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Groupon: Good for you?

July 28, 2011 by Devon Pasquariello

$100 concert tickets for $50? Yes, please! It’s obvious why Groupon is a bargain shopper’s best friend — but what if you’re sitting on the flip side of the table? Is it a good idea for your business? Before you answer, let’s first break into the Groupon vault.

How it Works
The Groupon website is full of clever “How it Works” videos, but to actually get the scoop you have to pick up the phone, navigate the automated system, and connect with a real person. Here’s what my conversation with Groupon revealed:

Retailers are advised to offer their product or service at a deep discount (50% off or more). For each deal that sells, the consumer pays the total to Groupon up-front. Groupon pockets half of that sale; the other half is disbursed to the business owner in three installments spread over 60 days.

Let’s do the math and break it down:

  • Offer: $100 spa treatment for $50
  • Groupon makes $25
  • Spa owner gets three payments of $8.33

The business is ultimately selling its product or service at 75% off — a steep discount by any measure. And yet, Groupon has folks banging down the door to get on a waiting list (4-6 weeks long in our experience).

So, when does it make sense to hop on the Groupon bandwagon, and when should you steer clear?

Scenario A: I’ve opened a new hair salon and I’m looking to get the word out.

Verdict: Go-go-gadget-Groupon.
Even though you might take a hit selling a half-off haircut, you’ll gain exposure for your business and may be able to up-sell with additional salon services.

Groupon makes sense for a new business as a grand opening offer. It can also work for retailers trying to clear out slow-moving inventory or service providers hoping to fill downtime (for example, a restaurant hoping to boost its weekday romantic dinner crowd).

Scenario B: I run a high-end clothing boutique. We rarely have sales because our customers are willing to pay full price.

Verdict: Hold your Groupon horses.
If you have a luxury brand or can sell your products at a higher price, there’s no need for Groupon. If you’re looking for more customers, why not offer a friend-referral system that earns store credit for your loyal shoppers instead?

Luxury brand or not, Groupon doesn’t make sense for any business that can sell its product/service at a higher price point. Also, if you have low profit margins, you may not be able to offer such steep discounts.

Your Turn
What’s your experience with Groupon, as a shopper or as a business owner?

Image credit: Techland


4 Responses to "Groupon: Good for you?"

Lou Storiale says:
Although it has only been a month, your analysis is spot-on. The GroupOn business model is slowly ending, as they have been known to reduce their share from 50% to as low as 30%.

Their initial plan was fantastic - the retailer received half of their share within 7 days and the other half within the month. However, now they are waiting as long as 3 months to disperse the total. I'm sure this is due to refund demands for poor service or product - but as a business owner, who cares? It is not sustainable.

However, up here in the "Land of Blago" (I live a block away from him, if you can believe that) retailers are noticing that they are NOT receiving 10-20% repeat customers as initially thought. The customers they receive from GroupOn ads are bargain shoppers and do NOT return to their stores at all.

So the end result is that they offered a $100 service or product and made $25 in 2 or 3 incremental payments.

Even a high-end boutique with astronomical mark-up can not turn a profit that way.

And don't forget about discount shoppers being finicky... At a huge discount, a hair salon is not likely to use their veteran employee to take on the army of "gimmies." So what you get is ratings on YELP and Google of 3s and 4s instead of your normal 5 rating. This could actually hurt your business in the long run.

My advice, use GroupOn to SAVE your business from collapse if it is headed in that direction OR use your experienced new employees and give them "the gimmies." Pay your electric bill and rent for 3 months and use the rest to up your other marketing efforts.

GroupOn, although wildly popular, is a flash in the pan. GroupOn's collapse begins as the economy improves - if they do not change their business model fast.
AUG 25, 2011
Cheryl says:
There is a new clothing boutique open a block away and has offered Groupon every day they've been open (1 month). $45 for $75 worth of clothing. It says that it must be redeemed that day between 10am-7pm and if not redeemed the consumer gets a full refund. How can a new business stay profitable by offering this type of deal every day? I refused to do a groupon because I think customers will get use to it and once you need to go back to full-price how are you going to keep them? Am I missing something?
AUG 03, 2011
Devon says:
Thanks for reading, Kyle. Good point about Groupons that go unused. The rep I spoke with actually said between 10-15% of Groupons bought aren't redeemed, and that's more money in the business owner's pocket. I know they've at least made a few bucks from my expired Groupon movie ticket purchase!
AUG 01, 2011
Kyle says:
Good advice but your logic is a little flawed in that you are assuming there will be a 100% redemption rate for each Groupon sold. Businesses like selling Groupons almost as much as they like selling gift cards because they know they won't all be redeemed. In fact, Groupon has a leg up on gift cards as every Groupon I've ever seen has an expiration date, and some expire rather quickly. Gift cards are good for at least 5 years now thanks to the Credit Card Act of 2009.
JUL 29, 2011

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