How Groupon Works and How It Impacts Small Businesses

Make sure you don't lose money with the popular coupon app

Groupon website
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If you're the owner of a small business, you may be wondering if listing a deal on Groupon can benefit your bottom line. Although it may seem like an easy way to drum up new business, Groupon is not that simple. You have to put as much consideration into a Groupon marketing campaign as you would any other lead development strategy. If you just make a coupon on the fly, you could end up losing a lot of money.

How Does Groupon Work?

Groupon is an advertising platform that is largely geared toward serving local markets. Businesses can use Groupon to promote discounts (vouchers) for services and products. Essentially, Groupon is a middleman that wants to connect you with people who will buy your services and products, because the more that people buy from you, the more money Groupon makes. 

The process has historically been fairly straightforward: You create a deal that is then listed on the Groupon website and possibly featured in its emails to local markets. Customers purchase your deal, and the company collects money on your behalf. Groupon takes a cut off the top; you get the rest. Notably, the company is relying less and less on this heavily discounted voucher system and moving toward a "marketplace" model designed to foster ongoing relationships with businesses and customers.

Regardless of changes to Groupon's model, a major benefit to using the platform is that it might expose your business to more ready-to-buy customers. Contrary to the information-gathering users who visit search engines like Google, people who head to Groupon have usually already decided that they want to make a purchase.

Relying on Google to get the word out about your small business is not always successful because you're relying on its always-changing algorithms, and there's no guarantee your site will be shown on page-one search results unless you purchase advertising. In comparison, Groupon shows users everything on its site within a particular set of search parameters. If your business matches what a consumer is searching for on Groupon, then your deal will show.

Do Businesses Make Money With Groupon?

According to Statista.com, Groupon’s global revenue was $2.6 billion in 2018. That revenue is built on working with countless small businesses that don't necessarily benefit from Groupon's business model.

There's no upfront cost for a business if it wants to list a deal on Groupon. However, historically, Groupon has required that the business discount its services or products offered by at least 50%, and sometimes up to 90% (again, this model is currently in flux). Then, when a customer purchases a deal, Groupon takes half of the revenue. This point bears repeating: Groupon takes its 50% cut of every single deal sold—not just one—no matter how many you sell.

For example, let’s say you normally charge $100 for a private horseback riding lesson. At 50% off your normal rate, you’d be offering your lessons for $50 each to Groupon buyers. But you would not make $50; you would only make $25 per lesson sold because Groupon takes half of it right off the top. If you offer riding lessons at 90% off on Groupon, you’d only be making $5 on each lesson.

In this scenario, you're counting on gaining a lot of new customers to recoupe those costs. Although Groupon boasts on its website that 91% of people who purchase deals will return or say they plan to return to the business later, those statistics are questioned by other sources, which state that many businesses that use Groupon complain of one-shot customers.

With this model, businesses can easily end up losing money. After discounting its product or service and then allowing Groupon to take its cut, a company might not even make enough to cover the cost of what it's selling. If the deal doesn't earn enough repeat customers, then the merchant is worse off than before it worked with Groupon. On the bright side, if you find that you're losing money, Groupon doesn't charge any fees to pause or cancel the service.

How to Make Groupon Work for Your Business

Groupon customers are often savvy deal-seekers who purchase and use one-time coupon discounts without intending to become regular customers. That’s great if you're looking for one-timers, but not ideal if you need people to sign up for ongoing services.

Instead of offering one introductory service at a deep discount, you might try splitting your deal in such a way that requires people to give you more than one try. For example, if you offer guitar lessons, instead of offering a coupon for half off one lesson, offer half off a package of two lessons. That way, people who purchase the coupon will need to try you twice to get their full deal, and that may be enough to convince them to sign up for more.

Setting limits on the number of vouchers sold or including restrictions to control how people can use their deals is also important, especially for small businesses. If a deal is popular, you may get an influx of new customers and increased demand for your services, which could backfire if you're not ready for it. Here are some examples of how a small business can control the flow of new customers so that they don’t all show up at once:

  • Promotional value expires 120 days after purchase
  • New customers only
  • Registration/reservation required
  • Limit one per person; may buy one additional as a gift
  • Limit one per visit
  • Limit the number of coupons available on Groupon

As Groupon's marketplace model continues to develop, you might also try some of its newer alternatives to the voucher model, such as online booking or store pickup.

The Bottom Line

Groupon is a solid advertising platform, has a good reputation among consumers, and is easy for business owners to start using. In the short term, Groupon (and similar sites) can be a powerful and effective way to generate new leads for your business.

Time will tell what Groupon's marketplace model will mean for merchants. Regardless, you should probably not rely solely on Groupon to grow your business. Nor should you rely on it to save your business if you're facing serious troubles. If you are going to use Groupon, make sure you do some careful planning to ensure that you don't end up losing more money than you earn.