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Are most Groupon merchants losing money?
Best Answer
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- Halley Farrell,
- Nick Hughes,
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Groupon is a great tool because it’s a cheap form of advertising that allows for a great amount of exposure. Most people, ( myself included), participate in deals like $10 for $20 worth of merchandise because we gravitate towards cheap deals in such a tough economy. We are attracted to bargains and we take advantage of these deals because we probably wouldn’t participate in any other way. As customers, we benefit from these deals but we never think about how it affects the business itself. As I mentioned before, Groupon allows for a lot of exposure that could cause for a huge influx of new customers. If a business isn’t properly prepared to tackle these huge waves of demand, it could lose not only its potential customers but its loyal customers as well. Restaurants, I feel, are the ones that are most susceptible to the repercussions of Groupon. Because they offer their food at such a low price, it doesn’t mean the materials or products they used were offered at a discounted price. It’s hard enough for restaurants to survive these days and offering discounted food doesn’t help. In addition to loss in food cost, they also lose money in their service. Most people who complete a meal with one of these coupons will only tip on what their meal was valued at ($10 or less). A waiter who normally goes home with $50 in tips could ultimately go home with half or less. I think that in the long run, making up for lost overhead cost could hurt a business.
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- Parveen Kumar
Great article. From a marketing perspective, stores or restaurants should have an added value for Groupon customers when they come in and use their coupon. If the value is great enough (coupon, reward card with free item, give away), those customers might give up their personal information to generate more customized marketing campaigns down the line. In other words, use Groupon as the start of a lead generation chain. You might find you can take the cost of the Groupon "loss" and show in the long run it's a gain in a vast database of customers intrigued by your offerings.
This is the same question I have about Groupon! My sister just used it for her small service business and I'm interested in hearing the results.
Unfortunately all we can do is speculate-- hard data isn't out there, so it's all anecdotes now... and I agree that the anecdotes are adding up to a narrative that while consumers love Groupon, businesses love it much less. I think it is going to be harder and harder for them to find participants in the cities where they first launched and growth will come from expansion. I don't honestly see this being a long-term business model.
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Yes, according to new research most are losing money. I'll present the reasoning below (a summary of the research) and 4 tips -- how to run a profitable Groupon promotion.
Are Groupon promotions profitable for stores? Do they generate sufficient additional sales to Grouponers at full price to warrant the steep discounts offered? New research tells us: The answer depends on how you define "profitable."
Source: http://bit.ly/fOCLXC
RESEARCH SUMMARY:
Surprisingly, the top two factors predicting a restaurant Groupon promotion’s effectiveness are:
1. How satisfied employees were with Groupon shoppers (did they tip more, or are they deal-seekers as an example)
2. The promotion’s effectiveness in reaching new customers
In other words, what matters less to most restaurant owners is:
1. Generating sufficient additional sales at full price to warrant the steep Groupon discount
2. Finding and retaining customers who come back and pay full price
Bottom line: Most restaurants look to Groupon to provide dirt-cheap foot traffic. Not good customers. Why? Because they view the opportunity as they view advertising. They don't hold Groupon responsible for profitable campaigns just as they don't hold Yellow Pages ads or weekly Valpak coupons responsible.
"YES there is a potential to get screwed BUT at least you know it with Groupon because there are numbers to support it," says Eric Bernhard, small business owner and process analyst at Rogers Communications.
"With other forms of advertising you are getting screwed and you can't even prove it."
A remarkably good point. But do you want to be better than average at making Groupon promotions profitable? Because you can. And these days it could be the difference between surviving and shutting doors. Just follow the steps below.
Here's a 4 step process to ensure your Groupon promotion is profitable. Designing a Groupon campaign correctly will increase chances of seeing more profitable, higher-tipping customers more often. If you design it poorly you'll end up like most restaurants & stores -- discounting yourself out of business.
I offer these simple steps to follow:
Step 1: Re-define "profitable" as being focused on quality of customer generated (based on return visits, expectation/requirement of discounting, etc.)
Step 2: LIMIT your Groupon
Research shows, limiting the number of Groupon deals you'll distribute may decrease the popularity of your Groupon but will generate higher quality customers.
Step 3: Sell, sell, SELL your value (beyond price)
It's critical to sell the experience, service, quality of product, etc. -- tangible benefits that go beyond price. This is your one chance to move beyond the discount as a means to differentiate.
Step 4: Track & report profitable customers
Never easy, owners much find reliable ways to ensure customer behavior is tracked back to the Groupon source. Front line servers need to be asking customers and recording the feedback and/or behavior (ie. smaller tips, only purchasing w/ discounts, etc.).
Additional useful reading:
Of Coupons, Groupon and Cocaine
http://ries.typepad.com/ries_blog/2010/12/coupons-groupon-and-cocaine.html
Also witness: The Gap experience. http://go-digital.net/blog/2010/08/when-not-to-use-groupon-as-an-advertiser/