the lifeblood of our business.

 

Conclusion

A really smart innkeeper framed the challenge of all of this in a really succinct question: “As an innkeeper, if someone walked up to your door and offered you $79 for a room that night, would you take it?” Most innkeepers I know would say, “Hell, no!” “So, why would you give it away through social buying or flash sales?” Price, occupancy and revenue all have to be put into the balance when considering new courses of action for your business. My opinion is that revenue possibilities (think net profit) oftentimes trump Average Daily Rate considerations. After all, there is no line on your bank deposit slip that asks what your ADR was.