Considering Offering a Groupon? Read This First.

jgibbard
Jeff Gibbard President & Chief Strategist, True Voice Media LLC

Posted on August 17th 2011

 

I’m going to break down why I don’t like Groupon and why I think group-buying as it stands now is horrible.  I’m going to use Groupon in this post to stand for all group buying platforms (with some small exceptions).

#1 – Groupon does not make financial sense for businesses

Let’s get right into it.  Let’s say I’m a business offering a $40 Groupon to customers for $20.  I don’t even get $20, I get $14 after Groupon takes their cut.

Groupon's Cut

That’s 35%, I’m losing 65% of my revenue to bring in a (hopefully new) customer.

OK, so maybe you’re thinking “but what if I bring in a new customer that comes back again and again?”  Yes, that could happen, but is it REALLY worth it?  Even if you do bring in a few loyal customers, they would have to vastly overcompensate to allow you to recover the lost revenue from offering the Groupon.

Here’s something else…

#2 – Groupon buyers are bargain shoppers

You know why Apple makes so much money?  Besides great marketing, they stand for the value of their product.  They don’t discount, they don’t make special offers.  Apple customers are used to paying full price, they’ve been conditioned to.  I don’t care whether you agree with the fact that people do that or not, it’s the truth.  Apple sells full priced products.

Groupon on the other hand is creating a legion of bargain hunting shoppers.  How are you supposed to charge a customer $100 for a spa treatment when you just gave it away for $50 last week and a competitor of yours is giving theirs away at $50 this week?

This creates another problem…

#3 – Groupon does not build loyalty

Do you think Groupon buyers are coming back to your business or going back to Groupon looking for another deal?  Maybe you think you’re THAT good…you’re probably not.

Groupon encourages customers to come back again and again…to Groupon.  And they are there looking to get another deal, which we’ve discussed is at the businesses expense.

So…

..if it’s not financially sound for the business and brings in bargain shoppers with a low likelihood of loyalty, WHY OFFER A GROUPON?

A Better Solution

Here’s what I think.  I think offering a Groupon is lazy.  No seriously, it’s lazy.  You want to bring in new people?  You want to get more business?  Then stop focusing on these bargain shoppers; instead focus on YOUR CUSTOMERS!  If you have people walking in the door already, why not turn them into your marketing department.  Take some time to build a community on Facebook, Twitter or wherever your customers are and offer them the discounts instead.

Here’s an idea: Offer YOUR CUSTOMERS 50% off to bring in someone new (who will pay either full price or a slightly reduced price).  This way you are rewarding your existing customers with a discount AND getting new business at full or nearly full price.  They already come in, they already like you, why not use that to your advantage?

Here’s another idea: Why not build a strong Twitter and Facebook following of customers and people that already like you?  That way if things are slow and you are considering offering a Groupon, you can save yourself the cut that you’d pay to Groupon and bring your customers back in.  Reward your loyal fans and followers with 50% off, not just any stooge with an email address and a taste for daily deals.  You might even find that your customers will tell their friends.  And at the very least, you are saving yourself around 15%.

My point is this: if you are going to offer 50% off, why not offer it to your customers either as a reward for being part of your community or incentivizing them for bringing you new people that they would serve as word of mouth representatives for?
Why give Groupon 15% to bring you the wrong kind of customer?

Are you a visual learner?  Here’s what it looks like:

Untitled

Final thoughts

If you really feel compelled to offer a Groupon be smart about it.  Make the amount small.  In fact…
Here’s an idea: Offer a $2 Groupon for $1.  Plan something exciting and unique for those that get it.  Ask them if it’s their first time with you and if it is reward that tiny Groupon with something extraordinary. Maybe make a special menu entirely for people who bought the $2 Groupon.  Whatever it is, don’t just give a bargain, give an experience.  Do something different.
Or just buy a standard Groupon and throw money away trying to get new businesses.  If the math I just showed you didn’t make sense then you might be the right type of business to offer a Groupon.  Don’t worry about it too much though, your business will probably be closed soon anyway if you are that desperate that you’re willing to take 35% from bargain shoppers on the off-chance that it brings you substantial new business.  Good luck.

jgibbard

Jeff Gibbard

President & Chief Strategist, True Voice Media LLC

Jeff Gibbard is the President of True Voice Media. With keen insights on Social Business, Marketing, Relationship Building, Communications and Creative Problem Solving, Jeff has helped numerous business people see the value in embracing social tools and processes to drive business value.

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Comments

Posted on August 17th 2011 at 11:40AM

Little correction - Groupon don't just take 15% - they take 30%+ commission.. 

jgibbard
Posted on August 17th 2011 at 1:55PM

Wow!  I had no idea.  I looked into Yelp deals and they took 15% so I assumed that they were similarly priced with Groupon.  Thanks for pointing it out.  That makes my case even stronger!    

