When Small Businesses Should Use Groupon

Grow, featured — By Liz Wiltsie on June 11, 2010 at 12:11 pm

Are you a small business owner trying to sell more products or Services? Have you considered Groupon or other group buying sites? Should you?

Groupon, the online group buying site that offers coupons to consumers in key markets nationally, has made a pretty big splash over the past 12 months by attracting 6 million subscribers and getting a $1 Billion valuation. A lot has been written about Groupon’s benefits and drawbacks, but not much about who should use it . . . and who shouldn’t. So I’ve developed a short list of criteria for small businesses to determine whether Groupon – or other similar group buying sites – are right for you.

When does Groupon work really well?

When your Cost of a product or service is less than 25% of your retail price
When your Scale can accommodate a rush of customers
When your Target buyers are young, educated women

Here’s a deeper dive on each of these three areas:

Cost:
With typical Groupon math, you will take home approximately 25% of the retail price of your Groupon offering. You can do more complicated math via this excellent Groupon Calculator based on number of redemptions, etc., but the simple example below can help you make a high-level participation decision.
- Typical Retail Price: $100
- Groupon Discount: 50%
- Groupon Published Price: $50
- Groupon Fee: 50% = $25
- Your Revenue: $25
Scale:
Because of the way group buying sites work (email blast of a daily special, often repeated every couple of months), you will likely see a concentrated increase in demand for your product or service. If a rapid influx of customers will tank your business, you need to be careful. You can apply some safeguards like redeeming restrictions and upper limits on the number of Groupons sold. But in general, if you will have to ramp up production in an unsustainable way, you will be hurt more than helped and should consider other promotional ideas.

Target:
Based on their national subscriber demographics, Groupon’s audience is:
- Young (68% are age 18-34)
- Well educated (80% have BA or higher)
- Female (77% are women)
- Employed (75% work full time)
- Above average income (29% have an annual income over $100,000)
If your product is often bought by young women, you will line up well with Groupon’s user base. Remember that many Groupons are bought as gifts so men’s products can also work because they are often bought by women as gifts.

A few details to remember:

Groupon’s marketing team will work with you to craft your Groupon email. This is a value-add for businesses which don’t necessarily have a short-form discussion of their best qualities.
Groupon will send your money in three installments: five days after your Groupon is run, 30 days after, and 60 days after.
Most Groupons can be redeemed for a full year, so while you may get an influx immediately after the offer, there is also uncertainty about when a Groupon will be redeemed.

As Group Buying Matures:

Already there are dozens of group buying sites. With Groupon’s recent $1 billion valuation, you can bet there are more on the horizon. The math will likely be pretty similar for a small business, but it means you have options. There are some very niche offerings, like http://liquor.com/ that gives local recommendations for cocktails and nightlife.
And as Groupon itself gets bigger there will be more and more competition among small businesses to be featured, so you may have to offer deeper discounts to stay competitive. Customers may also get used to the pattern of Groupon (repeats every 2 months or so with similar offerings) and just wait for the next big deal rather than converting into a long term paying customer. This is the danger of competing based on price (but that is another topic entirely).

So it’s really pretty simple. Can you make a profit or are you willing to invest in customer acquisition selling at 25% of your typical retail price? Can you handle a significant influx of demand? And are you targeting young, educated females? If you answered yes to all three of these, then Groupon is probably a great tool for your small business. If not, seriously consider whether Groupon is the best way to invest your customer acquisition or marketing dollars.

Group Buying Alternatives: Town Hog, Deal.io, DealOn, Social Buy, LivingSocial, Tippr, Group Swoop

Liz Wiltsie is VP of Small Business Strategy for BizeeBee. She has spent several years working with a variety of different types of small businesses and hopes to make their lives easier.

Liz Wiltsie

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[...] This post was mentioned on Twitter by Liz Wiltsie, BizeeBee. BizeeBee said: When Small Businesses Should Use Groupon http://bit.ly/bpEb2w (new at The Hive) [...]
http://twitter.com/rmg_reg RMG + REG

“Customers may also get used to the pattern of Groupon (repeats every 2 months or so with similar offerings) and just wait for the next big deal rather than converting into a long term paying customer. This is the danger of competing based on price (but that is another topic entirely).” – adding to this, I think businesses need to be very careful not to devalue their product with over-discounting, over-coupon, and as a result, lowering the value of their service/product when it comes to the consumer perspective. You don't want a customer to become so accustomed to only paying $10 for $20 worth of product/service that they are no longer willing to pay $20 for it.
http://twitter.com/rmg_reg RMG + REG

PS – This was an EXCELLENT write-up/review! I could not have written it better myself and will be sharing this with clients! Keep up the great writing, LizBee!
bizeebee

You are 100% right. As I mentioned, devaluing your service is another issue entirely. I am concerned about the long term consequences of all of this discounting. I don't think there is enough data yet about long term customer retention. I'd love to hear more of your thoughts about discounting, send me an email liz [at] bizeebee [dot] com.
bizeebee

Thank you.
Ben

Interesting, but I think a little too simplistic. Of your reasons, I'd say that #3 is definitely true. #2 is probably accurate, but certainly not a top reason.

