Is Groupon an awesome, or awful, idea for your small business? The pros and cons of group buying sites

by on August 28, 2012

Is Groupon an awesome, or awful, idea for your small business?When Groupon started in November 2008, it changed the world of the online coupon.  The first wave of business owner reviews was extremely positive: what a brilliant idea to get hoards of people to become customers!  The second wave of reviews was more negative, as the horror stories from small business owners started rolling in.

So the big question: Is  a group buying site like Groupon an awesome, or awful, idea for your small business? 

If you’re a little nervous about whether this is the right internet marketing strategy for your business, the following pros and cons should help to clarify what running a promotion like this actually means and whether it makes sense for you. 

PROS of group buying sites

Exposure

Think of it more like an advertising option than a money maker.  It can boost awareness, and website/blog/social media traffic.  It’s also great buzz creation if you are a new or relocated business.

Targeting options

Some group buying sites offer some great targeting options that can help you get your business in front of your target market. You don’t just want new customers. You want the RIGHT customers.

Research the group buying site: what are the demographics (age, gender) of their audience?  Do they focus on particular types of businesses? In some cases, you may be able to find a site that’s an ideal fit for your small business and a much better option than a more general, well-known site.

One local example here in Vancouver is Ethical Deal – offering group buying for eco-friendly products and services. If your small business is green and based in the Vancouver area, this site allows you to really target  and hone in on customers that are into environmentally sound options.

Handling excess

Extra inventory that you need to get rid of?  Or extra capacity at an event?  Then a daily deal can be a great way to get rid of a product that would collect dust or seats that would otherwise sit empty. Better to recoup some profit than nothing at all.

A boon for repeat customers

In my mind, the greatest potential with group buys is for businesses that rely on repeat customers. Yes, you will get a short term boost in sales, but if you offer something that customers need over and over again, the value is in getting the customer in the door in the first place.   If you deliver a fantastic experience for something that people regularly need and want, you could have a whole whack of new customers that will continue to buy from you.

Upsell potential

A group buy also has something to offer for small businesses that have a variety of offerings. Consider the likelihood that the new customer would buy over and above the coupon value. Once you get them in the door, do you have more to offer them?

A restaurant is a perfect example of this. Once the customer gets there, they’d be tempted by the full menu and the bar. Will they spend above the coupon? Most likely.

CONS of group buying sites

Profits and your bottom line

Your profit margin with group buys can be pretty dismal and for some, this type of online promotion turned into a complete business disaster.  If not thought through properly, it can put you in the hole for months!

Many businesses do it anyways because they think that the word of mouth marketing and the brand awareness is worth the loss. Tread carefully. The loss could be too great. And don’t forget that with these deals, you are not only targeting new customers. Your existing customers that would normally pay regular price can buy in too.

Each different group buying site will have different cuts and terms, so do the calculations and figure out if it’s REALLY worth it. (Example: Groupon will charge for between 30%-60% of the already reduced price.  You can also try to negotiate percentages with the group buy sites). Do the math and carefully think through whether you can actually afford to offer such a heavy discount. Make sure you’re familiar with all the terms and conditions and research the options at your disposal, such as the ability to limit quantity amounts for example.

Huge influx of customers

Can you handle the heat?  Some businesses are better equipped to handle major spikes in customers than others.  Don’t think that because people bought your services at a great discount, you can get away with delivering a poor experience. Not only will they never come back, you can bet that they will tell all their friends and family. And don’t forget to consider how a huge influx in customers will affect your current customers.

Some sites will allow you to limit the quantity, which puts you in control of how many customers you can handle. If you can’t limit the quantity, be sure to have a plan in place on how to deal with an upsurge of traffic. The ability to offer an awesome customer experience is absolutely crucial to making group buys worth it.

The mentality of the bargain hunter

Deal seekers for most small businesses are not the ideal customer base.  Let’s be honest here:  some people are coupon junkies because they love a deal.  They do not actually value your service or product.  For a large percentage of your coupon buyers, it could be a one time visit.  Something to consider especially in highly competitive markets and industries. A temporary surge in business, but not in profits or customer base.

