Learn How Groupon Works and How It Impacts Business

Groupon website
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If you don’t have an advertising budget, you will have to be creative in your marketing strategies or you could end up becoming too reliant on repeat customers and word-of-mouth referrals. Groupon is one way you can advertise directly to people seeking your type of services and products without having to bear an upfront cost.

When consumers use search engines to find a product or service, they are usually still in the information gathering stage and may be a far cry from actually wanting to make a purchase. People who head straight to Groupon are looking for new deals to try or have already made a decision that they want to make a purchase and are looking for the best deal possible. 

Sounds simple so far, right? Create a coupon campaign, let it rip, and boom – instant customers.  Unfortunately, Groupon is not really that simple and you need to put as much consideration into a Groupon marketing campaign as you would into any other lead development strategy.  If you don’t, and just make up a coupon on the sly, you could end up losing a lot of money.

What Is Groupon?

Groupon is an advertising platform that is largely geared towards serving local markets. Businesses can use Groupon to promote their own discounts (vouchers) for services and products. Groupon helps facilitate connections between businesses looking for customers and customers looking for deals.

That’s a big plus over relying on Google search to get the word out about your business because Google only shows what it wants to in local results and to rank consistently well in searches requires a lot of time and effort and there still is no guarantee your site will be shown on page one search results.

But Groupon will show users everything on their site within a particular set of search parameters and if yours matches, your ad will show.  Even better – you can create and control massive social media campaigns and get your coupons noticed even if you don’t have a website. Which, I do not advise – all business owners should have at least a one-page website to serve as a means of verifying a business is legitimate.

For example, Google a zip code for ‘horseback riding lessons’ and Google selects what it wants you to see and not what is necessarily in your area.  Groupon will do better for consumers because a search for riding lessons will only be filtered by what the user decides and not an advertising algorithm.

Almost sounds too good to be true, and frankly, it is.

How Does Groupon Work?

Groupon is fairly straightforward – you offer a deal, they collect money on your behalf when a deal is made, Groupon takes a fifty percent cut right off the top, and you get the rest.  Essentially, Groupon is a middleman that wants to connect you with people who will buy your services and products because the more people buy from you the more money Groupon makes.  That is not the case with Google who has an entirely different (and significantly broader) agenda and motives and who has virtually no incentive to promote your website at all (unless you pay for ads on Google.)

In a nutshell here’s how Groupon works:

  • Sign up.
  • Offer a coupon or deal.
  • People buy it and pay via Groupon.
  • Groupon collects the money, takes a (big, fat cut) right off the top, and
  • Gives you the rest.

Groupon’s Business Model - Great for Groupon, Not so Great for Business Owners

According to Statista.com, Groupon’s business model clearly works very well, at least for Groupon, whose global revenue was $3,119.52 million in 2015 of which $2,047.74 million is attributable to the consumer market in the U.S.

Here are two more statistics to get excited about:

  • The average price per coupon deal in 2015 was $76;
  • 20.66 million people visit Groupon every month (January 2016).

Such positive financial data demonstrates that Groupon’s business model works very well for the company and that consumers are wild about Groupon, but before you get too excited, remember that the reason Groupon is so successful is that it favors its own interests first, then consumer interests, and very (dead) last, you, the business owner factors in.  Groupon uses businesses to achieve their own consumer-based goals – and you, as a business owner, are their main consumer. 

Your coupons to Groupon are similar in relationship to third-party vendors and Amazon: Amazon wants to let businesses use the Amazon brand to increase their own sales, and because Amazon makes money from Amazon sellers. Groupon also wants businesses to use their services because without businesses offering coupons Groupon could not survive.

Why You Need to Be Careful Advertising on Groupon

Groupon offers coupons/discounts that range from 50% off to 90% off the usual price of whatever is being offered. Groupon takes 50% of revenue from every deal. Here is an example:

Let’s say you normally charge $100 for offering private horseback riding lessons. At 50% off your normal rate, you’d be selling your lessons for $50 to Groupon buyers. But you would not make $50, you would only make $25 on that deal because Groupon takes half.

If the same deal was offered at 90% off, you’d be selling your riding lessons for $5 each!

In scenarios that involve selling merchandise, you could easily end up losing money because by the time the discount price was offered and Groupon took its cut, you may not make enough to cover the cost of what is being sold.

It is also extremely important to note that Groupon takes its massive 50% cut off every single deal you make – not just one. Sell 100 discounts and they will take 50% of every single one.

Dealing With Groupon’s Deal Seekers

Although Groupon boasts on their website that 91% of people who purchase deals on Groupon will return to the business later for additional purchases, those statistics are refuted by other sources who state that the majority of businesses who use Groupon complain of one-shot customers.

Groupon customers are often savvy deal seekers who purchase and use one-time coupon discounts  without intending to keep coming back for more products or services (i.e, for a massage, tanning, meal, etc.) That’s great if you are looking for one-timers, but not ideal if you need people to sign up for ongoing services.

Instead of offering one introductory lesson (or 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 or craft lessons, instead of giving a full hour coupon for half off, split it between the two sessions. 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 that lessons with you are fun and they should sign up for more lessons.

Be sure to include restrictions to control how people can use their deals. Here are just a few examples of conditions that allow the business to control the flow of new customers so they don’t all just show up at once:

  • Promotional value expires 120 days after purchase.
  • Amount paid never expires.
  • New customers only. Reservation required.
  • Registration required.
  • Limit 1 per person, may buy 1 additional as a gift.
  • Limit 1 per visit.

Setting limits on the number of vouchers sold is also important especially for small businesses so that you can make sure you will be able to handle an influx of new customers and increased demand for your services.  While researching information for this article I saw one local arts and crafts store offering vouchers for a ceramics project.  The business had sold over 300 vouchers and my first thought was how on earth is a mom and pop walk-in shop going to handle 300 people showing up all at once?

The Bottom Line

Groupon is a solid advertising platform in that it works, has a good reputation among consumers, and is easy for business owners to get started using, however, Groupon's simplicity and power should not be relied on to grow your business. 

In the short-term, Groupon (and similar sites) can be a powerful and effective way to generate new leads for your business, but if you are not careful in planning how you will offset the steep price for those leads you could end up losing a lot more money than you earn.