John Lynch
Posted on August 17th 2011 at 12:41PM

Groupon (Daily Deals) make allot of sense for allot of SMBs.  Start with some alternatives to bring clients in the doors during tough economic times.  $1000 for a billboard, $800 for print in a mag or newspaper, $300 a month for search etc....Unlike these options a daily deal is run with no upfront or out of pocket expense which appeals to many SMBs. 

Daily deals are not meant to be used as money makers but as marketing and advertising.Take a look a recent data:

38% were already frequent customers of the company.  In other words, existing customers, loyal customers, are getting significant discounts to buy what they might have bought anyway.  The added value is minimal, it erodes margins and potentially conditions the loyal customers to become discount seekers. On the positive side, 31%, are brand new business (new customers who weren’t aware of the company before the deal plus those with some brand awareness), 27% were infrequent customers, and 4% were former customers. That's at least 35% and arguably 62% of deal buyers that represent NEW business.  This is compelling data, and these are the customers that provide what the daily deal model is supposed to provide: bringing you new customers to try your business or products out.  Now it's up to you to do a great job in meeting their needs and satisfying these new customers.  And not only satisfy them but satisfy them to the level that will allow you to convert a percentage of customers to long term, loyal customers.

jgibbard
Posted on August 17th 2011 at 4:41PM

John I see your point, however, you missed several of mine.  You talked about alternative spends to bring people in the door.  My recommendation is to build a community, something that costs only time and emotional energy.  I agree that a Groupon is less expensive than the other methods that you mentioned.  My point is that it takes even less money to enrich your relationships with existing customers and have them so excited about your product or service that they tell others.  Let your customers market for you.    

Furthermore, Daily Deals ARE meant to be money makers.  All marketing is supposed be a money maker.  If your marketing has a negative ROI, it's bad marketing.    

Finally, 62% of deal buyers being "New" business doesn't REALLY help all that much if the business nets less than 50% of that revenue.  I don't find that the data presents a compelling case FOR group-buying, I think it provides a good case AGAINST group-buying.     

Posted on August 17th 2011 at 12:46PM

100% agree. In fact, there are many ways to get customers, reducing price to get customers is the most stupid way. Groupon creates price way in the market and create unloyal customers.

Posted on August 17th 2011 at 1:18PM

Agree with article whole-heartedly. Might take a step further and say we are starting to see small businesses in very competitive markets put themselves and each other out of business via the groupon fad, or at least out of the 'green' as they try to chase volume. This model does not create a sustaining atmosphere. Does not make sense for most businesses.

Posted on August 17th 2011 at 1:31PM

I agree with Anonymous #1... It's not 15%.  It is actually 30% 

Posted on August 17th 2011 at 1:50PM

Groupon seesm to facing osme hurdles these days. Bad publicity, possible illegal activity in Alberta. Can the holiday be over? I also wrote a blog pst on the group buying experience a shor time ago.  Check it out at bargold.ca.

Posted on August 17th 2011 at 2:01PM

The points you make are excellent, and good advice for most businesses.

However, your pie charts are completely off... Groupon and the Business get part of the 50% the customer pays, not the "other" 50% that would make the pie total 100%.  You'd be better off outlining half the pie in the "customer pays" color, and then breaking down which part of that 50% goes to which party, leaving the other half the pie completely empty to highlight that no one gets that $$.  (Although, I suppose it could be said that the "customer keeps this half in their wallet").

I do think you are spot-on in your text-based logic, though.

jgibbard
Posted on August 17th 2011 at 4:47PM

You are correct that the pie charts are off.  Now that you mention that I can see your point.  Hopefully the idea came through that Groupon and other daily deals are not worth it.

To summarize, acknowledging that Groupon's cut is 30% not 15%:

  • The customer pays $20, gets $40.
  • The business receives $8 for $40 worth of product or service, after giving Groupon the 30% cut ($12) and $20 to the customer
  • Groupon makes off like a bandit with $12 for facilitating this "good-for-customer / horrible-for-business" transaction.
Posted on August 17th 2011 at 2:21PM

You make some valid points. Offering a group buying deal can be a bad experience for the retailer if enough thought isn't put into your deal first. 

We have a group buying platform (fashion and lifestyle niche, and we take a discounted cut compared to industry) as part of our services and have run into these same problems. Our mandate was to bring our clients new, loyal cutomers; as well as, introduce our members to these new retail stores by means of a great offer. Here's the trick we came up with that has our clients experiencing an average upsell of 35% over face value of the coupon - we insist that our retailers let the customer use two coupons per purchase. Why does this work? Let's say the offer is $25 for $50. If the customer can use two, they generally buy two. Now they have $100 to spend in the store. This creates a situation that benefits the retailer most times: they either find something worth exactly $100 or do one of the following - use the coupons in two seperate visits and spend the extra money each time, or find something worth over the $100 and spend the extra money in the single visit.

