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The other day, a friend and I were chatting about our wedding linens business and the topic of Groupon came up in our conversation. For all of you who are not familiar with Groupon, Groupon is a service that offers a really great deal for a product or service once per day. They have an email list of over ten million people and if you contact Groupon to be included on their “deal-of-the-day”, you can get the word out about your business to millions of people you would otherwise never be able to reach.
There are usually huge discounts involved (50% or more) to incentivize buyers and the general idea is that by offering a big discount on your products or services, people will try out your offerings and keep coming back for more. On the surface, it sounds like a great way to market your business and I was really excited about the idea until I thought about it some more and did some analysis. While Groupon might work for a small subset of local businesses, here’s why I don’t think Groupon is a good fit for the majority of small businesses out there.
Using Groupon Will Cost Your Business An Arm And A Leg
You might have read some Groupon horror stories already, but the reality is that Groupon is extremely expensive. If you look at their faq, they give off the impression that running a Groupon campaign is free. They collect the money online from prospective customers, send you a check and mail out the coupons automatically.
What is not explicitly spelled out is that they take 50% of your revenue as a fee for using their service. So given that most Groupon campaigns offer the end customer around 50% off, let’s run some numbers here. Say your product retails for $100. By giving a 50% discount to customers, you will only make $50. After Groupon’s 50% cut, you only get $25 for something you normally would charge $100 for. Depending on what your markup is, it better be more than 400% otherwise you could potentially lose money on every transaction!
What’s attractive about Groupon is that they run the campaign for you and simply send you a check. It’s not until later when you have to fulfill orders with these ridiculous discounts do you realize how much money you are potentially losing out on. For our online wedding linens business, most of our customers are one off wedding customers and the other half are party planners and small business owners. It is questionable that taking a huge loss on thousands of orders would prove beneficial to us in the long term.
Groupons Don’t Make Your Business Memorable
From experience, I’ve used Groupon a few times as a consumer and you know what? Both times, what stood out in my mind after my purchase was not the business itself but how great of a deal I got on the product or service. In fact, I remember bragging to a colleague at work about what a killer deal I got at this local restaurant and tried to convince him to sign up for Groupon as well. Not once did I mention the quality of the food or any details about the restaurant. I was too excited about the bargain itself.
Using a Groupon takes the spotlight away from your business. After all, it was Groupon that provided your customer with the coupon and the unbeatable deal. It was Groupon that made your customers’ purchase exciting and fun. As a result, customers are more likely to brag about the groupon and not your business.
Groupon Deteriorates The Value Of Your Business
Whenever a store offers an incredible deal or discount, there is this perception that the markup was already ridiculously high. If company X can offer a 50% discount and still make a good profit, then they must be jacking up their prices. Once a customer receives a large discount, it trains them to wait for later coupons and deteriorates the value of your products and services.
There is this dining card I sign up for almost every year called “The Passport” card which entitles the card holder to a free entree at select restaurants when another entree is purchased. The card lasts exactly one year until it expires and you have to pay to reactivate it. One year, we decided to let the card expire and you know what? We refused to dine at “Passport” sponsored restaurants during this period because it didn’t seem worth it without the card. We were so used to getting a free entree that we didn’t want to pay full price again.
While this principle applies to coupons in general, the price erosion caused by a Groupon are infinitely worse because the discounts are so steep.
Groupon Hurts Loyal Customers
Don’t you hate it when you are a loyal customer of a product or service only to find out that the company started issuing huge discounts for new customers only? This happens all the time with cell phone carriers and it really pisses me off. Using Groupon has a similar effect on your regulars and your loyal customer base.
By taking a loss using Groupon to obtain new customers, you are essentially forcing your loyal customers to make up for your losses. And this is counter-intuitive to the way you should be doing business. Your regulars should be the one rewarded with discounts and perks.
There are 2 possible outcomes when a regular customer sees one of your Groupons and both are bad. In one case, your loyal customer could get pissed off and consider shopping with a competitor. But more likely, your regular customer could buy a S@$% load of Groupons and only pay a fraction of the price for what they normally would spend at your store. In effect, you would be losing out on future business with this customer because you would be taking a loss or breaking even on what could have been a 4X profit!
Conclusion
Outside of the issues I’ve already covered, the main problem with Groupon is that the longer term effects are extremely hard to measure. It might be possible to measure repeat business somewhat but it’s almost impossible to measure the word of mouth effect.
