Should I Use Groupon? Don’t Be Tempted By The Dark Side

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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63 thoughts on “Should I Use Groupon? Don’t Be Tempted By The Dark Side”

  1. I am a small business owner and someone suggested I use Groupon. Short version of my story is i didn’t like the fact that they after all the fees have been deducted a business owner only receives 25% of the total price. The payment schedule is unheard of. 33% in 7-10 days, 33% in a month and 34% in two months. Those numbers were from A groupon rep in my email. Exposure for your business is the only good thing about Groupon.

  2. Mary says:

    Thanks for the article. After reading a few different opinions of Groupon I have to say I think it depends on the kind of business you are running. I think sites like Group and Restaruant.com are great for businesses who can get repeat customers fairly easily, like midlevel retail stores and restaurants. I personally always like to use things like Group to try a new place I have never been, then if it is great I keep going back.

    I don’t believe it would be a good idea for a high end business since part of the appeal for your customers is that your business is exclusive due to the price. You probably would only get new business from deal seekers and nothing else.

    I have a client who I use the trail offer tactic for a lot. She does makeup for weddings, prom, etc and we post on facebook right before wedding season and prom about getting a free make up trial run for liking her page. This tends to be especially effective with brides because they get to try you once and then they love it and use you for the big day as well as for the bridal party. I have considered trying an offer like this on Groupon but need to get more details. I was glad to read more about how Groupon charges businesses for their services.

  3. Thank you for this blog! I just received an email from Groupon and have currently been working on marketing for my online business and thought “oooo Groupon would be great”. After reading your article I agree with you that it could deteriorate the value of my product and business. I also had NO idea they took a 50% cut! Knowing that now is definitely going to make me take a closer look at the products that are offered on Groupon and question the quality of them.

  4. Mary says:

    Groupon is not worth the hassle. Yes they make you discount your services down to less than half and then take half of that. And yes the Grouponers (bottomfeeders) are loyal to Screwpon, not to your business. Screwponers expect the most, tip the least, are problematic in every way and are most likely to give you a bad review even after you’ve bent over backwards to make them happy. And yes Screwpon will “refund” the Screwponer even after the promotional value has “expired” and yes even after they come in and used your service. Screwpon will charge the merchant back and give the screwponer “groupon credit” never do they actually refund, they just screw another merchant so Screwpon never loses.

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