Should My Business Use Groupon?

Deals websites offer less value than businesses think .

Should My Business Use Groupon?

A good SEO company is going to look at the different mediums at their disposal to decide what is best for the client, and where is the best place to put money for advertising. One question that is always asked is if a business should use Groupon or another “deals” website to promote themselves. The answer is “it depends.”

So many clients contact us asking about social media campaigns, and usually for one of two reasons. The reach of social media campaigns can be huge, and Groupon and other “deals” websites utilize social media very effectively to spread the word about the deals. This does not necessarily mean that the customer is learning about your business, and instead they are generally learning more about Groupon.

There are pros and cons to offering deals for your products. The “sampling” form of advertising theorizes that if you get the products into the hands of the consumer, then quality experiences will lead to repeat business. However, when the customer themselves have been trained by the service to search for “deals” and not necessarily products, there is more to be considered than just getting your product into their hands. You very well might be giving product away to consumers who have no intention of ever coming back unless the price is equally as low as the deal price. We need to start thinking like the consumer who uses these services to find goods and services, and realize that they are more price driven than quality, if they are using the service in the first place. We need to think about how to convert a very difficult customer, and that is going to work differently than a typical customer.

Nobody doubts the ability of Groupon to expose your business to huge amounts of potential customers who would otherwise never hear about you. Your advertising budget is simply not large enough to communicate to that volume of people, so Groupon offers you the ability to pay with your products. The revenue split between yourself and Groupon will be 50/50, which means that if they sell a Groupon deal for your business for 10 dollars, you will be paid 5 dollars and Groupon will keep 5 dollars. You also need to factor in that Groupon will only sell your deal on their platform if you can offer at least a 50% discount off the regular price. This means that for every Groupon deal sold, you will receive 25% of the typical price you would sell for. This is a steep discount, and must be worth the amount of money it costs to produce the services or goods in lifetime repeat business. Here is where you are going to need to do some math on your own to decide if it is right for you. The typical redemption rates for Groupon deals are broken down by business-type. Spas typically show a 90% redemption rate, retailers show a 56% redemption rate, and restaurants show a 78% redemption rate. This means that you cannot count on making a profit the way typical gift cards are sold, counting on a low rate of redemption for something that you have already been paid for. If you own a spa, you can expect 900 out of every thousand sold to be redeemed. If you sold at a 75% discount on the 1,000, then the 10% that will not redeem but who have paid will hardly make up for the discount. Do not assume you will cover the discount cost this way because it only works on products that can be sold for an absolutely huge markup, or services that cost nearly nothing.

The main way to think of Groupon is as advertising, and the cost of the discount applied to a massive amount of people. If you would reach a targeted number of people through 10,000 dollars in media buys, then you can look at this the same way, as a 10,000 dollar media buy paid for with discounted products that you will lose money on. The real question to ask is if you have a strategy that will create repeat customers once they have used the discount. Unfortunately, this is where the numbers become more dismal from a business point of view. Groupon states that the typical rate of return business after the Groupon coupon has brought the customer into your location is 22%. This means that only 22 of every 100 people who show up and present a coupon that costs you 75% loss on your typical sales price will ever buy something from you again. This is a very low number statistically when compared to other “sampling” strategies. Typically, we as marketers feel that if we can get someone into your physical business and trying the products, we have a very good chance of creating a customer that will return. Groupon, however, creates a customer who is far more likely to never return than one that is going to become your loyal patron. We consider these types of clients “coupon customers,” or customers who have been trained to not buy something unless they feel they are getting it for a discount. These types of clients will actually avoid buying from you if they feel they are not getting a deal, and will move on to your competition if they feel the deal is better there. This type of customer is only beneficial if the product margin is extremely high, and can compensate. Basically, if you are better off with selling someone something for $1 than having an empty store, and the price it cost you to stock that item that you have just discounted is $50, and then you are going to go out of business very quickly if you cannot make up the difference on the next sale. If only 22% of people will ever make that next sale, and you cannot sell that same item for far more than a 50% markup, then you are not going to be profitable.

66% of businesses say they would use Groupon again after using them for a deal-promotion. We would speculate that most of these businesses either have products or services that fit the profit model or they simply believe that the price is worth it to get people in the door. As an advertising agency, we are charged with creating the most exposure for the client’s price paid…..and when compared to other forms of marketing Groupon sometimes doesn’t stack up.

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