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June 28, 2011#

Going Groupon Part One: Should You?

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Unless you’ve been living under a rock, you’ve probably heard of Groupon. In fact, you’re likely within a city block of someone who has been featured on Groupon. If not that, then you probably have a competitor that’s used Groupon. Everywhere you go, you hear about it.

What is Groupon?

Groupon is one of the most popular “Daily Deals” sites, thanks to their marketing, catchy writing and yes, their deals. Members can expect to save anywhere from 50%-90% on local restaurants, shops and services. All they have to do is sign up to receive the email or get the app on Facebook and check their feed every day. For the consumer, the idea rocks and has paid off handsomely.

But how good is it for the businesses who get featured? Though Groupon continues to lament that 95% of their merchant customers are happy and would do it again, when you break it down, you might just get a different story.

There’s journalist named Rocky Agrawal that has been covering this story a lot longer and more in depth than I have. You’ll find links to his articles at the bottom of part two. He’s done a lot of work to bring out the facts about Groupon and her merchants. Case in point, in one article titled “Why Groupon is Poised for Collapse” he brings the following deal to the table:

Imagine you’re a small business owner. You have to choose between two propositions:

  • You can pay $62,500 for marketing. You’ll get a whole lot of customers coming through your door. No guarantees if they will ever come back, but they’ll come once.
  • I’ll pay you $21,000. You get $7,000 in about 5 days, another $7,000 in 30 days and the remainder in 60 days. In exchange, you’ll give my customers cheap products for the next year.

The first deal sounds laughable. Argrawal says It’s tough to get a small business to spend even $200.00 a month on marketing, so a sum of $62K is outrageous. The second one isn’t much better, when you think about it. If I’m a small business owner going with option 2, then I have to realize that while I’ll gain the $21K, the profit losses I’ll accrue over the next year wouldn’t be worth it. Not even close.

The kicker? These are both Groupon. It’s the way the business model works: you’ll pay through the nose for their network of members in your local area. Since they have such a dedicated following, you’re almost guaranteed to get a rush of new customers. That’s a good thing, right? Not necessarily.

How Groupon Works

Groupon entices businesses with it’s success stories that every small business owner would love to have: a flood of new customers, all wanting your product! You can’t keep up with the demand, and at the end of the day, you’re exhausted but happy and looking forward to seeing more of the same and raking in the profit from all these new customers.

Don’t hold your breath.

First of all, don’t expect to make a lot of money from a Groupon deal. From the beginning, your Groupon rep will tell you – it’s not about revenue, it’s about foot traffic.

Secondly, the majority of the folks who come to your business through Groupon will only be coming so long as you’re giving them Groupon-esque deals. More on that in a moment.

Lastly, there’s always the possibility (as there is with any sort of marketing effort) that your Groupon deal just flat won’t play out how you were hoping it to.  I spoke with a local business in Sapulpa, OK who ran a Groupon Deal. The general consensus was that it was somewhat disappointing, but for a myriad of reasons: The offering, the price (theirs was one of the higher-priced Groupons I’ve seen recently) and even the weather. He admitted that he didn’t get the kind of turnout they were hoping for, but also said he’d probably be willing to be featured again. The danger in this is when a business is drawn to Groupon by the sight of all the customers they are bringing in, which creates an artificial comfort. To most small-businesses, more customers = more profits, so the idea develops that the need to have more Groupon deals in order to keep a steady flow of customers walking through your door.

The Hazards of Groupon

The truth of the matter is, if you’re a seasoned business that believes they need a Groupon Deal, you definitely do not want to do a Groupon Deal. In his article titled “Daily Deals and the Potential for Fraud” Agrawal writes:

Because the deal companies generally require businesses to take a 75% hit off their regular selling price, they also will tend to get riskier businesses in their portfolio. The most stable businesses don’t need to discount their product to that degree.

Customer satisfaction guru Larry Freed recentlyposted some new dataon exactly what kind of customers were purchasing these daily deals. He reported that a combination of brand new business, infrequent customers and former customers add up to 64% of the Daily Deal users. Unfortunately, he also showed a large percentage of the customers were already loyal to the business:

Of the people buying daily deals, 38% were already frequent customers of the company. In other words, existing customers, loyal customers, are getting significant discounts to buy what they might have bought anyway.

Additionally, those same reports show that the type of customers you’re bringing through the door for the first time won’t necessarily be there again – by and large, the Groupon clippers are loyal to only one brand – Groupon.

Groupon still works

The first part of this article was showing you the facts and dealing with what very well could happen to you should you run a featured deal on Groupon. Does that mean it’s a bad idea for everyone? Not at all! Groupon has become a success for a number of reasons, and not the least of which is because it does work sometimes. Really. The key lies in asking yourself a few questions. That’s next in Going Groupon: How to do it.

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