By now you may have heard of the popular online coupon marketplace known as Groupon. With Groupon, businesses can offer steeply discounted services or products to be showcased for Groupon’s vast following. A certain number of users must sign up in order for the offer to take effect, which spurs users to spread the word about your company. By being featured on Groupon, your business can greatly increase its customer pool–although you will sacrifice profit margins and must share revenue with Groupon.
Groupon sounds like a pretty good deal, especially since businesses only pay for sales made, but is it right for your business? The following list outlines some situations in which it could be beneficial (or detrimental) for your business to try using Groupon.
When to Use Groupon
Excess Inventory
If you have a lot of finished product sitting around, Groupon could be your ticket to clearing the warehouse. Especially if it is costing you a significant amount to hold on to the inventory, you may as well use Groupon to clear it even if this lowers your profit margins.
Repeat Sales
Groupon is a great tool if you think discounted sales will result in customers returning for more at full price. In this case, you can think of the discount and the revenue you share with Groupon as a customer acquisition cost. Especially for new products and services, this can be a way to give customers a taste of what you offer in hopes they come back for more.
Additional Sales
Even if customers don’t return after the initial sale, for some products they might be tempted to buy more at the time of the Groupon redemption. For example, if you offer two-for-one sandwiches at your restaurant through Groupon, the customer might also buy a drink or snack at the standard price. If you can compensate for the lowered Groupon profits with full-priced additional sales, then you’ve really won.
Excess Capacity
A good example here is a tourist service such as a cruise around the harbor. Any unfilled capacity you do not sell is gone once the ship has sailed. You could sell this unfilled capacity during off-season through GroupOn.
Keeping the Lights On
If your factory has excess manufacturing capacity in the form of equipment and personnel, you could use Groupon to sell that excess capacity in lieu of selling the equipment or laying off employees. Groupon could be just the short-term infusion you need to stay afloat during these tough economic times.
Attracting a Young Demographic
Most Groupon users are young (68 percent are aged 18 to 34). Therefore, Groupon is ideal for products and services targeting this demographic. There are several other heavily weighted demographic groups (77 percent are female), so be sure to check out Groupon’s user breakdown to see if it is a fit for your target market.
Generate Buzz
For a new or relocated business, Groupon can be the perfect way to familiarize a large group of customers with your product. Plus when someone gets a great deal they usually tell someone about it. In a new area Groupon can be a relatively cheap way to expose your product to new customers and then let word of mouth do your marketing for you.
When Not To Use Groupon:
Unprepared for Large Influxes
Be warned: Groupon sales have the potential to attract high volumes of customers. Depending on the size of your business, Groupon sales may generate demand that you may not be able to meet. Though there is usually a long time period for coupons to be redeemed, customers just might redeem all at once, and in that case you had better be ready.
When You Never Have Repeat Sales
The sales you generate from Groupon will be a lot less valuable if you cannot use the new relationships you create to drive additional sales. Since there is such a large discount when customers use Groupon, you need to make sure the investment will be worth the cost.
Have you used Groupon for your business? Are there other reasons that you can think of for using or not using Groupon or similar services?
Glad to hear other people are considering not just the positive effects but also the negative effects that can occur when business owners use Groupon for their promotional needs. Many small business owners come out on the worse end of the deal when they don’t take the time to adequately prepare for their Groupon promotion. Here’s a Groupon ROI calculator I created to help bring some real numbers to the discussion: bit.ly/cQE5by
Hopefully it helps shed some light on the true costs involved for small business owners that are considering a Groupon campaign.
Great response – its 2 way street. Preparation is key!
I love Groupon, but I would also add that companies looking to promote exclusivity should shy away. Some experiences and products are pitched as a small club and Groupon will ruin that feel.
Nice article. Thanks for posting both side to using Groupon. What are your thoughts about using Groupon for a local plumbing company? I’m pretty certain we could handle the potential volume increase, and we’re obviously looking for repeat customers. I’m looking for an outside opinion on how Groupon could work for us. Thanks in advance.
I don’t think I’ve ever seen deals offered for plumbing services or anything close to it. I’m not sure how that would go down. I don’t know anything about the plumbing business but I would assume most people don’t call a plumber unless they need it. That is unless you hook up with a general contractor I guess huh? So, I would guess that you’d either get a lot of people buying the deal that needed plumbing work or people would buy it in the hopes that they would use it later. In the first case, that’s what you want; to provide excellent customer service and earn repeat customers, right? In the second case, that alright too; if they don’t redeem the voucher within one year (or whatever your state law requires) then it’s only worth the price they paid for it for an additional 4 years in most cases.