How does the consumer benefit, besides the deal they just received? By what we tell our clients - the most important thing for the retailer to do in to prepare the staff properly. They need to be capable and know how to treat these new customers like GREAT customers. If you treat them like bargain hunters when they arrive, that's what they will be! I believe that literally everyone on earth would rather have a deal than not - even with Apple I get a 5% discount because I am a business customer... I LOVE it! Who wouldn't? So, knowing that simple fact, and looking at it as an opportunity rather than a problem, provides you with a situation that can and will be a positive experience for your business. Treat your new customers right, and they will come back!

Posted on August 17th 2011 at 2:42PM

You couldn't have said it better! I can't stand these daily deal sites and think they are ruining business.

Posted on August 17th 2011 at 3:52PM

Your points are valid, and others have voiced the same opinions, but I think labeling all daily deal purchasers as bargain shoppers who aren't loyal and will never return is not 100% true. I think the advice to give is that businesses need to be more discerning. Daily deals aren't for every business, but it might make sense in the long run for some.

jgibbard
Posted on August 17th 2011 at 4:50PM

I wouldn't say that ALL daily deal shoppers are bargain hunters, but I'd say it is more appealling to bargain hunters thereby increasing the likelihood of the shopper being a deal seeker.  I agree that businesses need to be more discerning, and a good way to start is to do the math on daily deal sites...it doesn't add up for businesses.  I think very few businesses will see long term success from a group-buying strategy.

Dale Little
Posted on August 17th 2011 at 3:54PM

I think your points are very valid.  Unfortunately, for a variety of reasons, many business owners jump on each marketing band wagon that drives by.  There really is no easy way to build a business, but focus on existing connections and customers is much more cost effective and (with consistent effort) highly profitable.

SalesAddiction
Posted on August 17th 2011 at 4:00PM

I have never bothered to do the math but I've wondering for some time how this can make money for retailers. It just felt bad.  Thanks for putting this out there.

It seems to be one of those things that people jump simply because it's trendy.   

Posted on August 17th 2011 at 4:00PM

Groupon SUCKS! I am not sure where you are getting the math though. I just ran a Groupon and this is the math:

I did a $10 for $20 at a restaurant. That means that Groupon and I split the $10. So I get $5 and Groupon gets $5. Then I absorb all of the hidden fees such as credit card processing etc. I now get about $4.50 for a $20 dollar voucher for some cheap-ass, non-tipping, deal seeking leech who will never be back into my restaurant. Instead, Groupon's swarming locusts head next door to my competition when they have a Groupon. Then on to the next deal. They have no loyalty except to Groupon themselves. They are deal seekers, and now can afford to go out twice as often as before. 

They look at the menu, price it out and spend maybe a dollar more than they need to fill out the amount on their voucher. 

Groupon will work for service businesses such as a gym or yoga, because these "extra" customers that are brought in by the "deal" aren't expending product, just space which is a fixed expense and is already paid for.

Ultimately... these "group buying" sites suck for most businesses, but business owners will have to find out for themselves before they find out the hard way like I did. 

Groupon screws you!

jgibbard
Posted on August 17th 2011 at 4:53PM

You are correct, and as others have pointed out my math regarding Groupon in particular is incorrect.  I meant to use Groupon to stand for ALL group buying sites (with some small exceptions).  The math I used was actually based on "Yelp deals."  From what others have said, Groupon is even worse.  Your comment further exhibits the point.  These daily deal sites are bad for business and this is likely going to be their downfall.  Of course customers love them, but that's not a reason to keep offering it as a business.

Thanks for the comment.

Posted on August 17th 2011 at 4:35PM

This was a very interesting article. Restaurants are either using a Groupon method to bring customers in or turning to loyalty programs.

Posted on August 17th 2011 at 5:29PM

You have some valid points, but what is the cost for print coupons? or for any print adveristing? What are the percentages of new customers it brings in?

jgibbard
Posted on August 17th 2011 at 10:06PM

I don't have figures on that Mary, but I'm also not making the case for those methods either.  

Posted on August 17th 2011 at 5:41PM

If you buy an ad in a magazine you get no cash back for your trouble and you also have no way of really knowing how many people actually noticed your very expensive ad - we all know the mags and papers inflate their readership figures. And did their reader even see the page you were on? With a daily deal site you know what sort of exposure you are getting - they push your brand for the day to their entire database, targetted to your local area - AND you get some pocket money. You may absorb some costs when people redeem their deals (but not everyone does - how many giftcards have you forgotten about till after they expire?) and if you are clever, when they walk through your doors you convert them to a loyal customer, or inspire them to recommend you to their friends. Businesses that are worth paying full price for will get those people back. Run a good business? Daily deal sites could open a hole new world for you. Run an average business, or not sure how to convert people, at worst it's a better value ad than one in traditional media, with a cash-in-hand rebate.

jgibbard
Posted on August 17th 2011 at 10:05PM

Can't say I agree with you at all Anonymous2.  

First of all, creating an ad, whether it is in print or digital is measurable if you do it correctly; most people just don't do it correctly.  Additionally, this post makes no claim about the effectiveness or lack of effectiveness in any other form of advertising or marketing.  This post is about the very clear case that group-buying is a poor use of resources especially when compared with building a loyal following instead.

