Is Groupon Good for Business?

The Groupon site was officially launched in November of 2008, and has since grown to be a multi-billion dollar company. The popular site features discounted gift certificates to local businesses as well as lower prices on physical products (Groupon Goods). There is no doubt that this site is popular amongst consumers due to the hefty discounts provided on great products and services.

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The impressive consumer response to the Groupon business model has left many businesses trying to incorporate the usage of Groupon into their marketing plans. So, the real question becomes, “Is Groupon good for business?”

The short answer is that it is relative to your business model and what your marketing goals are, but let’s have a look at some of the important details.

Black and white numbers backgroundAnalyzing the Numbers

1. Groupon expects businesses to provide a discount between 50%-90% off normal prices.

2. Businesses split all proceeds from Groupon Sales with the Groupon.

So, What Does This mean?

On average, businesses usually receive between 20-25 cents on the dollar for each purchase made. Let’s say you generally sell your product or service for $100, but create a Groupon with a 60% discount, making your new price $40. Groupon takes half of that, so you now end up with $20 from your $100 product/service. While this can be seen as a terrible return, there are some other important factors to look at before making any marketing decisions.

Important things to think about:checklist

Customer Lifetime Value – What is the lifetime value of each one of your customers? If you use Groupon to promote your business, you may lose money on customer’s initial transactions, but profit from them in the long run. That being said, you also need to think of how many Groupon customers will actually return. Groupon’s research team estimated a return rate of 22%, however, companies have seen both higher and lower return rates.

Profit Margins – Analyzing your profit margins can help you decide if Groupon is right for your company. Since most companies make an average of 25 cents on the dollar for every Groupon purchase, you would need a profit margin of over 75% to make each Groupon redemption profitable.

Unfilled Capacity – Your company’s unfilled capacity also plays a role in deciding whether or not Groupon is right for you. For example, if a movie theater finds that 75% of their theaters are empty on a regular basis, they may consider selling the extra seats at a discount rate. This works best for companies that have high fixed costs, and low variable costs.

New vs. Existing Customers and Market Share – It is important to understand who will be purchasing your Groupon. Chances are, it is your goal to get new customers. An interesting study done by Lightspeed Research showed that 63% of Groupons are purchased by existing customers. If your existing customers are the ones purchasing the Groupons, then Groupon does not have the same marketing power it would if you are reaching new customers. This is where your company’s market share becomes important. If you have an 30% market share in your industry, you will not be reaching as many new customers as you would if you had a 3-5% market share.

Average Sale Price – How much do people normally spend on one order at your business? This is important to analyze because it allows you to understand how profitable Groupon will be for your business. For example, if a restaurant sells a Groupon for $10 that offers consumers $20 towards their meal, but has an average sale price of $40, the Groupon may be more profitable. Accounting for Groupon’s commission, the restaurant now made $25 from a $40 sale instead of $5 from a $20 sale. It is important to keep in mind that many consumers are only looking to spend the amount of the Groupon and not a dollar more.

Average Cost to Acquire a Customer – Many businesses have begun to look at Groupon as a marketing opportunity instead of a way to increase profitability. By knowing your average cost to acquire a customer (based on your marketing efforts), it is easier to understand the value of Groupon from a marketing standpoint. For example, you may find that your company loses $5 in profits from every Groupon you sell, however, if you are used to paying $10 for each customer acquisition, this may actually be a good deal. That being said, it is important to understand how many of the Groupon purchasers will turn into return customers.

Groupon-Specific Details (Amount bought per customer, redemption percentage) – There are a lot of Groupon-specific details that factor into the profitability of your promotion. Two of the main ones are the redemption percentage and the amount of Groupons purchased per customer. The redemption percentage is simply how many people redeem the Groupon compared to how many purchased it. The average redemption percentage is 85%, but it will differ for each individual Groupon. Another important factor is the amount bought per customer. Since the point of Groupon is to reach as many new customers as possible, the more Groupons bought by a single customer, the less marketing value you receive as a business.

Can you handle the extra volume? – One of the best things about Groupon is its ability to drive large amounts of traffic to your business in a short time. While this can obviously be a great thing, it can also be a bad thing if your company is not ready to handle the extra volume. If your company struggles to handle the higher volumes, it can have a negative effect on your company’s reputation. If quality and service are sacrificed, customers will have a negative opinion about your company.

 Are you reaching the right people? – You will hear me mention time and time again that your company needs to reach the “right” customers. The “right” customers are customers that are a good fit for your business. These are the loyal customers that will continue to use your business and help you grow. Think about if your Groupon will be reaching the right demographic. A lot of Groupon users are deal seekers and may not have a genuine interest in your company.

Here is a look at the Groupon demographics as provided on their official site:

groupondemographics

Creating the Proper Strategy

You may be asking yourself what the overall takeaway is from this article. There are plenty of articles that have biases for or against Groupon, but that is not the point of this particular one. Let me make it clear: I am not saying you should or should not use Groupon. I am saying that you need to evaluate the data you have available and think about whether or not Groupon is a good fit for your business. The best way to do this is to think about your business goals. What are you trying to achieve by using Groupon? Are you trying to spread awareness about your business? Are you investing in new customers with the hopes that they will return? Are you trying to make a profit on each Groupon you sell? There are so many different things you can try to achieve by using Groupon. Like any marketing channel, Groupon is just a tool, and its power relies on how you use it. I’ve gone over some important things to think about before using Groupon. These points should be used to comprise a solid marketing plan that will align with your business goals.

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