To sum it up, I think of Groupon as a shortcut with major consequences. The attraction is that you’ll get a lot of customers upfront, but once everything is said and done, you’ve lost a lot of money and the long term benefits are questionable.
My general philosophy in business is to focus on the long term. Instead of trying to get a one time flood of customers, why not put forth your efforts on making your business stand out? Be the store that everyone wants to shop at because you are awesome and not because of a coupon. Be the store that offers the best customer service. Be the store that gives customers the best shopping experience. Giving a one time discount isn’t going to win over any followers.
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Good post!
Price promotions are an easy tactic for short term gain. But, from a marketing standpoint, it’s always a better idea to focus on how you can better meet customer needs through those other ‘P’s', e.g. through improving the product/service mix and looking at promotions that add value to the brand, rather than potentially erode value, etc.
I have run a few promotional discounts on my own site, but it’s good to control how these are carried out. When you use a third party, I think it could potentially get out of hand. One thing that I have been thinking about is using a similar website service (a high traffic style site) to run a competition, where I can take advantage of the scale of their traffic/email list and their carefully targeted demographic audience.
I have to agree 100% here. Especially on the impact to your existing customers. Reward the heck out of them but in the end especially as a small business trying to compete on price is a no win situation.
[...] This post was mentioned on Twitter by mywifequit, David Ning, Nicole, Credit Cards Canada, Frugal Zeitgeist and others. Frugal Zeitgeist said: RT@mywifequit Should I Use Groupon? Don’t Be Tempted By The Dark Side http://su.pr/1zv95b [...]
Hi Steve,
Sorry, but I have to disagree (for a change!). From my own experience, I have used Groupon and become a loyal customer for a store. I got a discount the first time I bought, but have paid full price every time thereafter. It’s a win for the business because they got a new customer. It’s a win for me because I have a great place to meet a demand.
Also, I don’t think promotions reduce the perceived value of a product or service. We are bombarded all day long by promotional pricing for everything, and it is normal. This includes many luxury items like cars.
Yes, it’s true that the business owner can lose money on each Groupon. But deciding whether it is worth it depends on the business owner. If the business is a low-margin internet retailer, then the cost could be fairly high. But many real world stores offer goods and services at margins of over 50%.
Besides that, all successful businesses spend money and effort on marketing. How much are you willing to pay for a new customer? What is the LTV of a new customer? What is the value of having a customer that might promote your product on their blog, Twitter or Facebook?
I think many business owners would be willing to pay $20 or more for a new customer.
Also, another factor is your own expertise and success. 99.9% of business owners will never achieve your level of success. So, for you, the value may not be there. But I think that many other businesses could benefit. They don’t have blogs. They don’t understand social media. They don’t have the time or inclination to put together great marketing campaigns.
However, all those reasons leave out one important fact: perspective. You are speaking from a first-hand business owner’s viewpoint. I am just imagining the benefits to business owners who might benefit. So I think that your position may be more relevant.
you are a rarity, not the norm.
Groupon is not a bad idea, just generally not a good idea. It takes some tact to know what to do to make the most of an offer.
Generally, the higher profit margin you have, the more likely you have something to gain with offering a Groupon. Like the article said, it’s almost like giving people 75% off your regular price.
EXCELLENT post again Steve… I was just wondering about this recently and I am VERY thankful for this insight from you and I actually agree. I was hesitant about groupon and didn’t know why. It seemed like a great deal to get your name out there, but you are right… it doesn’t put the spotlight on the small business… among the many other things you mentioned! Wonderful info! THANK YOU again!
Hello, I just wanted to let you know it is hard reading your blog because the text is too small and the color is too light. I wanted to read the Groupon post but after a few sentences, I decided to write this comment. Thank you!
@Anna
Thanks Anna. I will look into increasing the size of the fonts on the site
As a retailer that’s considered and been invited to do a Groupon, I have to agree with a lot of what was said here. When I did the math it made no sense to me to do the Groupon unless I wanted to consider it a loss leader to possibly attract more customers.
In fact, once I had done the math, it occurred to me that I should jack the price up above what I normally charge, in order to not lose out completely. This means that I would risk alienating my current customers because my whole shtick is that I already charge low prices.
