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

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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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84 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.

  5. Beena says:

    Hi,

    I am developing a mobile phone app to directly link small businesses to local consumers, no middleman!

    I would love to run the idea by small business owners to see what you think about it. If you are interested to know more about the app, please let me know.

    1. Ashad says:

      i will be interested in please provide me with more detail. Thanks

    2. Virginia says:

      Yes, Im interested! Tell me more…. About to start small biz.

  6. Some Other Guy says:

    My wife did 1 Groupon and 2 Living Social deals about three years ago with her bed and breakfast.

    She made a profit on all three and walked away with a large hunk of cash each time.

    The secret with her is that she never ever bought into the claim that you have to give away your initial service at a loss because you will end up with repeat customers who will pay full price later. That isn’t true at all, because those types of customers drawn to deals are (from what I have seen) notorious cheapskates who also have extremely high expectations and are active about complaining via social media when they are unhappy and like to just go from deal to deal because the DEAL is the experience for them.

    She avoided channel conflict because she was offering the groupon / living social deals locally, and most of her regular guests are from out of town.

    In the end though, she still had to work her butt off to turn over and prepare all of those rooms for a very small amount of money per room night, compared to her regular rates.

    But I think she netted $30K that year from the set of three deals in a row, so it was real money.

    I would say that my wife is the exception to the rule about that kind of thing though, because she’s a CPA and MBA and former banker who understands all of the numbers and the model for innkeeping.

    Innkeeping is sort of like airline seats. If the room is empty for the night, you get nothing. If you fill up the room with a $75 guest, at least you made $75 minus the incremental cost of turning over the room.

    She structured it so that deal customers could only book on weekdays, when she is often empty anyway.

    It makes me extremely proud to know that my wife went head to head with two different value destroyers and turned a profit.

    1. Sheila says:

      Great… It takes a well thought out plan of execution. You can make money with coupon companies like Groupon and Living Social, you have to know the numbers that WORK FOR YOUR BUSINESS!!! Great story…

    2. So pleased to hear of people having success with the program.

      I guess at the end of the day it is a marketing tool to expose yourself to new customers who otherwise may not have found you in the sea of competitors. I do think it’s a good tool for this.

      Depending on your margin this may work out in your favour or cover your operational costs at least. Better than an empty shop.

      I think everyone here has paid for either SEO, flyers or such marketing that has either netted them zilch or can’t quantify the value, if any.

      I am a rep for Lyoness and although we have an existing large customer base in North America I could see how you could use groupon in combination…. ie get a flood of new (or returning) folks through the door and then have the opportunity to bind them to your business for an ongoing relationship or a piece of their future merchant purchases, even if not yours.
      It would be my pleasure to support your business success.

      1. Tamara Rogers says:

        Free mobile app included for small biz; along with your own Rewards Program card to use throughout your community.

  7. thanks a lot for sharing your experience.
    I have a small electronic online shop selling portable gadgets like speakers,solar charger….
    do you think approaching Groupon for advertising my business is a good idea in those niches?
    thanks guys for reply

  8. KIKI NG says:

    I would like to sell my products at groupon, but I dunno how can I do.
    Wish you can reply me as soon as possible.
    Thank You Very Much.

  9. jacko says:

    The people who buy Groupons are not what you should consider typical loyal customers; these are people who are just looking for a deal and they are all over the map on what businesses, products and services they will try. Also these “deal finders” are the most difficult people to please because they don’t tend to be the care so much about quality and experience as they do about getting a deal. The grouponers are not loyal customers, and can actually depreciate the experience for those loyal customers, by not providing good feedback to sites like yelp, everyone is disatisfied, and they merchant could find themselves starting to resent the grouponers, which may become visible to those loyal customers.

  10. adi says:

    it is depend on your business.

    example:
    i know china by heart i go there often.
    i use groupon to sell what ever product, even 25% from normal retail price, still leave me 500% earning.

    it is all depend on what business you are in.
    you can have groupon work for your benefit

  11. karl says:

    Do you think these deals would be an idea for a new business only starting out? Not for the repeat customers (the area we are going into will not have repeat customers) but for word of mouth and genuine reviews? We can afford to break even on the deals provided we dont give hundreds of them away (we were thinking about 20

  12. SmallB says:

    Don’t fall for shiny Groupon. They refused Google buyout offer since they make almost 50% of your revenue. For small business owners just stay away from using Groupon. Also like someone said above you will not get loyal customer from Groupon. The customers you will get from Groupon is the last batch of customers who might have looked at every single web site to pinch penny. They simply care less about your business except their pocket and it will be extremely headache experience to deal with them.

  13. Terry says:

    I never wanted to use them as customers start to get what I call the “Walmart Mentality” and will always look for deals from your business. It’s bad enough that I did a few coupons early on and posted them on retailmenot and people complain that they expired and ask for the latest codes. I haven’t done any discounts in the past few years but I can still look back and see it as a negative.

    I was approached by Groupon a number of times to do a deal and still get sales calls from these guys. I tell them I don’t like their fees and discounting my services by 75% causes more headaches than benefits in my mind. Also, a search of your business will link to your Groupon reviews usually on the first page of Google.

  14. Rosemary says:

    I am a massage therapist and just started working at a new spa. I really like my co-workers and working environment and the owner is great to. But I just found out the owner offers groupon package deals for massage and spa and on a groupon customer I am getting paid only about $10 an hour. I am used to getting more like $30/hr. Massage is hard work and that is not worth my time and energy so I am thinking might be time to move on. Too bad because I really like working there otherwise.

  15. john son says:

    you would be better to place a coupon add on your website for 75%
    or take 10% of your revenue and dump it into adwords, and 10% into website content and good written articles.

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