January 9th, 2011

The Value of Groupon

Organizations today are thinking about how to take their business local, mobile and social in an effort to reach consumers where they are spending their time and money.  Using opt-in tools like Facebook, Twitter, Foursquare and Gowalla, businesses are attempting to gather followers with relevant messages in hopes of generating new business.  These tools are fantastic for businesses with an existing dedicated fan-base that is interested in helping to spread the word.  However, as technology continues to evolve, new tools are becoming available for businesses to reach out to new customers that may never have heard of the business.  One such tool is Groupon.

Groupon leverages the collective power of consumer interest by making a deal available only when a certain number of people agree to make the purchase.
“This creates the incentive to share the deal with friends and family, until ‘the deal is on.’ It’s great for local businesses because they can set the parameters for the offer and they know a minimum for how many offers they will have sold in advance.”

As a consumer, I love Groupon: discounts for items I might buy anyway or otherwise wouldn’t buy due to high cost of entry and introduction to brands I’ve never encountered before.  As a communications adviser, I can see the benefits of Groupon: introducing new users to instigate trial, driving traffic and encouraging frequency of existing users.  However, I can also understand the hesitancy of business owners to engage with Groupon for fear of losing money and never seeing results.

The Groupon site has over 35 million registered users. (Source: Mashable)  This is how small businesses can reach a large bank of consumers that might never have heard of them before.  It can be a source for lead generation.  However, “Groupon offers such a wide variety of products (spas, restaurants, and all sorts of weird local businesses)…This attracts a certain type of customer (people who want ‘deals’ and aren’t focused on business quality or returning) and encourages a certain type of behavior (namely low retention because of the deal volume).” (Source: Quora question/answer)

Determining the value of participating with Groupon takes a series of calculations and guesses, which this New York Times post sums up nicely.  To start, consider that Groupon takes a percentage of every coupon sold.  According to The New York Times, “The members who buy the coupon get 50 to 70 percent off on a product or service, and Groupon splits the proceeds with the retailer — usually leaving the retailer with about 20 to 25 cents on the dollar of retail value….Groupon is advertising….It costs money. Instead of writing a check for an ad, you are choosing to lose money on sales.”

There have been many documented complaints from businesses when it comes to their individual Groupon results: minimum purchases, single visits, poor tipping, etc.  However, there have also been success stories: new customers, sales increases, etc.  Groupon may be successful for some businesses and a risk to large to take for others.  Regardless, it is a great opportunity to reach new users and it is the business owner’s responsibility to deliver service and product that encourages repeat visits.  Businesses interested in using Groupon should prepare for impressing new customers and gaining their future loyalty.

While poor performance can’t be solely attributed to the Groupon model, there are ways that Groupon might improve the experience for business-owners (disclaimer: they may already offer these things, but I can’t find any information about it):

  • Hyper-local targeting, by zip code or neighborhood.
  • Provide opportunities for business to re-contact those that bought and/or redeemed the Groupons they offered.
  • Provide additional incentives or rewards for consumers sharing their purchases.
  • Connect with review sites like Yelp and encourage users to share their experiences using their purchased Groupon.

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