To your point about "being clever and converting them to loyal customers" and running a good business vs an average business, my argument is only validated.  Good businesses shouldn't need to give away upwards of 65% of revenue.  Those same dollars could be spent in-house making a better experience for those that buy full priced goods and services or incentivizing current customers to bring in new business.    

Simply stated, group buying is a lazy and ineffective way to use capital to generate new business compared with the alternative of expending emotional capital to increase the likelihood of positive word-of-mouth.

Posted on August 17th 2011 at 7:35PM

Unfortunately, we are building consumer loyalty to Groupon & NOT  to the individual business:(

Posted on August 17th 2011 at 9:50PM

Totally agree with the article ... Deal of the Day campaigns like Groupon allienate existing clients, destroy brand and impacts the long to medium term pricing margin of the business.  A business has to explain to loyal customers why they only heard of the deal through a third party (e-mail from Groupon), the number of cheap coupons issued normally impacts on the ability to provide a quality service (hence brand destroyed) and it is hard for the business to start getting normal prices again as the mind set with customers (old and new) is that the business is prepared to give steep discounts si way stop now ...do it always!

 

RobbinBlock
Posted on August 17th 2011 at 10:46PM

Create a product/service people want to buy, promote it strategically and well, and you may not need to go to the strategy of last resort. You're giving away your hard-earned cash. Coupons are advertising; nothing more, nothing less. If you do decide to use them, make sure you're getting a good ROI. They work better in some situations than others. Visit my blog to get more pros, cons and tips on couponing.

Posted on August 18th 2011 at 9:02AM

Hi Jeff,

 

I completely agree with your article, I like the simple way you have put the thoughts across, some people just dont see it like that, they get caught up in the hype...

what about this: www.flubit.com appears to be groupon with a twist and seems more sustainable for retailers and customers... any thoughts?

 

 

Posted on August 18th 2011 at 10:57AM

I think this article makes a number of dangerous assumptions. Even as basic as the difference in cost and profit. I'm going to make an assumption myself that any company getting involved in Groupon has worked out the point where they are actually losing money on their products (rather than breaking even). If a company hasn't done this then their problems are a lot bigger than their use of Groupon as a marketing tool. 

Secondly, not all businesses are like Apple where people buy into a brand and are willing to spend over the odds (there's no arguing with that!) for a specific, desirable, product. A lot of companies over inflate their prices with the pure aim of seeming like you are getting a constant bargain from a sale (I direct you to nearly all bed and furniture retailers as well as many tech companies). Let's not forget that a portion of society will only buy what they perceive as a 'bargain'. If you're willing to ignore that market (which i can only guess is actually quite a large chunk) then, again, you either have an amazing business like Apple or you have wider problems. 

Thirdly, the number of people who buy a Groupon isn't representative of the number of people you get to directly advertise to on a daily basis. I have been prompted to return to my favourite restaurant (at full price) after seeing a Groupon voucher, missing the buy date but going anyway. For companies that work on word of mouth, as you were describing, even if someone has purchased a voucher, it's not to say they haven't spoken about the experience which has brought in their friends or family members at full price. 

Finally, your first pie chart makes no sense and your arguments are not backed up by any evidence. Neither are mine; but I'm not the one writing articles without all the facts to hand. Groupon may be a company in crisis; jumping on the bandwagon isn’t going to help what is actually quite an innovative idea with many repeat customers (both consumers and service providers).

 

jgibbard
Posted on August 18th 2011 at 2:08PM

I agree that the first pie chart is off.  Here is a more accurate one: https://skitch.com/jgibbard/ftybj/groupon

Beyond that let's get REAL, there is a reason why more than 50% of businesses say "NEVER again" after offering a Groupon.
[Source]: http://www.businessinsider.com/groupon-survey-results-2011-7 

Or "Worst decision I have ever made"
[Source] http://www.huffingtonpost.com/2011/06/10/groupon-merchants_n_874896.html

Financially it simply does not make sense especially when you compare it to the alternative that I describe: building a community and offering them the discount instead and keeping the 30% that Groupon takes.  This isn't a jumping on the bandwagon article, this is basic math.  What sort of evidence would convince you beyond the basic math that it's not a good financial move and that most businesses that run a Groupon say they wouldn't do it again?

You may not be the one writing the article but you ARE commenting, so unless you have data to contradict the claim I'm making I'm not sure how you can claim Group-buying creates "many repeat customers."  

How about this: "Only 1% of Groupon customers become long-term merchant customers..."
[Source]: http://www.businessinsider.com/groupon-merchant-churn-uk-2011-6#ixzz1VOARJJs0

Finally tell me where I'm getting cost and profit wrong?  If I can have new customers come in at full price and repeat customers come at a discount (thereby incentivizing repeat business) OR I can offer 50% off to anyone AND THEN 30% of the remaining 50% to Groupon...which is the better profit model for the business?  Who is MORE likely to tell others about a restaurant or spa: the one the goes all the time, follows on Twitter and Facebook, and just got an awesome new discount OR the daily deal shopper that comes in and spends $5 more than the Groupon?  

