Smart Marketing: The true cost of a business presence on Groupon

By Karen Rosenzweig

I’m sure by now, most of you are familiar with Groupon, the collective buying discount service that offers huge discounts on things to do, eat and buy in local communities. And, no doubt you are aware of the multitude of Groupon ”clones” such as Living Social, Tippr, Rue La La, Plum District, Ideal Network and Urban Dealight, just to name a few.

These “daily deals” are typically in the 50-percent discount range, with some even at a 75-80 percent discount off restaurants, services, etc . — who wouldn’t love that? These deals obviously are great for the consumer, but as a marketing consultant who helps businesses increase visibility and sales, I’m a little worried about what’s in it for the business.

I’m wondering how many Edmonds businesses have considered using a “daily deal” offer – and more importantly, have really investigated what the real cost of offering these deals will be. What happens if you set consumer expectations so high that they demand a deal on every visit and think 50- percent-off pricing should be the norm? And what if these new choosy, bargain-driven consumers simply take their business elsewhere when you return to full pricing?

You could argue that the high traffic and visibility that results from these daily deal offers will create a stream of new customers and that the wide-reaching mailing list they have is invaluable to a new business struggling for attention.

And yet, I disagree. Is it a good business decision to give a deep discount for a one-time sale — especially if you never see the customer again? For example, when a restaurant offers a $50 value Groupon for $25, the restaurant only reaps about $12.50 of that – yes, Groupon typically takes 50 percent of the sale.

That’s a steep price to pay to gain a new customer – if they ever do return. And is the visibility and word-of-mouth value from this one-time offer really worth a 75 percent (or more) discount off a business’s already tight margin? Is that good ROI??

Actually, it might be — IF the business also does one (or more) of the following:

– Capture the customer’s complete contact info when they redeem the Groupon. I’ve talked with dozens of friends who have happily purchased and redeemed Groupons in the past few months and virtually NONE of them were ever asked for their contact info so the business could follow up and make them a repeat customer. Retention and repeat business are a MUST if you offer a Groupon.

– Sell a follow-up/repeat service to the same customer when they redeem the Groupon. As a business, you have an interested customer right in front of you, happy with the deal they have purchased. Why not sell them a SECOND 50-percent-off deal right then (before they leave, possibly never to return)? And guess what? You get all of that money ($25 on the $50 value), rather than giving $12.50 of it to Groupon!

– Categorize this as a marketing/advertising expense only. This type of offer may return better results than advertising in the traditional media platforms, although that’s debatable. But if you have a budget to obtain customers, and know your true cost of obtaining new customers, this method could be effective.

– Have the bandwidth to handle a deal’s popularity. Can you accommodate 1,000 new customers who purchase a $10 haircut, if you are a two-chair shop open only 40 hours a week? Can you handle the demand of full restaurant nightly all eating at discount and still pay your staff and overhead?  Do you have personnel to handle the phone calls and web inquiries to schedule all these new customers AND to service them?

My firm belief is that with the exponential growth of social media tools such as Facebook, Twitter and LinkedIn, most businesses could offer their own special deals and discounts DIRECTLY to their fans and followers, without paying a middleman (Groupon, etc). And most of your fans/followers are more than happy to share the deal by word-of-mouth “advertising” with their friends in these online arenas.  Those are the strategies I prefer to use in helping local businesses build their visibility and credibility.

I know there’s going to be some feedback and plenty of discussion on this issue, so let your opinions fly in the comments below! I especially would love to hear from businesses who have used Groupon or other daily deal companies, and how their subsequent sales have been affected.

Edmonds resident Karen Rosenzweig is a social media consultant/trainer and owner of One Smart Cookie Marketing. She writes weekly about how companies, entrepreneurs and restaurants can increase their customer base and gain visibility through Twitter, Facebook, blogging and other social media tools.

  1. Karen. I completely agree with your article. At first blush it sound good. But its important to measure the long term impacts to your business. There are a lot of people saying XYZ business did it so I should to. But in reality they may not know how it effected that business.

    If interested check out a different approach to solving the problem of driving new and repeat customers

  2. I agree with you completely. One thought on this point: “My firm belief is that with the exponential growth of social media tools such as Facebook, Twitter and LinkedIn, most businesses could offer their own special deals and discounts DIRECTLY to their fans and followers, without paying a middleman.”
    Imagine someone opted not buy a Groupon and later came to a store owner and asked for 50% off while that deal was still current: “You’ll get more revenue, because you don’t have to split it with them.” The owner would likely say no, but if they did, they’d be pocketing 100% more revenue!

    On another level, I think Groupon is hurting the small businesses they work with when they don’t clearly inform the customers/deal purchasers exactly how much of the revenue is going to the merchant (and how much is going to them.) Perhaps they might be more grateful to the merchant, more amenable to a repeat visit, if they knew that their transaction was causing a loss?

    I’ve seen many tweets and updates from individuals that praise Groupon for a deal received, without mentioning the merchant who sacrificed to provide the service or product. This causes me to deduce that the customers really belong to Groupon, and not the merchants.

    I have some other thoughts on this if you care to read this piece:

  3. We all must be on the same wavelength because I’ve been thinking of this for a while now. I’m glad my friend sent this to me. Nick you’re right, watching businesses jump on the Groupon bandwagon because it’s the next greatest thing to get a bazillion new customers with out weighing the true cost of this type of marketing is scary and sad to see. Brian, great point on the social media revolution that is starting a tsunami of connectivity. I wish more business owners would do this. Karen, great article! Loved it!

  4. For some businesses, participating in a Groupon-like deal is a huge risk! Money/Expense aside, if the venue cannot handle the potential volume of customers, and customers (regular or Groupon-ers) get upset about having to wait extra time, not being able to get a reservation or appointment …. and they post negative reviews online, this alone could substantially affect the online reputation of the business. The long term damage to their online reputation may not fit in the “marketing budget” very well. Great article, Karen!!!

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