Groupon can be a decent deal for the consumer, but for the business, unless you look at it as a marketing tool and highly limit the amount of the product being offered, I’d pass.
@George,
The reason we are constantly bombarded with discounts is because they work, and because many customers have been trained to wait for them. What Steve is saying is that overly-steep discounts may cost more than the new customer brings in.
In the late 1970s/early 1980s, rebates and very low-percentage financing promotions came into fashion in the automobile industry. The best, most well-off customers learned to wait until rebates and low-percentage financing deals are going on. Only those who have to take what the dealer offers (those who are financially borderline) go in and buy at other times.
It is not for nothing that the big Detroit companies have had existential crises every 2 to 5 years ever since that time. It is because they have forgotten that customers want a good product at a fair price every time they go into a car dealer’s lot. If your prices are higher (like autos tend to be), customers also do not want to face “Monday morning regret,” where they go to work on Monday bragging about the deal they got, only to find that someone else got a better deal than they did.
For some businesses, Groupon may indeed be a good deal. For others, it may not. As I read it, Steve is telling us to proceed with caution, rather than to step on a potential landmine. I think that’s good advice.
I have used Groupon several times over the past year and became loyal customers to at least half of the stores and restaurants I purchased deals for. What stood out to me wasn’t necessarily the 50% discount (though it helped get me in), it was the food, service, merchandise, etc. I guess being new to Portland, its a good way to explore local digs.,
What I did not mention in my previous comment was how it feels being on the other end of Groupon. I never used Groupon for my business, but I used a similar company recently. Though I did like the influx of sales, I doubt I will have that many return customers (no matter how much ass kissing I do). Its the nature of the beast: Customers want cheap, to spend as little as possible, not pay for shipping, etc. If you’re not discounting your store within an inch of its life, they will move on.
@Carla
Excellent point Carla. The cheap customers are the ones that you don’t want for your business. The best customers are the ones who recognize value and are willing to pay for it.
This is a good warning post Steve, but it’s pretty harsh. If you approach Groupon as a marketing tool more so than a sales leading tool, there are some benefits…as long as you structure your deal well, you can raise awareness and avoid losing money…it’s not all bad!
Steve,
I think the businesses who use Groupon and LivingSocial and the like are banking on people buying the coupon, but then not using it withing the timeline allotted (1 year, 6 months, etc.) becasue they simple forget…
Taking your example, let’s say 5 people buy a $100 groupon at 50% off ($50). So, Groupon will take in $125 and you get $125. But let’s say only 1 person actually then uses the Groupon and gets $100 worth of items/services from your business. Then you’ve actually netted $25…
I think more people than we realize buy Groupons but forget to use them before they expire…I wonder if there are some stats on that…
-Leslie
@Leslie
That’s a good point. I’m curious as to what the statistics are for unused Groupons. However that being said, since Groupon is a marketing tool, if they don’t use the coupon, they don’t get to try your product and service which defeats the purpose. I’m curious how many stores actually make money using Groupon.
The other point to this, if they don’t use the voucher, the only group that gets the money is the state. Since the paid portion of the voucher (lets say $50 of a $100 voucher) is essentially a gift card, you are required to escheat that portion to the state if it doesn’t get used. It is not like its free money for anyone…
Maybe for info products where each extra product costs pretty near zero. Apart from that I think it is a terrible idea.
I’ve used groupon a couple of times and I have to say most of the time I will keep going back to that company if the product is good. For instance, I had been meaning to find a Beard Papa for so long, though there is only one in the city as I found out from the ad, I bought 2 groupons, shared with my friends and now we are dying to go back!
The only bad experience I had was with a package of dance classes that the studio wouldn’t honor shortly after the expiration date, and would even let me use them as credit toward full price classes. I was trying different dance schools but held out on going that studio since the experience left a bad taste behind, but that could have easily resolved on the company’s end.
Though I agree, for wedding products why use Groupon?
I never thought about it before but you are right. I’ve used Groupon as a customer a few times, mostly for spas. I love going to spas but hate paying a lot for it. So I keep buying the Groupons for spas. I won’t go back, even if I like a place, because I’d rather wait for the next Groupon deal from another spa. Why pay full price when I don’t have to.
Groupon are not good by these you can get huge focus at once but not much regarding future perspective people will look for another similar deal from you and most of them would be single time consumers. But its true that Groupon can be a very effective technique to enter in new market .