I await your response. 

Posted on August 18th 2011 at 4:27PM

Apologies, I only saw the first part of your reply. In response to the second reply:

From what you’ve showed me 46% or so said they would consider using a Groupon again. Correct me if I'm wrong but 46% repeat business is pretty good for a transactional organisation.

The organisations who say ‘worst decision I’ve ever made’ I'm sure you can find evidence of this for every service offered to businesses. How many people complain, at length, about recruitment as a service? They take a 15-20% fee for their work but it seems to be a business model that works. People are aware of the related costs, pitfalls etc but still use them. Why? Because it’s a service that works, for some people. Not everyone, but enough to keep a massive multi billion industry afloat.

I agree that building a community and offering them the discount and keeping the 30% that Groupon takes would probably make you more money in the long run, if you have the patience to build a business by word of mouth alone (you’re argument doesn’t take into account marketing or advertising so we’ll stick with that). Many don’t see this as the best way to build a business full stop; hence we also have companies dedicated to marketing, PR, advertising etc... all services that could replace Groupon’s 30% fees with no promise whatsoever of people through the door of your business. If you actually have a strong, viable, attractive business and you’re confident that all people need to do is find you, Groupon seems like a great option.

I can’t use figures to argue against something you haven’t provided figures for! I'm talking about what a company can realistically sell a product for without losing money. Some services (dentistry for example) I'm sure can afford to offer 75% off their usual prices. I suspect they also slim down their offering for a Group on deal (what would have lasted an hour for 100% only lasts 30 mins for the 35% they get from a Groupon, meaning they only ‘lose’ 15% to Groupon). Again, if it isn’t viable to a business it is them at fault for not understanding what they are getting into or managing the risk properly.

You just can’t blame Groupon for some people not understanding the business risks (which are associated with any service).

Your last pint is correct; that is a great model to work from. If I was running a business I would use that over Groupon time and time again. But I don’t run the business using Groupon, nor do you, and it’s only these people we can blame for the failures, not Groupon itself. 

jgibbard
Posted on August 19th 2011 at 4:36AM

Again, to be clear, I'm, not blaming Groupon.  I presented my case for why I think it's a bad idea. If people choose to offer a Groupon, more power to them, I hope it works out, but if it doesn't the blame is on them for not considering whether Groupon is a good idea or if there is a better, more cost effective alternative.

You mentioned recruiters. I don't feel like recruiters are a good comparision to Groupon.  I think recruiters are more similar to the alternative strategy I propose.  A good recruiter doesn't just go out and blast a job posting to anyone and everyone looking for a job, they find people that match a profile.  Recruiters often leverage their network to get the exact right targeted fit for a company. Businesses that use Twitter and Facebook to build a following will need to leverage their network of existing customers and seek out individuals that fit the target audience they want to build awareness with.

To summarize, I'm not disputing what Groupon has the potential to do if all the circumstances are right, I'm saying that, in general, there are better, more cost-effective and more targeted alternatives that have a greater possibility of long-term financial gain.  

Posted on August 18th 2011 at 8:40PM

Did you READ the Business Insider "study" 50% of SIXTEEN businesses said they wouldn't do it again. That is NOWHERE near a statistically relevant sample and referencing it hurts your credibility.

I could easily find 16 businesses that said they would re-use Groupon. If I published a study that said 100 PER CENT of businesses would re-use Groupon would that have any warrant?

The value of Groupon is the HUGE audience it gets your business name in front of. Stop thinking of it like a sales tool and instead like an advertising vehicle and it makes sense. The beauty of it is you can actually MEASURE it's effectiveness in terms of getting people in the store. You can't do that with a newspaper ad--which is something many small and local businesses still do.

It's not for everyone, and there needs to strategy and thought put behind its use. (Make sure you know the terms, don't bankrupt your business) but there's no denying that it can be a very effective tool for getting the word out.

Not all Groupon buyers are bargain hunters only. Everyone loves a great bargain and I can name at least five businesses that I've become a loyal patron of because I bought a groupon once. To say it's a bad model is a little ridiculous. There are tons of happy and successful businesses who have used it effectively, they just don't make the news, because it's nothing unusual.

 

Posted on August 18th 2011 at 9:11PM

Kelly, I completely agree!

I, too, have become a loyal customer of at least 5 businesses because of a groupon that I've purchased once. I routinely go back to certain businesses and pay full price based on trying it at a discount the first time I went. And it's not just one type of business, either... personal care, entertainment, restaurants... they've all been places I've become quite loyal to.

Not only have I become a loyal patron of these establishments, but I've also used word of mouth to get others to try it. For example, my family bought a groupon to try a wakeboarding class at a local lake recently. We tried it and had a blast. A week later we went back... and took more people with us. Not only have we been back multiple times, but those that we took, and yet others that we didn't take, but instead told about it, either by phone or by social networking sites, have also become loyal patrons and returned more than once... all because we bought ONE groupon. That ONE groupon we purchased brought them over 20 new customers who paid full price, on at least TWO visits, with hopes to return more in the future. I'd say that's a success.

