Groupon – Too Much Of A Good Thing?

Groupon has brought a revolutionary advertising model to the local business market, and is making a fortune in the process. The company has a website, Groupon Works, which details successes companies have achieved by working with them. But there are also numerous horror stories describing how using Groupon was a disaster for small businesses.

So how can a small business best take advantage of Groupon?

A Group Buying Overview

Groupon and its competitors (Living Social is a large one, there are numerous startups & others, such as newspapers getting into the field) work through something called group buying. A massive discount is offered for a product or service, but the discount is only activated if at least a certain number of people purchase the coupon. This encourages people to share the discount with their friends, bringing new customers into the store.

At this point, Groupon has such a massive email list that pretty much all the deals hit the required number of sales (I looked at the past thirty or so for my local market, and every single one was “on”). The other reason they make so many sales is that they require advertisers to offer huge discounts, generally over 50% off.

Financially, Groupon and the other services work something like this: the business pays nothing upfront, but agrees to offer a huge discount (>50%). Of the revenue that is brought in, Groupon takes a significant portion. In the end, there is no real “advertising expense,” but a business might only collect ~25% of the revenue they could normally expect from a similar amount of sales. Groupons are for a fixed amount – ie, it’s not really a 50% off coupon, but a customer pays $10 for a certificate worth $20. This is important, because if they spend more at your business, it will be at full price.

Should You Try Groupon?

The Upsides To A Groupon Campaign

Despite some of the horror stories, Groupon has a lot going for it:

• Gets your name in front of a very large distribution list
• Brings in lots of customers – odds are many of them are new
• No upfront advertising cost
• Potential for customers to spend more than Groupon was worth
• It’s something new to try, at a time when many small businesses are struggling

It is pretty easy to understand – offer a big discount, get it in front of a lot of people, and you’ll make a lot of sales, including to new customers.

The Downsides To A Groupon Campaign

Some of the complaints from businesses that disliked Groupon include:

• Brings in unprofitable business
• Attracts an overwhelming number of customers (customer service issues)
• Overly transaction/price oriented consumers
• Potential branding issues if your business does not normally offer discounts

Basically, companies aren’t prepared for the huge amount of business, or they feel it does not work out to their benefit financially.

How To Do It Right

So how do you run a Groupon and make it successful?

Be Prepared

Groupon may bring you more business than you have ever experienced. Make sure you’re providing a discount on something you can offer at a high volume, and discuss limiting the maximum number of Groupons. I’m not sure exactly what Groupon’s policy is on this, but a fair number of them sell-out, so it’s definitely possible to set a limit.

Get Repeat Business

One key to making Groupon work is using it to gain new customers that will buy from you again. My understanding is that they will not provide you with emails of people that purchased the Groupon, so make sure to encourage (and consider an incentive) people to provide their emails when at your location.

Also, think about the people you will be attracting – consider offering a discount for the product your most valuable customers tend to buy. You might not sell as many Groupons, but you’ll attract consumers who will be more profitable down the line.

Understand The Financial Side

Some of the businesses angry about Groupon sound like they didn’t understand what they were getting into. If you are a retail store with thin margins, can you afford to sell products at a loss? New customers may provide a benefit over time, but if it destroys profits in the short term, can you handle that?

In addition, it may work better to provide a coupon with a dollar value rather than one for a particular service. For instance, rather than offering a meal for $10, offer a coupon worth $20 for $10. People will be more likely to spend over the coupon’s value if it’s not perfectly matched to a particular product.

Conclusion

Groupon has the potential to generate some buzz and bring in a large number of new customers – something any business could use. It can, however, be a disaster when used without care. If you run a business that thrives off of repeat customers, and in particular if it also maintains high margins, Groupon is a great fit. For everyone else, it’s a maybe. Put some real thought into how it will work, and structure the deal with care.

For a more academic look at how Groupon works out for businesses, check out this paper from a professor at Rice University’s school of management.

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