I just checked recent deals offered on Groupon for Chicago and I saw only deals for restaurants, spas, bars, classes, entertainment, recreation, newspapers, fitness clubs, beauty salons, car wash, and groceries. I didn’t see anything near plumbing work (i.e. carpentry, electrician, etc.). However, I have seen photographers use Groupon before. So it’s not out of the question to have professional services use Groupon. You’ll probably want to make sure that you clearly state that only labor costs are included in the deal offering if you decide to move forward.
Prasad Thammineni: I think it is interesting to see this kind of purchasing power effect in action. GroupOn recently merged together with MyCityDeal in Sweden. I like to receive offers, but I haven’t had the opportunity to test the service yet.
Great list Prasad. I am glad you included the potential issues arising from being ill prepared for an influx of business. It isn’t just from those who successfully purchased the GroupOn deal but also from those that missed out. Too much demand too quickly is a major destroyer of businesses that attempt to take on too much.
With first time customers you only have one chance to make a good impression. Mess that up because you have taken on too much and you will quickly find yourself gaining a bad reputation.
Kevin, thanks for the response. I checked around also, and didn’t see anything similar to plumbing, which is why I had the initial concern. With photographers, they can offer some sort of package where they know their costs and prices of each specific package. It makes me wonder if we do something where we do a hot water tank replacement for $X or something specific like that. The issue is that we’re then greatly limiting the people who would need/buy the coupon.
You’re correct, most people really only call a plumber when they need it (emergency situations) however, we have had coupons ($25 off your next service call type coupons)/gift certificates in the past where people have used the discount to take care of a leaky faucet or something of that nature (non-emergency); they felt that would take care of the issue when they had the opportunity to do it at a discounted rate.
Our prices are all flat-rated, not time and material, so we basically have a “menu” of plumbing tasks where the customer sees the price before we do the work. A “percentage off” coupon up to a certain dollar amount could work, but then everyone’s coupon is worth a different amount. That’s why I’m thinking the coupon may have to be for a specific task like replacing a hot water tank.
Hi Kevin Eklund,
Thank you for sharing the GroupOn ROI calculator. I quickly reviewed it and it is quite useful. I will see if I can get the editor to add it to the post.
Your response on the plumbing question is a good one as well. Plumbing costs in my experience varied depending on who did it unless you have a fixed price menu.
Neptune,
Looks like you have a fixed price menu and you have done coupons before. As long as you have enough margins (Groupon takes a 50% cut) and can handle the volume (plumbing is an emergency when it happens), Groupon is worth considering. Give the ROI calculator a shot to see the effects of GroupOn before doing it. It is also worthwhile calling companies that have done GroupOns in your city to get a sense for how it worked out.
Prasad Thammineni
Nice to see a balanced article. No solution works for every business, and small businesses need to be especially careful to use the tactics best suited to their situations.
I agree with what Jill Kocher said, which is that no solution works for every business. As CEO of CoupMe.com and a career Marketer, you really have to think about balance and not just blast your deal/brand out and expect pain-free, ROI positive results. Marketing is about balance; finding that mix of positioning, price and presence. A 50% off deal redeemed by thousands can harm your business if it exceeds your capacity and ability to deliver service to your new and existing clientele. To be transparent, CoupMe takes a similar approach to GroupOn, but one differentiator is we work closely with local businesses to craft an offer that works for them LONG TERM and not against them by exceeding capacity short term. The core value of what GroupOn, CoupMe and other similar sites do is introduce crowds of local customers to your local business by giving them an incentive to try your product and services. The win is not when your deal is broadcasted to thousands, but victory is measured by the loyal, repeat customers our partnership helps foster. Incentivize for repeat business. Think about an offer that’s compelling, but has a secondary hook for a follow-up visit. Also think about an offer where you can get someone in the door, but that discount will likely lead to upsell or better margin opportunities. Punchline is to work with a site like CoupMe that will customize your program around the future and not the present.
Prasad:
Thanks for the compliment. What I didn’t include in that calculator was the costs to hire additional workers to handle phone calls, appointments and extra labor that will be required when you sell X hundred/thousand vouchers.