Overall, I think if you offer a truly unique product or service and you can really stand out among the crowd, Groupon is a worthwhile investment. But if you blend in with your competitors and just want to drum up some business, Groupon could put you in the red. The latter category is probably where a lot of businesses lie.
In my previous business we sent out coupons every month. The one benefit to Groupon that I think I see ( maybe I’m wrong) is that there is no initial cost. ie you don’t have to mail them out. After that it seems they are very expensive when used. A massive discount. I seem to remember that the couponing really started around 25 years ago. I was in the restaurant business then as well and the Entertainment book was the first big coupon push. We tried not to get involved for as long as we could. It’s interesting that eventually even McDonalds had to get on the coupon bandwagon, at least in Canada.
I actually love Dealfind/Groupons. I don’t own a business – but when I see a business I love, I buy. It’s a dog eat dog economy and frankly – they are gaining my business and taking my business away from another restaurant/ merchant. The fact is – they may not make a tonne of money, but the staff still makes tips, the alcohol usually is marked up…etc. I definitely will return to the restaurant/ store if i love the food/ experience/ merch.
[...] I started talking to business owners. Many said that they were losing a lot of money by doing these deals. Some said they wanted to do the deals, but they didn’t meet the qualifications that these sites require of businesses before they will feature them. Some said that they felt that the people that bought their deal never came back again and only purchased other deals. I found this echoed in articles like this: Using a Groupon takes the spotlight away from your business. After all, it was Groupon that provided your customer with the coupon and the unbeatable deal. It was Groupon that made your customers’ purchase exciting and fun. As a result, customers are more likely to brag about the groupon and not your business…read more about whether small businesses should use groupon at mywifequitherjob.com [...]
This is indeed a tricky one. The business should know the value of a customer. Hopefully it is a repeat customer or have the ability to upsell that transaction.
Often times advertising costs without bringing in any revenue. Even if you lose money on the transaction, you should get the customer’s Name and contact info to market to them at a later time.
Best,
Chris
Exactly. Imagine a website like Groupon EXCEPT where the profits went back to the customer.
http://bam.thecustoemradvantage.com
^There it is.
http://bam.thecustomeradvantage.com*
Groupon become a trend now buy go for it to bring new customers but do not go for to many time. Just like a shopping complex, one day sales, everyone will go for it. If you keep doing one day sales, then everyone will wait for your one day sales and you already change their human behavior on your product.
I been try to enter in Groupon promotion but too bad it only provide to business , that is foods, entertainment and relax purpose.
Is Groupon good for businesses over the long term?…
Short answer: it depends. Long answer: As many above have said, Groupon needs to be viewed as an alternative form of advertisement; it’s the closest thing to a CPA (cost per acquisition) model in the physical world. Used wisely, it’s a great way to g…
@carla what is the name of the similar company you use instead of groupon?
[...] There are many "Groupon Horror" articles out there…here's the most succient one I've found [...]
Thanks Steve…still deciding whether this applies to businesses like mine, which are online membership based? I think you’re right, however, that if one is selling a scarce good or service, Groupon may only be a good deal for the consumer…and for Groupon, of course!
@J Su Yin
Not sure about membership sites and how that would work for Groupon. I don’t believe that I’ve ever seen a Groupon for a product that requires a recurring payment but that might be something worth pursuing. There are other groupon-like sites for online business services like AppSumo which you may want to visit as well.
Hi J Su Yin, Just wanted to chime in here. If you are doing an online product and the cost of delivery is literally $0 then yes you should run on a Daily Deal Site! You’ll get more leads, exposure, traffic and buyer leads ( and a check from the Deal Site ).
What’s common is to offer 3 months for the price of one. Archives.com does it very well, dangerousguitar.com, flying photo school and many others. Imagine the upsells you can do as well as the list building you’ve done.
Done correctly – it will be a huge win for you!
Good luck!
Why not use Groupon as a way to extend your contacts? Sell your Groupon vouchers, when the customers come in explain you used Groupon as a one-off to gather names, you will do more discounts, but *NOT* via Groupon – if they leave their email you will tell them directly when they can get the same deal again. That way you:
- include your existing customers in future deals
- freeze Groupon out of the loop after the initial subscriptions, so save money
- make sure you *do* get repeat business from the exercise
Using Groupon without thinking how you’re going to leverage the service is the biggest mistake. If you just dumbly sign up and give away a load of cheap services blindly then sure, you’ll lose money for no real gain.