The sample size for the Business Insider study is ridiculously small, to the point that it's laughable. They have such a small sample size, and yet there are so many businesses that use groupon, which almost makes me think they went with such a small sample size to skew the results in their favor.

 

jgibbard
Posted on August 19th 2011 at 4:10AM

Is Groupon or what I've proposed as an alternative a more targeted approach?

Is Groupon or what I've proposed as an alternative a more cost-effective approach?

You said to stop thinking of Groupon as a sales tool and to start thinking of it as an advertising vehicle.  So let's call this advertising.  I'm curious what you think the purpose of advertising is?  It's to generate sales.  Good advertising is targeted, Groupon is a blast.  Good advertising maximizes ROI,  Groupon is more expensive than offering a straight 50% to existing customers.  

Yes, there are examples of businesses that benefit from offering a Groupon.  Yes, Groupon can help you reach a large number of people.  Yes, Groupon may lead to repeat business.  And yes, Groupon will allow you to raise awareness more quickly.   

So, if you want to offer a Groupon...offer a Groupon.  If you want to use it as marketing, use it as marketing.  If you read through my entire post, you'll see I didn't once advocate for printed coupons, tv ads, radio spots or anything else. 

The only thing I offered as a better alternative is to build your business starting with your customers first.  Incentivize and reward your customers to bring in new people.  I also recommended that a Groupon could be used creatively such as offering a very small amount just to get people in and then going above and beyond.

I don't have stock in Groupon or any other group buying platform.  I don't have a horse in this game.  My perspective is that it's not the best use of resources, you are free to disagree with that.  I'll be advising my clients to focus their time, money and energy elsewhere.  

jgibbard
Posted on August 18th 2011 at 2:16PM

One more thing: Do me a favor and tell me what percentage of businesses can actually afford to offer 65% off regularly?  Here's the math: 50% loss in gross revenue to the customer and another 30% of the remaining 50% in gross revenue to Groupon totalling 65% less gross revenue.  

To put it simply, a company sells something for $100, how sustainable is it for that company to sell it for $35.  Can they possibly break even or generate even a tiny profit?  Even furniture companies?

Posted on August 18th 2011 at 3:43PM

That wasn't my point. And, actually, I suspect some companies can afford to offer something for £35 that they retail at £100. Especially as it's not a permanent offer. Also, the number of companies who offer the same groupon week after week; I'm assuming they'd have gone bust already if they were making a loss. 

My point was that if a company doesn’t tie offers like this into a business plan, where they either break-even or make a small loss at the expense of exposure/marketing and future repeat sales then there is a problem with the organisation. 

Groupon offers a service, this service has associated costs, which I'm guessing are in the contract and explained upfront, if a business uses this service without understanding the associated risks/rewards then, to be frank, the company deserves to go bust. 

If I owned a company and spent £100K on advertising and I only made £35K sales out of that, I'd be in a similar position (worse, in fact). 

Your article is essentially blaming Groupon for poor company practice. Any service like this initially is a risk, but what in business isn't until it’s tried and tested? 

jgibbard
Posted on August 19th 2011 at 3:46AM

I'm not blaming Groupon,  I'm stating a case for why I think businesses should think twice about offering a Groupon.

My point was that using a Groupon is a specific marketing decision.  

It is a decision to blast out a 50% off coupon to anyone that is looking for a deal.  This is the target audience, they're on a daily deal website.  In order to reach this demographic you must forfeit approximately 30% of the remaining revenue from the sale of that Groupon, leaving you with 35% of the cost of product or service.  That's $35 for every $100 worth of product or service. 

If you were to decide that you wanted to offer a discount, I would argue that it makes more sense to offer 50% coupons to your customers and give them one coupon for a friend.  That's $50 for every $100 worth of product or service and it comes with a referral.  You net 30% more money and your discount is targeted to existing customers and their network.  Do that, create loyal customers and keep building outward from your community.        

Unless the business has fixed costs, like with a Vineyard or is trying to clear out old stock items, Groupons don't make financial sense.

I love them as a customer because who doesn't want 50% off?      

Posted on August 18th 2011 at 5:36PM
Groupon can be beneficial, it just works better in certain industries and situations than others. For instance the hotel industry does this everyday with most of the individual sales they make. i.e. expedia and travelocity basically do the same thing. And having worked in hotels for many years they still make money from this sale plus the add on sales where people spend money in the different outlets. Hotels also limit these sales to make sure they get peak rates when demand is high and supply is low. Air fares are done the same way Groupon also works well as an introductory offer for w new business and gets great exposure. Most restaurants do this when they open anyway and Groupon on is a good way of getting in to an instance market. I'm not saying that Groupon is perfect. If you run a spa and you offer a discount one week and your next door neighbour does the same thing the following week but there isn't enough demand to fill both then you are doing nothing but de-valuing your products/services. Also if supply outstrips demand unless you differentiate and offer a superior product & service (ie apple) then you have to question being in that market.
jgibbard
Posted on August 19th 2011 at 4:17AM

I agree with everything that you wrote.  To be clear, I don't think Groupon is entirely bad.  Groupon DOES work better in certain industries and it is a great way to get big exposure for new restaurants.  I think many businesses just hop into the Group buying game without fully considering the implications. 

