As a Business Consultant, I am always researching newer and better ways of marketing for my clients.  In today’s difficult marketing environment, traditional marketing strategies are producing fewer and fewer leads, if any.  As a result, small businesses are desperate to find the “next great thing” when it comes to marketing.  So I spent some time investigating Groupon and thought I would share with you my results.

My intent is not to pick on Groupon specifically.  This blog post is about this kind of marketing in general.  Others, like LivingSocial and restaurant.com, fall into the same category.  I single out Groupon because they seem to have the most buzz these days.

What is Groupon?  It is an online coupon distribution system with a really good marketing campaign behind it.  A business signs up with Groupon to run a campaign offering a 50%-70% discount on their product or service.  Groupon typically receives 50% of the revenue.  For example, if you offer a 50% deal on a $100.00 product, the product sells for $50.00.  The customer pays Groupon the $50.00 and then Groupon takes their $25.00 before paying the business their $25.00.  So the business will typically get 25% of the revenue.  Groupon then takes up to 60 days to pay the merchant in full.

What is Groupon supposed to do for small business?  Most business owners I speak with fall into two basic categories in their understanding of Groupon.

1. Groupon is a revenue generating marketing campaign designed to drive prospects to their place of business to purchase goods and services.
2. Groupon is a marketing campaign designed to increase awareness of the business and generate reoccurring NEW customers.

What does it really do for small business?  Based on my research, it:

1. Crushes profits
2. Strangles cashflow
3. Trains your existing customers to only buy when they have a coupon

Harsh?  Not really.  Just Google “Groupon worst business decision ever” and read about the business owners who nearly went out of business after running a Groupon campaign.  Here is one example: http://www.dailymail.co.uk/femail/article-2068373/Cleaned-gambling-Groupon-Few-firms-realise-huge-risks.html?ITO=1490.

Some even call it a Ponzi scheme.  http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/.

Here is a good article from the NY Times that does the math on a restaurant Groupon campaign:  http://boss.blogs.nytimes.com/2010/11/23/doing-the-math-on-a-groupon-deal/

The problem does not seem to be the “number” of respondents Groupon can deliver for a business.  Groupon is very good about delivering the “quantity”.  The problem is the “quality” of the leads and the business mechanics and financial aspects of delivering the goods and services.

For most small businesses, 25% of revenue does not cover the costs of goods, payroll, overtime, etc, so they are going to take an immediate hit on cashflow.  So if you decide to run a Groupon campaign, understand that you are probably going to lose money on every deal sold.  Make sure you have the cash reserves (and cashflow) to handle the campaign.

What about the perception that a Groupon campaign will deliver new customers and drive repeat business?  My research has found business owners saying that less than 10% of the customers ever come back.  The vast majority of customers are just bargain hunters – thus the “quality” issue.

Others have hoped that the customers will spend more than the value of the Groupon which will help offset the costs.  One business owner found that less than 5% actually do this.  Why?  Again, most people using Groupon are bargain hunters.  And these days, most of us are bargain hunters.  Even if you are a regular customer of a restaurant that offers one these programs, why would you not use Groupon (or something similar) if they want to give you free food?

So if you are thinking about running a Groupon campaign, you absolutely need to know the following about your business:

1. What is your objective?  If you are a brand new company with a start-up marketing budget for awareness, this may be a good strategy.  If you are looking at this as a traditional marketing campaign to get new customers and increase revenues / profits, probably not a good idea.
2. Your average dollar sale.  One business owner’s average dollar sale was $5.00.  She ran a $13.00 Groupon.  Here is her story:  http://techcrunch.com/2011/06/09/groupon-single-worst-decision/
3. The actual cost to produce or supply your product.
4. The breakeven point for the campaign (if any).
5. The maximum amount of cash you are willing and able to outlay.
6. The maximum number of Groupons you can supply and service.  In one of the linked articles, a business owner almost went out of business because she had to pay overtime and rent extra ovens to meet the demand.
7. AND MOST IMPORTANT:
   1. You absolutely need a process in place to track the on-going costs of the campaign.
   2. Have a system in place to capture customer information so you can continually market to the 5%-10% who may come back.

For most small businesses, Groupon is at best a very expensive marketing campaign.  At worst, it is an unprofitable marketing campaign that drains cash and ties up resources that could be better spent on more profitable business.

In summary, I think I have found a real life example of the old adage:  “I lose money on every deal, but I make up for it in volume…”