One Company's Sink-or-Swim Experience with Online Coupon Sites

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At 8 a.m. on a Saturday last February, the phone started ringing in a small Miami office on a concrete pier that juts into the blue waters of Biscayne Bay. Moments later a second line started ringing -- and with that, the phone system at South Beach Boat Rentals was officially overwhelmed. The next caller went into voice mail, and the one after that got a busy signal.

Undeterred, callers left messages or tried back again and again, eager to plunk down $199 for a powerboat rental that would normally cost $400. It seemed almost too good to be true, and potential renters had questions -- lots and lots of questions.

By the time the phones went silent on Sunday night, some 800 calls had poured in, representing a 2,000 percent increase over the company's normal weekend phone traffic.

"Time to Try Something Else"

Ironically, the massive increase in business came without any additional up-front advertising costs. "We spend thousands of dollars on Google AdWords, and we always show up at number one when people search for Miami boat rentals," said Ernie Sauer, a former New Yorker who "retired" to Florida and launched South Beach Boat Rentals in 2009.

"But a whole host of people don't go to the Internet, and we thought it was time to try something else."

That something else turned out to be LivingSocial, the coupon site that's been giving Groupon a run for its money in the fast-growing deal-of-the-day marketing space. Groupon would have been his first choice, Sauer said, but "they didn't want to talk to us for months and months and months."

"One problem is you can't get a real person on the phone [at Groupon]," Sauer said. "You go to their website, outline your deal, and they might eventually get back to you if they're interested."

Frustrated with the lack of response from Groupon, Sauer asked his manager, Greg Jackson, to seek out alternatives. Jackson happened to have an acquaintance who worked for LivingSocial in Washington, D.C., and at long last Sauer was able to talk to an actual person about his deal.

"LivingSocial was just coming on the scene in Miami," Jackson explained, and the service was eager to line up new offers. South Beach Boat Rentals signed on in the second quarter of 2010, but then "LivingSocial put us on hold. It took nearly a year to get this done."

Getting Past the Restaurant Model

The problem? According to Sauer, in mid-2010 the daily-deal sites were still working mainly with restaurants, where the business model is fairly straightforward. "They couldn't get their head around our deal," he said of the LivingSocial sales representatives.

"Anyone can walk into a restaurant and eat the food," Sauer said. "But in our case, you have to have boating experience. Our insurance requires a whole bunch of questions to make sure renters are qualified."

LivingSocial appeared hesitant to alienate customers who got excited about a deal, only to find they weren't eligible to take part. And for practical reasons, the offer would have to include a lot of other fine print that could be off-putting, including fuel surcharges, boat availability, and weather restrictions.

If boat rentals presented a new challenge for LivingSocial, the whole idea of a coupon was just as daunting for Sauer. " 'Frightening' is the best word I can think of," he said. "We viewed it as a way to get our name out there, because repeat business is where we really make our money."

"But we didn't know how much of a loss leader it would be," Sauer added. "And we're talking about some pretty big numbers. We drank lots of coffee and ran the numbers over and over again. What if we charge this, what if we offer that? We tried every scenario you can think of, and sometimes they didn't work out."

Running the Numbers

Initially, Sauer said he and Jackson leaned toward offering a flat $50 discount good toward any rental. But with some packages going for up to $2,000, "a $50 coupon would be kind of meaningless," he said.

Another option was offering a deeply discounted price on an all-inclusive package, including refreshments and a professional captain. That might have the attraction of luring more inexperienced boaters, but it would also lock in the company's losses, since all of the possible upgrade options were already included in the price.

"We ended up losing about $30 or $40 on every deal if we did an all-inclusive tour package, and we couldn't see any way around that," said Sauer.

In the end, Sauer and Jackson settled on a deal that was simple enough to explain and lucrative enough for both sides to accept: four hours in a small boat with no captain for $199.

The deal went live in February, nearly a year after the company's initial contact with LivingSocial -- and that's when the real work began.

Of the 800 calls that flooded in that first weekend, just over 200 customers followed through to purchase the deal. For the next two weeks, South Beach Boat Rentals was inundated with callers wanting to schedule their four-hour slot, and about 30 percent of the certificates were redeemed in the first 30 days.

The Verdict: Ready for Another Round

Sauer says the initial flood has tapered off now, and scheduling is getting easier. Despite all the efforts to thoroughly explain the complexities of the deal, "a handful" of customers have demanded their money back after discovering they couldn't pick any boat in the fleet or that they wouldn't have a professional captain behind the wheel.

But the gripers are in a distinct minority, according to Sauer: "Ninety-nine percent say, 'Oh, that was fabulous, we'll be back to do it again.' "

That's a feeling Sauer himself shares about the process, in spite of its ups and downs. The coupon deal "put us on the map in some respects," he said. The company's gross revenue is up 50 percent compared to six months ago, and while some of that is due to the general economic rebound, there is little doubt that the coupons played a significant role.

Better yet, Sauer stated, about a third of the customers redeeming coupons so far have upgraded to larger boats or longer rentals, so the deal hasn't been the big loss leader Sauer initially feared it might be.

Now that he's been through it once, Sauer is at it again: About two weeks after its successful deal on LivingSocial, South Beach Boat Rentals got a call from Groupon. "Suddenly we're on the A-list because we've delivered," Sauer chuckled.

Based on his hard-won experience, Sauer says the new deal came together in just two weeks, and he thinks he'll sell 400 to 500 vouchers, thanks to Groupon's larger customer base.

And this time, he promises, there won't be any busy signals: With three new employees and an upgraded PBX phone system, he said, "we can't wait for the calls to start coming in."

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