#1 is misleading imho. This would lead to very few Groupon deals. While you are only getting 25 cents on the dollar, you have to factor in shrinkage (customer never uses the coupon) and, most importantly, customer lifetime value. The CLV could be much greater than the acquisition costs even if you spending your precious marketing dollars on one of these daily deal sites. Think of these cases:
- You have a deal at your restaurant for $20 for $40 of food. You only get $10 from the deal. If the customer ends up buying $80, you've actually generated $50 in revenue (as opposed to the full $80).
- You have excess inventory, such as seats at a concert that would never sell out. You'll get some revenue with little additional marginal costs. Thrown in the concessions and you might make plenty extra.
- You give one month of a service for $50 instead of $100. You get $25 which is a loss. But the customer stays with you for 8 more months and the deal has been wildly successful.

When a customer that you acquired via one of these sites returns and buys more, you need to factor that in. The harder one to quantify is the word-of-mouth effect from a person who experiences your establishment and then tells others.
bizeebee

Ben,

Those are great cases. Also, the calculator that is linked to takes a lot of the more complicated math into account. I do know a business owner who used Groupon and sold something he regularly used as a promotion item. So in this case he was getting money for something he often gave away, that was a win win. The extra seat issue is a similar case. But it is normal to be able to redeem a Groupon for 6 months to 1 year. Do you know, are there different rules in that case? Because how do you know if 8 months from now you'll still have empty seats? The monthly service is one of the best examples of a more direct customer acquisition model. That's probably one of the better uses of Groupon. You're exactly right. But on that kind of deal the owner may also run a free first month promotion and then has already done the math and decided it was a worthwhile idea. Thank you for this feedback, great addition.
http://twitter.com/malbiniak malbiniak

It seems like something is missing from this list: is your business model based on return visits, or one time transactions? If it's the former, Groupon may be for you. If it's the latter, you might want to pass.

For example, I took advantage of the Hancock Observation Deck through Groupon. It's an annual pass, and I saved something like 50%. I've used it a half dozen times, and I haven't spent a dollar on any of those visits. I may have told a few people about my experience, but that's a pretty expensive WOM campaign.

Contrast that to Kyu Sushi, a restaurant I saved 50% on through Groupon. I'm new to Chicago, am looking for new spots, and Groupon is a great way for me to discover restaurants. If I like the place, I'll go back…whether or not I have a 50% off coupon.
bizeebee

Matt,

Thank you for bringing this up. I would like to see more data about repeat customer conversion rates for Groupons. I'm always a bit concerned that people brought in on price may not become repeat clients when the price is doubled. But you make excellent points. Restaurants may be one of the better uses, IF they can handle spikes in demand, because people will come back if they have a great experience.
http://bizeebee.com/blog/2010/07/whats-groupons-take/ How much does Groupon take? | The Hive: A Resource for Bizee People | Small Business Resource

[...] wrote a detailed article about some Groupon best practices but we still get the simple [...]
http://grouponclone.contussupport.com Groupon Clone

An informative post. Groupon.. a successful new ecommerce trend, the best way to experience your city without paying full price.
Brian Bischof

One thing a business should consider carefully is the expiration date. When I cash in my Groupons, I often do it at the last minute (including this week for another one) and the person working the desk always says, “we are overwhelmed right now b/c the groupon expires soon and everyone is using it at the last minute.” I always thought it would be smart for Groupon to have a moving expiration date so that you don’t have 500 people calling you on the last week to buy.
http://bizeebee.com/blog/2011/06/3-basics-of-small-business/ 3 Basics of Small Business | The Hive: A Resource for Bizee People | Small Business Resource

[...] to attract new customers especially when you’re running your business. There are a lot of great services that will help generate customers, the key is to be wary of the impact it will have on your [...]
http://bizeebee.com/blog/2011/07/got-promotion-pains-tips-to-dealing-with-the-deal/ Got Promotion Pains? Tips to dealing with the deal. | The Hive: A Resource for Bizee People | Small Business Resource

[...] you’re trying to get new customers to come in then doing a daily deal is a great way to breathe some new energy into your studio. When attracting new customers note [...]