That is why other companies are making efforts to work more with businesses to offer daily deals that work for them…..and the ability to run more deals more often for different deals. Quirpo.com also is a marketing company that will do online seo for the business to increase their online exposure long term.
guys, do you know if groupon, or other social buying sites like groupon, in the US, accept a limit on the maximum number of groupons?? for example, can a small business owner negotiate with groupon that the deal is validated if groupon sells from X to Y coupons? (no less than X and no more than Y). Does Groupon accept that??
Yes, you just tell them that you want to put a limit on the deal. They will want the highest limit possible. (so that everyone makes the most money as possible)
very useful post, thanks……
I agree that Groupon will cost your business an Arm and a leg and no one will remember your business.
Good points, as always, about when to not use Groupon or other sites. But there are times when it works great. There is a “cost of acquiring a new customer” and when adjusted for in the “loss” on the voucher, a business can come out way ahead. We’ve seen plenty of businesses launch from near zero via Groupon. (and others shut themselves down!)
Great post. I have been thinking about doing a groupon but this post has made the decision for me. I could give 50% discount to get some new customers, but to then lose 50% of that, I don’t think so.
Thanks for the warning.
I came up with the exact conclusion when I looked closer at Groupons. I’ll go a step further and say …. Thieves!
Groupon can actually work to one’s advantage if we just know how to think outside the box and tap its potential.
[...] of using these daily deals as a marketing strategy can be devastating. Most small business owners fail to calculate just how much they will be giving away for free. It is not only about the product or service itself; it is also about having the proper staffing to [...]
[...] marketing company performing the campaign? Here is what others are saying about daily deals:Should You Use Groupon For Small Business?Should Your Company Use Groupon To Increase Sales?10 Reasons Local Businesses Should Not Use Groupon [...]
I hear this theory quiet often.
Let’s remember Groupon is a marketing tool (expense) and not a revenue center. Try traditional marketing it is quiet expensive and not always measurable. Groupon is a billion dollar marketing machine because people love it and it works.
Truth is – if you’re not utilizing it most likely your competitor is. No sane person feels ripped off after receiving a great deal at your establishment, remember they only compute the price they paid not the portion going to Groupon behind the scenes.
Hopefully they have a pleasurable experience and you may just come to mind next time they have need of something your business can provide them. I personally would give every person who came in a certificate for 10% off there next purchase to further encourage retention…
I agree with PhilIMS
From what I understand about marketing through promotions the best way to deal with this is not to look at profiting up front per se. The way to profit is on the back end. For example. Give the initial customer a promotion to get them in the door. You treat them exceptionally well with a great product and/or service and then when they redeem their coupon you give them another discount for inviting friends the next time. And give their friends a referral discount when they invite more friends, and so on, and so on. You see word of mouth is absolutely the best advertising you can get. I think it’s best to look at this as a long term business solution not as an immediate cash fix.
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Groupon is bad for business owner and consumers. Because business owners have to mark up the original price or cut down the quality or service to make up their discounts and Groupon fee.
[...] http://mywifequitherjob.com/should-you-use-groupon-for-your-small-business/ [...]
[...] http://mywifequitherjob.com/should-you-use-groupon-for-your-small-business/ [...]
Groupon sent me an email every day, however, I only purchase one deal per month. I’m always curious to check out the restaurants, spas, activities. I guess for a business owner, to raise awareness, letting people know your existence is not free. I remembered that when I had my business, i have to spend $3000 to put a half page ads on a magazine to raise awareness. So even if nobody buys any Groupon from the deal you offer, you get your name out to Groupon subscribers. If you wanted to buy a mailing list from marketing company, I believe it is $500 per 2000 emails.
Great post, but after reading all the reply here, still cannot decide if I should use it to promote my small business. I used groupon as a customer a few times and like some people said here, I really do not remember the store’s name. Can some body please tell me do I have to mark down 50% on price? does Groupon charge anything if it doesn’t sell? If I decided to sell through them, when do I need to ship my product to them, I am selling high quality pearl jewelry, are they going to be save on their warehouse? Thanks.