Posted on August 18th 2011 at 8:49PM

Jeff's point is right on target.Playing with Groupon degrades your brand, your core value promise and the quality of your customer base. What Groupon does is easy to replicate. Hire a college grad and have them build a social network for your business and distribute exclusive coupons.

Or better yet, give your customers a free meal for bringing a friend (they'll end up treating most of the time). This way you extend the brand by creating a brand ambassador and avoid the garage sale crowd.

pbforsberg
Posted on August 18th 2011 at 8:59PM

Good point about Groupon -

One of our clients have offered it in their business and have had good results.

However, let me quantify a little bit. They have a boat that transports passengers. It sails on a regular schedule so fixed costs are already accounted for with existing business.

The boat usually sails at 45% capacity - the Groupon has helped increase payloads to 85%. So far, so good -

HOWEVER - the season is not yet over so the ability to track and measure the actual sales/ redemption rates are not completed. Once this is done we will have a "Good" handle on whether it was profitable or not.

I would imagine, in a business that has relatively high COG (Cost of Goods) expenses, margins will be quite tight unless the business owner knows the new customer acquisition cost, annual value of a customer, lifetime value, and redemption rate of the Groupon. (we are currently building that data for our clients)

I have asked other business about this in regard to Groupon and all I have gotten is the "Deer-in-The-Headlights" look.

 

We have a couple of restaurant clients we do marketing for and have been steering clear of Groupon. Instead, we promote specials, include desserts, do birthday promotions to existing clients via a weekly email campaign. Business for them is up an average of 21% week to week comparison over last year while others are starving and offering 2-4-1 specials, and I assume participating in Groupon.

 

Thanks for the post -

 

Posted on August 18th 2011 at 9:00PM

Great article and very insightful.  As a physician, I have seen a number of my colleagues jump into this business model without really thinking about the ramifications.  Simply getting warm bodies into a medical practice is not the goal.  The goal is to get the right warm bodies. 

That being said, I do not participate with Groupon and just try and incentivize my clients directly.

 

Great article!

Posted on August 18th 2011 at 9:02PM

 

I respectfully disagree... Groupon does build customer loyalty in many cases, especially if you have a business that offers a totally unique product or service. For example, here we have a "cable lake" that allows you to do watersports like wakeboarding with a cable (instead of a boat) around this small lake. We purchased a groupon for it, and had never heard of it really prior to that. Following that, we went and had a fantastic time! After buying one groupon, we have gone back on 3 separate occasions, paying full price, because we had a great time.
Furthermore, there is word of mouth involved. We went to the cable lake, and had fun. Each of us who went told at least 2 people about it. We also all posted on facebook about how fun it was, and posted pictures representing that. From there, some of the people we told began going regularly, at full price, and started telling their friends. The business owners have acknowledged how much business has been brought in by people who tried it once with the groupon, but started coming back because they had so much fun.
And yes, if you don't have a unique product or service (like if you're a salon or boutique), customers will probably return to groupon instead of returning to you. But consider this: I have bought 3 separate groupons for pedicures. I went to three separate locations, giving groupon my business, not the pedicure places. However, after going to three different ones, I realized that the second one I went to offered the best service, and I began going back to them for my pedicures, with or without groupon. Did I initially take my business back to groupon? Yes. But in the long run, my business ended up going back to the business that offered the best service for the best price, rather than continuing to go back to groupon.
I don't think groupon is right for every business, and I also believe that offering a benefit to existing customers that bring in new customers is a great way for a business to generate a larger customer base, like the article you posted suggested. However, I also think that for a newer business or one that is hoping to re-new interest in the company, Groupon can be a great way to regenerate that interest. I think it's up to the individual business whether it is right for them or not.
However, that's just my opinion.