These are some of the most important considerations for this whole group buy phenomenon. As with anything in the world of internet marketing, whether you should do a group buy completely depends on your unique small business. There are no generalizations possible and you need to take the time to think through and figure out whether this strategy makes sense for you.

Now let’s hear from you. Have you done a group buy with your business? How did it go? Share your experience to help fellow small biz owners make their decision!

Comments, likes and tweets are always appreciated! Did I mention that I LOVE your feedback?

Image source:  dmdonahoo/ Flickr Creative Commons

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{ 8 comments… read them below or add one }

Marilyn August 28, 2012 at 10:55 am

My office (a group of alternative health care practitioners) seriously considered doing a Groupon promotion and decided against it. The more I hear, the more relieved I am that we didn’t go down that path.

The reasons we said no:

1. The financial deal was awful. They list our services at 50% off, and they take half of that, so you’re only getting 25% of your usual fee. For most of us, that doesn’t even cover the overhead costs of seeing a client. On top of that, they wanted *us* to pay the 3% credit card processing fees (their 50% cut doesn’t cover bank fees? really?). And, they’re sitting on a substantial portion of the money for a month or two, presumably investing it and making money there as well. It felt like it’s all about your labor and their profit.

2. They weren’t willing to limit the number of Groupons they sold. When you provide one-on-one services, this gets problematic quickly. None of us wanted to be overwhelmed, or to be less available to our regular clients.

3. Other similar businesses we talked to said that the people who came were, by and large, demanding and cheap (ie not tipping their massage therapist), and didn’t come back as repeat customers. My experience watching Groupon consumers bears this out — they’re on to the next cheap massage, or the next cool restaurant, or the next new experience. They don’t remember that they liked you or decide to come back at full price. Which is the only thing that could possibly justify offering treatments at a financial loss.

I could see how this could work better for a different business model, like a restaurant or entertainment of some kind. For relationship-based, one-on-one work, I’m really glad we opted out.

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Martina August 29, 2012 at 7:47 am

Hi Marilyn,
I really appreciate you sharing in such detail what your business went through and your decision making process! The points you bring up are excellent and will be really helpful for other small biz owners reading this post :) I completely agree with you that group buying is a great idea for some businesses and for others, it just really doesn’t make sense. Thinking through the financials and how much it will actually cost your biz to offer the deal is CRUCIAL – this is where most horror stories come from. And it might be an idea to first try a site that will allow you to limit the number of offers so that you can do a small test run.

I have a friend who is a massage therapist and the business she worked for did a Groupon and got completely inundated. She found the clients rude and worst of all, the business expected the therapists to work at a fraction of their usual fees for the Groupon customers. Needless to say, she quit!

Cheers,
Martina

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Steve Hippel August 29, 2012 at 3:24 am

That was a really informative and balanced post. Group buying isn’t something that I have tried myself. It could be really useful for some of my members and readers who are largely small businesses.

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Martina August 29, 2012 at 7:36 am

Thanks Steve! I haven’t done it myself either, just doesn’t make sense for what I have going on in my biz right now. But I do think that for certain types of businesses, it can be really successful if executed and thought through well.

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Heather Stone September 24, 2012 at 1:02 am

Hi Martina,
I think this has been an ongoing debate in small business circles for some time. I guess the answer is that you should do some research and have your eyes wide open about what being involved with Groupon means. It’s likely good for some businesses and bad for others so figure out which category you fit into before getting involved.
Heather Stone recently posted..Is Groupon an awesome, or awful, idea for your small business?

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Martina September 24, 2012 at 9:18 am

Couldn’t agree more! Thanks for your comment Heather :)

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Martin Lindeskog September 25, 2012 at 2:08 am

I think that the “group buying” by using purchasing power with the leverage of the Internet is a good thing. We will see companies creating a better mouse trap in the future, competing with GroupOn. The goal is to get loyal customer that is buying on a regular basis, not only taking advantage on a special deal one time.

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Martina September 25, 2012 at 8:14 am

You’re right Martin. The power in group buys is getting access to new, loyal customers. Not just one-time deal seekers. Thanks for your comment!

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