I just published an article on business owner tips for using sites like Groupon that touches on how to prepare for deal promotions and working with services that offer them. There’s so many things small business owners need to do before just jumping head first into offering deals.
Neptune,
It sounds like you’ve given it a lot of thought and it could be very promising. I wish you the best of luck.
I invite you to check out a new service we just launched called SayLocal. It solves several of the issues raised about Groupon and its clones. First off it solves the Neptune Plumbing problem because SayLocal offers deals on all kinds of services. More importantly, it provides a solution to businesses for whom the group buying economics don’t work. SayLocal justifies the high cost of acquisition (giving away 75% of the initial purchase, 50% to the consumer and 25% to the group-buying website) by providing a way to track and reward repeat purchases. In order to earn additional discounts, consumers have to shop at full price until they reach a spending level set by the business. SayLocal, as far as we know, is the very first group buying service to bring loyalty into the equation, and we’d love to hear your feedback.
@Neptune Plumbing
Angie’s List is now offering these kinds of deals and it’s apparently working well.
Good post Prasad,
I believe however Groupon is not the savior that the media continues to hold up in awe. Their model is commoditizing retail and the service sector, encouraging customers to “never pay retail again” and all based on “the hope” to local mom & pops desperate for customers, of people returning. I wrote an 11-part series about the dangers to small business including two case studies, the first part begins at http://www.retaildoc.com/blog/groupon-worst-marketing-business/
Thank you Mr. Prasad, with the explanation on the business side of the popular Groupon. For weeks I’ve been noticing these olive colored banners on sites all over the internet portraying deals on a variety of stuff. And trust me, you’ll know when there is a big sale of some sort or some thing new in the shopping sector, when you hear my wife and her BFF keep ‘yapping’ about it.
However, being apart of the small business world myself, I realize that these banners (company) get a lot of traffic and thought it would be a good thing to join, but after reading this page I’m thinking twice simply because of the profit margins and other stuff explained.
Thank you.
Many of the businesses that are using groupon really shouldn’t be in business – they are offering 50% or more off of their regular prices – doesn’t any 5-year-old lemonade stand operator know that you cannot provide such deep discounts to a target audience is soley motivated by the savings and expect to stay in business?
A lot of businesses are complaining that groupon is hurthing them financially – well what did they expect? In reality, groupon is probably the most expensive distribution channel they can utilize. Maybe they should try running the 50% discount using their own email list and see what happens; rather than discount and pay groupon.
I don’t see how groupons business model is sustainable – businesses cannot afford to offer such deep discounts over the long term.
The key to running a successful Groupon campaign for any business is to capture those Groupon customers. Research shows that only 22% of Groupon customers will ever come back to a business that they redeemed a Groupon promotion at in the past. That’s a horrible statistic and doesn’t begin to justify the enormous cost brought on by a small business to run a Groupon campaign. Here’s my solution to how to retain more Groupon customers and turn them into future repeat customers: http://thederekjohnson.com/2011/02/11/how-to-run-a-better-groupon-campaign-for-your-business/
Three reasons NOT to use Groupon
1. Groupon customers typically only spend the amount of the Groupon.
2. Grouponing your brand might hurt your brand.
3. Profit margins are hurt and customers will not want to pay full price in the future.
I run a website http://www.localpinch.com where a small business can list a gift certificate (full priced or discounted) and we can help you find new customers. No cost upfront to you.
Now you can also buy and sell past Groupons and Coupons from websites like Living Social, Tippr, Groupon, and Quirpo.
If you can’t use your groupon or coupon, sell it to someone that can!
There are some great tips here I never considered! Groupon has changed things for businesses and people are catching on to the trend with many copycat sites. Even Facebook is starting a daily deal of their own.
Thanks for the ideas!
Although these are some great tips, you leave out the fact that Groupon is extremely expensive. Sure it gets “customers” but do they stick around when the deal is done. Probably not. All of the buy in deals do not offer businesses income or lasting results.
I run a factory outlet and am interested in joining Groupon with a view to offering vouchers/offers to attract more customers. How do I proceed?
Everyone who works with Groupon ( or other deal websites) must understand it is pure marketing and Publicity. You need to be ready.
– Do you ask for Client details when the client uses his/ her vouchers
– Do you follow up on the clients to make them come back, what is your Sales plan after?
– Don’t play all on Groupon, make sure your fully paid clients are getting the service they expect, like openinghours, flexibility, gift certificates etc.
At the end Groupon clients are only less then 10% of your real clients