Just in case you haven’t heard of it: Groupon is a website (and now mobile app) that allows users to search for nearby deals and specials. These deals can be any anything: dining, nightlife, retail; dentist visits (ugh), car washes, pet grooming, golf lessons, etc. It’s a prominent example of digital social media marketing.

The catch is that the deal only becomes active if enough coupons are purchased (get it — Group Coupon/Groupon). Businesses can decide on their own “cap” for how many people need to participate in order for the deal to run, therefore ensuring a certain amount of business and creating social pressure via allowing users to post the Groupon to their social networks.

Here, we break down Groupon and explore how beneficial it really is to the businesses that partake in its foot traffic-inducing deals.

The Deal

Everyone likes a good deal. Everyone LOVES a deal that’s between 50% and 90% off. And most of all, everyone loves free money. For example, I used to work for a direct-mail marketing agency that would mail incentives to the databases of car dealerships. Not only were great deals going on, but customers could also get a $10 Target gift card, or coffee mug, or cheap fleece blanket just for stopping in—and that’s what they did.

The number of people that would show up simply to be surveyed by me, get their free tchotchke and run was astounding. Some drove to the dealership from over an hour away (I would know, I had to ask them where they came from) for a 2-minute interview and a gift. The gift was certainly not worth the gas they spent, but the fact is, many consumers place an extremely high value on free stuff.

The bad news was that out of the usual 5,000 invitations that were mailed, about 1-2% showed up, and only about .2% even looked at or purchased cars. Many would never come back to the dealership. That’s a lot of free tchotchkes for no ROI.

Groupon obliterates those return rates by offering things people are looking for (locally) at 40 to 50% off or more—and they don’t have to get up out of their couch to take advantage of the offer. With this new service, return rates of 1-2% are practically extinct.

The Math

In order to run the promotion, businesses allow Groupon to take (on average) around 50% of profits from however many coupons they sell. Let’s say your organization is selling $40 worth of services for $20 and your goal is selling 500 coupons. Typically Groupon takes 50% of the voucher sales. Therefore, they are getting $5,000 of your $10,000 profit. If you sold the units full price, you would only need to sell 125 to make the full profit. So, what you’re essentially doing is drastically decreasing your margins in order to increase volume. Is Groupon worth it?

The answer to that really depends on your business plan and current situation. The one huge downside is that many customers, as proven in my anecdote, won’t be back. A study done at Rice University showed that only about 20% of NEW customers that come into your business off of a Groupon (this doesn’t include your existing customers that are also using the coupon) will return to your business again.

Those aren’t great numbers, and it might have something to do with the business not being prepared for a drastic increase in traffic. Think about the business that we referenced earlier that usually sells 125 of their product, but has now just sold 500. There’s a high likelihood that the experience suffers greatly (long wait times, poor service, etc). Customers are left disgruntled, and as we all know, today’s disgruntled customers love to go online to tell their friends about what an awful experience they’ve had! This is a huge danger that a business must beware of if they’re considering launching a Groupon.

On the other hand, if your business is prepared for a Groupon, the net result can be extremely positive. Many times, making an investment means losing money to make money (hello loss leader). Using Groupon can be an investment for the future, as long as its implementation is handled correctly. This echoes my experience with the car dealerships—those dealerships that placed calls to ensure their customers got the mailer and spoke enthusiastically about the event before it happened had better sales rates and higher foot traffic. Those that expected the promotion to do all the work for itself usually resulted in low sales, and sometimes only 15 people out of 5,000 even showed up.

The Lesson

The takeaway here is that the responsibility of an effective promotion lies as much with the company paid to carry it out as the organization behind it. Groupon is an opportunity to drastically increase foot traffic and sales, but the net result could actually be a loss for your business. If your business is equipped for a drastic increase in business, perhaps at a loss, and has a plan in place to capitalize in the future on the new, expanded audience, it just might be something worth considering.

If your business is thinking about doing a Groupon deal and you’d like to make the most of it, we can certainly help. Contact us, and we’ll help you maximize the return of this powerful new platform.