I respectfully disagree... Groupon does build customer loyalty in many cases, especially if you have a business that offers a totally unique product or service. For example, here we have a "cable lake" that allows you to do watersports like wakeboarding with a cable (instead of a boat) around this small lake. We purchased a groupon for it, and had never heard of it really prior to that. Following that, we went and had a fantastic time! After buying one groupon, we have gone back on 3 separate occasions, paying full price, because we had a great time.
Furthermore, there is word of mouth involved. We went to the cable lake, and had fun. Each of us who went told at least 2 people about it. We also all posted on facebook about how fun it was, and posted pictures representing that. From there, some of the people we told began going regularly, at full price, and started telling their friends. The business owners have acknowledged how much business has been brought in by people who tried it once with the groupon, but started coming back because they had so much fun.
And yes, if you don't have a unique product or service (like if you're a salon or boutique), customers will probably return to groupon instead of returning to you. But consider this: I have bought 3 separate groupons for pedicures. I went to three separate locations, giving groupon my business, not the pedicure places. However, after going to three different ones, I realized that the second one I went to offered the best service, and I began going back to them for my pedicures, with or without groupon. Did I initially take my business back to groupon? Yes. But in the long run, my business ended up going back to the business that offered the best service for the best price, rather than continuing to go back to groupon.
I don't think groupon is right for every business, and I also believe that offering a benefit to existing customers that bring in new customers is a great way for a business to generate a larger customer base, like the article you posted suggested. However, I also think that for a newer business or one that is hoping to re-new interest in the company, Groupon can be a great way to regenerate that interest. I think it's up to the individual business whether it is right for them or not.
However, that's just my opinion.

 

jgibbard
Posted on August 19th 2011 at 1:58PM

I have 0 disagreements with what you wrote.  Good points.  Your experience with the lake and how you reacted to it afterwards are a great testament to the potential positive outcome.  

Newer businesses can use Groupon to spread the word far and wide.  Unique products will likely benefit because less people are actively searching them out and the net gain is potentially huge by reaching an audience currently unaware of the product or service.  

I think the point I'd like to communicate is simply that a business should think long and hard about whether offering one is the right move.  In some cases it is, but in many (and I would argue: most) cases businesses are turning to Groupon without fully considering the potential negative implications.  That's not Groupon's fault, it's the same as any other bad marketing decision.  As many of the companies I've seen offering Groupons have very low margins and small budgets, I feel they are better off working on their core audience and existing customers.  Once a community exists it makes more sense to look beyond that for new customers.

Posted on August 18th 2011 at 9:02PM

I agree with most of your points but there are a few exceptions where Groupon is a great deal. I did PR for a company that was trying to increase membership. We were doing pop-up events giving away memberships that would normally cost people $35. If potential members paid attention they could have gotten free membership at a bunch of events. We offered the groupon for 1/2 off membership ($17.50) and got a bunch of people to sign up! We didn't make much on it but it was a lot more than 1/2 of $0. With my current company Groupon would never work. Our services are much too valuable to give away.

jgibbard
Posted on August 19th 2011 at 1:49PM

Fair enough.  Good example.  What happened when the membership expired, did the people from the Groupon come back and renew at full price?

Posted on August 18th 2011 at 9:17PM

Well, said Jeff. Since last year we have been talked to local businesses that have run Groupons (and other daily deals) and we hear the same thing over and over - they clearly spell out the disadvantages that you have spelled out.  

Here is where I disagree with your overall premise: I would not go as far as saying the Groupon is "horrible" for businesses.  Groupon is great for CUSTOMER ACQUISITION and as we all know,  customer acquisition is expensive.  Customer acquisition is necessary for local businesses to grow their businesses so Groupon has a role to play in helping local businesses acquire new customers for growth. Local businesses should not blame Groupon. Instead, they should focus on customer retention activities AFTER acquiring customers via Groupon. The majority of local businesses have never focussed on customer retention , it has been a problem that has plagued local businesses for decades and all Groupon and others have  done is just amplify the problem (they have NOT caused it). An analogy here is that you do not put an ad in the paper and expect customer retention - customer retention is an activity that you undertake after the customer walks in the door - and we don't blame newspaper do we? At Infinite Customer, http://infinitecustomer.com , we have built a product that takes over where Groupon and other daily deal companies leave off - we have built a solution  specifically for local businesses that helps them retain their daily deal buyers and turn them into profitable repeat customers. When it comes down to it, it is a business fundamentals problem on the side of local businesses, so let's not pile on Groupon, they are just providing a customer acquisition service (at a cost that local businesses are willing pay).

jgibbard
Posted on August 19th 2011 at 1:48PM

I completely agree with you, it is not Groupon's fault, the problem is the businesses are failing to retain customers.  I am not blaming Groupon for anything.  Groupon is a service and I feel there are better alternatives that businesses should consider first.  

I think it is a poor use of resources to spend the money offering a Groupon when that money should be going towards building an environment where customers come back over and over.  If everything is ducky and the business is growing and has some money to burn offering a Groupon to expand their reach, that is fine.  The problem is many businesses turn to Groupon to "get people in the door" because it is slow and then don't plan for how they are going to turn those customers into loyal customers.

 

NickBowditch
Posted on August 18th 2011 at 10:22PM

Good article.

What about running your OWN Groupon style campaign? With your existing (or new) customers and promoting and selling a product or service that you know you make a pretty good margin on?

You could just run it within your own networks, blogs, social media channels or whatever - at a time and on a date that suits YOU.

You control the game. You control the profit margin. And you either take on the new customers (hopefully) or at least give your existing customer base a well-deserved reward.

Nick

jgibbard
Posted on August 19th 2011 at 1:38PM

That's exactly what I'm advocating for.

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