Is Groupon a Small Business Killer?

17 09 2010

I recently read a blog post from the owner of my favorite coffee shop, Posies Cafe in North Portland. It was a blog post explaining how Groupon nearly put them out of business. The owner explains the entire process, from the call with the Groupon rep, all the way to her experience of turning down a loyal customer’s Groupon. The owner had hesitations, but knew Groupon has been the Internet darling as its traffic, subscribers and revenue have skyrocketed over the past year. And the recent press it has received about the Gap deal has really put them on the map (if they weren’t already). So, I can see why a business owner would fall victim to the hype. Thanks for telling your story, I’m hoping it helps other small businesses not fall into the same trap.

So, is Groupon right for your business? That’s a tough question to answer, and one I’m not going to attempt for you. What I will do is provide thinking points for you. Ponder these. If you decide to use Groupon, make sure you’re prepared and understand what could happen, both good and bad.

The Pitfalls of Using Groupon

The downside to using Groupon (or any deal site for that matter) can be huge, per the above story or this story of a NYC smoothie shop owner’s experience. Let’s take a look at what these downfalls consist of:

  • Heavy Response – Groupon can drive tons of foot traffic to your store, which most small businesses are not prepared for. A sudden surge in customers waiting at your counter or banging down your door when you’re not prepared can only spell disaster. If you’re a business that takes appointments, you’ll feel the same effects through your phones. Both situations will inevitably lead to bad customer service.
  • Lack of Follow Up Opportunities – The only way Groupon can really work for a small business is to drive repeat customers. Businesses take such a hit (lose revenue, see next bullet point) when doing these deal sites that the only way to recoup the  loss is to get these customers back in the store (customers that most likely wouldn’t have ever visited your establishment without the Groupon). Amazingly, no, shockingly, Groupon does not provide any customer data of those that purchase the deal. Not a single email address. That makes it really difficult for stores to follow up to get these folks back in their business.
  • Economics Don’t Pan Out – Any way you slice and dice it, the economics just don’t pan out. Let’s do some simple math. If you sell a product for $100, and your margins are 50%, you make $50. If you do a Groupon deal and offer a 50% discount off of the $100 product, the customer is now getting a $100 product for $50. Your margins remain the same at $50, so you’re breaking even at this point. We’re not done though. Groupon will take 50% of the deal price, which would be $25. You keep $25. So, in this example you’re losing $25 on every Groupon that is redeemed. It just doesn’t pan out.

The Positives

There can be some positive aspects that come from using Groupon. As a small business owner though, you must still be careful of the pitfalls I mentioned above.

  • “Affordable” Advertising – Groupon has over 13 million subscribers, and with all of the recent press they’ve received for the Gap deal they’re bound to obtain even more. With that many eyeballs, and the “free” advertising a business receives (you don’t pay to have Groupon promote your deal on their site) you can gain excellent visibility and generate awareness to folks who may have never found you.
  • Effective Sales Generation – If a business is prepared, Groupon can be an effective sales machine. The deals can drive hundreds, if not thousands, of new customers, and if you have the appropriate systems (staff, lead capture, etc) set up, Groupon can be a goldmine.

The way I see it, there aren’t that many positives for a business. The customers are the ones winning with these deals, and they don’t always win either (due to poor service, waiting weeks to get an appt, etc). If you do decide to use Groupon, I want to leave you with some tips in the hopes that your deal works for you. I want to make sure you think about how this could destroy your business before you make your choice. Don’t be put out of business because of a bad decision, and an apparently aggressive sales team that’s not thinking about the businesses themselves (see the Posies story above).

  • Do the Math – make sure you do the math to see if running a deal on Groupon will work for you. You know your margins, overhead, etc, make sure you look at all of this and understand what you can afford, and what you can’t. You have to at least break even in order for this to make any sense at all.
  • Staff Up – You must ensure you have the appropriate staff available to answer questions, take orders, serve, etc. When your business is suddenly hit by a swarm of hungry customers, you need to have a plan in place to deal with them. If you don’t, many customers will leave angry. A customer with a bad experience will tell 10x the amount of people than a person with a positive experience.
  • Customer Retention – It is imperative, for Groupon to work for you, that you capture email addresses so you can use remarketing tactics on these customers at a later date. More than likely, these are one-time customers (maybe 1 out 5 will return, maybe), unless you are able to follow up with additional messaging to get them back into the store. These customers need to come back several times just to make up for the loss you incurred on their Groupon deal alone.

OK, so there you have it. I’ve laid out many pitfalls, some positives and now tips for determining if Groupon is right for your business. In the end you’re trying to grow your business, not drive it into the ground. Don’t jump on the bandwagon just because deal services are the internet darlings of today.

Has your small business used Groupon or any other deal site? If so, I’d love to hear your experience.

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5 responses

27 09 2010
Matt Selbie

Agree with general conclusion. My main concern with these mechanisms is that they largely focus on the wrong problem – the restaurant business in the US has a massive defection issue – over 35% according to The Restaurant Marketing Group, therefore the main issue a location should focus on is retention. Clearly when loyalty is so poor, there are fundamental issues of offer that are not working. Driving new traffic via Groupon at a discount is simply accelerating the rate at which these newly acquired customers will try (at a discount) then leave because of poor performance.
Clearly couponing has it’s place – but only beneficial when the business has an offer appropriate to its audience. On-site customer feedback is the key to ensuring this – new mobile technology can help – see http://www.opiniator.com for example

4 10 2010
» Blog Archive » To Coupon Or Not To Coupon

[…] Or, as some say, it can be a small business killer. […]

5 10 2010
Matt Selbie

This came out today on Groupon – a study on its effectiveness if you are a restaurant. Main message – Be Afraid

http://restaurant-hospitality.com/news/getting-gouged-by-groupon-1004/

7 05 2011
John Audette

While some businesses have used online volume couponing successfully, it is far and away the most dangerous marketing tactic that I have seen in my 15+ years as an Internet marketer. We have just finished a 5-part series on our blog exploring couponing, Here is the link if you are interested – http://www.406strategies.com/?p=3211

7 05 2011
Online Couponing Links | 406 Strategies: Internet Marketing for Small & Local Business

[…] Is Groupon a Small Business Killer? […]

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