The true business cost of a Groupon

I’m sure by now, most of you are familiar with Groupon, the collective buying discount service that offers huge discounts on things to do, eat and buy in local communities. And, no doubt you are aware of the multitude of Groupon ”clones” such as Living Social, Tippr, Rue La La, Plum District, Ideal Network and Urban Dealight, just to name a few.

These “daily deals” are typically in the 50-percent discount range, with some even at a 75-80 percent discount off restaurants, services, etc . — who wouldn’t love that? These deals obviously are great for the consumer, but as a marketing consultant who helps businesses increase visibility and sales, I’m a little worried about what’s in it for the business.

I’m wondering how many Edmonds businesses have considered using a “daily deal” offer – and more importantly, have really investigated what the real cost of offering these deals will be. What happens if you set consumer expectations so high that they demand a deal on every visit and think 50- percent-off pricing should be the norm? And what if these new choosy, bargain-driven consumers simply take their business elsewhere when you return to full pricing?

You could argue that the high traffic and visibility that results from these daily deal offers will create a stream of new customers and that the wide-reaching mailing list they have is invaluable to a new business struggling for attention.

And yet, I disagree. Is it a good business decision to give a deep discount for a one-time sale — especially if you never see the customer again? For example, when a restaurant offers a $50 value Groupon for $25, the restaurant only reaps about $12.50 of that – yes, Groupon typically takes 50 percent of the sale.

That’s a steep price to pay to gain a new customer – if they ever do return. And is the visibility and word-of-mouth value from this one-time offer really worth a 75 percent (or more) discount off a business’s already tight margin? Is that good ROI??

Actually, it might be — IF the business also does one (or more) of the following:

- Capture the customer’s complete contact info when they redeem the Groupon. I’ve talked with dozens of friends who have happily purchased and redeemed Groupons in the past few months and virtually NONE of them were ever asked for their contact info so the business could follow up and make them a repeat customer. Retention and repeat business are a MUST if you offer a Groupon.

- Sell a follow-up/repeat service to the same customer when they redeem the Groupon. As a business, you have an interested customer right in front of you, happy with the deal they have purchased. Why not sell them a SECOND 50-percent-off deal right then (before they leave, possibly never to return)? And guess what? You get all of that money ($25 on the $50 value), rather than giving $12.50 of it to Groupon!

- Categorize this as a marketing/advertising expense only. This type of offer may return better results than advertising in the traditional media platforms, although that’s debatable. But if you have a budget to obtain customers, and know your true cost of obtaining new customers, this method could be effective.

- Have the bandwidth to handle a deal’s popularity. Can you accommodate 1,000 new customers who purchase a $10 haircut, if you are a two-chair shop open only 40 hours a week? Can you handle the demand of full restaurant nightly all eating at discount and still pay your staff and overhead?  Do you have personnel to handle the phone calls and web inquiries to schedule all these new customers AND to service them?

My firm belief is that with the exponential growth of social media tools such as Facebook, Twitter and LinkedIn, most businesses could offer their own special deals and discounts DIRECTLY to their fans and followers, without paying a middleman (Groupon, etc). And most of your fans/followers are more than happy to share the deal by word-of-mouth “advertising” with their friends in these online arenas.  Those are the strategies I prefer to use in helping local businesses build their visibility and credibility.

I know there’s going to be some feedback and plenty of discussion on this issue, so let your opinions fly in the comments below! I especially would love to hear from businesses who have used Groupon or other daily deal companies, and how their subsequent sales have been affected.

Originally posted on My Edmonds News

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One Response to “The true business cost of a Groupon”

  1. John Audette April 27, 2011 at 2:24 pm #

    Your central thesis is spot-on – the only way a Groupon promotion can work is if it creates a new long-term customer for you. I just wrote a blog post about a business that just filed Chapter 7 after a large Groupon campaign. Coincidence? Maybe.

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