Life of an Internet Entrepreneur

A lot of buzz has emerged about Groupon, a website that allows retailers to offer a “group” coupon to many customers at once.  A certain number of customers must sign on to the deal before it is active.  Once the deal is over, Groupon sends the business owner a check, and the business owner provides the goods and services to the customers that signed up for the deal.

This sounds great, right?

Some businesses have not had great experiences with Groupon, and that has scared off other small business owners from jumping in. Others have sworn it is the best thing that has ever happened to their business. With such a wide spectrum of results, it can be overwhelming to look into. Groupon claims that 97% of businesses that run a Groupon event want another one, and one must admit that is an extremely impressive percentage.

So how do you know if Groupon is right for your business?

Groupon is better for some businesses than others, and is a tool.  It is not good or bad – you just need to know how to use it.

1. Local Brick and Mortar Retailer

Groupon has separate deals running for each and every city, every day. You’ll first want to check that Groupon has a section for your business’ metro area. Groupon is always increasing services to new cities, so don’t despair if you can’t find your location yet.

If your business is a local brick and mortar retailer, Groupon can get a lot of people into your store and give you great statistics which you might not be keeping for your store currently – such as how many people redeemed your coupons.

While Groupon will not turn over it’s mailing list to you, there is still a great benefit to you.  Simply have a newsletter form in your store during the coupon redemption period, and gather emails that way to be able to communicate directly with the new customers you have just picked up from your Groupon sale.

2. Manufacturer vs. Reseller

Groupon is a site based on discount deals. High percentage-off deals. On top of that, Groupon takes its cut.  If you don’t control the means of production, it will be very hard for you to even break even. Your challenge is finding an item that customers will like, at a price that makes you money, and still is a deal for the customer.  That challenge is easier to meet when you have a much higher total margin.

For example, say you run a cupcake store that sells cupcakes for $1. Your store does not actually bake its own cupcakes, but rather purchases them from a bakery for $0.25 each. You aren’t leaving much room for profit, Groupon’s cut, AND a huge discount for Groupon’s customers.

On the other hand, if you bake your own cupcakes, you might produce them for $0.15 each, and be able to make a much more compelling Groupon event. Remember, there are likely MANY cupcake stores in your city, and some of them will manufacture their own goods instead of buying from a provider. Can you compete?

3. Frequency of Purchase

Some businesses, like Dunkin Donuts, can count on the same customers coming in virtually every day of the week.  Others, like car dealers, might not get the same customer back in their store for several years.

Why does this matter?

Because if the car dealer offered 50% off a car, he might get a lot of people in, but he would be left with no cars, 50% of the money, and wouldn’t see any of the customers again for several years- if ever.  Cars are the same at every dealer of the same brand, making the purchases price sensitive, above anything else. That would surely be a losing deal.

Dunkin Donuts, on the other hand, can give 50% off a coffee, because that represents a very small portion of the customer spending in a given year at a coffee shop (and, coffee’s profit margins are astronomical).

Groupon therefore is biased towards helping companies with a high frequency of repeat customer purchasing, since they can often afford a “get them in the door special” that low frequency purchase businesses can’t offer.

4. Perishable Goods & Services

Plenty of events have sold tickets on Groupon.  You are likely saying:

“Hey! But that’s a low frequency purchase”

And you are right – but, that is also a perishable good or service. The event is not so focused on maximizing every dollar, but rather trying to avoid theoretical loss (similar to when hotels discount room-nights drastically when they have last second capacity).  The event is happening at a certain time, and most tickets are sold, and any empty seat in the venue is of absolutely no value…so even $1 per ticket will earn the event planner money.

5. Closeouts

Groupon is a good place to get rid of closeouts, assuming you have enough quantity left to offer to a significant number of people. Remember, Groupon will only “activate” the coupon if a certain number of customers take advantage of it.  If you have 150 leftover halloween costumes in your store, you may be able to get rid of them through Groupon, but keep in mind Groupon buyers aren’t “suckers” – they know how to bargain hunt, and are usually interested in finding something that is “current”.

If your goal is just to turn inventory and get some cash, go with the closeouts.  If your goal is to invest in as many long-term repeat customers as you can get, opt for something everyone will be excited to buy, instead of sticking them with the “leftovers”.

6. Experience

Everyone likes trying out new things, feeling special, and sharing in that discovery with friends and family.  If your product or service enables Groupon customers to do any of those, you will stand a good chance of getting new customers who keep coming back.

I like to use Medieval Times as an example of a successful experience.  They offer “experiences” at about a handful of places across the country that bring you back to the middle ages where jousts and knights were common-fare. At their stadium, you sit back, watch a great show of sword-fighting and jousting on horseback, while you dine like a king.

There are many daily deal types of sites out there.  Most feature some electronics or gadgets.  Customers come to Groupon for more than just that. If you can offer an “experience” instead of just a product or a basic service, you will find great success on the Groupon platform.

7. Ability to Scale Up

A lot of the negative experiences small businesses have had on Groupon aren’t actually due to Groupon being to blame, but rather small businesses not accounting for just how important planning the logistics and service related to a Groupon event.  If your cupcake store sells 50 cupcakes per day, and 1,200 Groupon customers sign up for your coupon, you’ll need to serve a much higher number of cupcakes than you are used to.  You’ll need to have additional help making the cupcakes, have more cupcake ingredients on hand, more help at the cash register, and other customer service issues.

Since you are hoping to earn some of these customers as repeat customers, it is very important that your store is still running smoothly, even though the extraordinarily high quantity of customers makes it tougher to do so.

8. Shifting Behavior

One way to use Groupon to your advantage is to combine the Perishable Goods & Services tip with the Ability to Scale Up tip in order to shift the customers’ behavior.  You can offer a coupon that can only be redeemed at a certain time or on certain days, taking advantage of your slow business days.  This way, you won’t need to hire additional help, and it will even out the traffic into your store.  After all, when your employees don’t have customers to take care of, they are the perishable service.

9. The Gray Area

Like other coupons, gift certificates, and non-cash paper and plastic, some of the profit retailers make on Groupon events comes from the fact that not everyone who purchases a coupon actually redeems it.  Some people forget they even bought it.  Others simply lost interest in the activity or product they bought.  So, in a way, the true discount a retailer offers is always lower than advertised, once you average out the folks who don’t redeem their Groupon coupon.

The Consumer Federation of America reported that 10% of gift cards are never redeemed, costing the consumer about $5 billion dollars last year.

10. Audience

As with any marketplace, there are certain common shopper demographics on Groupon as well.  All other things being equal your Groupon event will be most successful if you cater to college educated women, from metro areas, who go out twice a week and are single. Stores like restaurants, places to hang out or go on a date, accessible by subways or buses are obvious hits.  If your business doesn’t generally get many people from that demographic, take the time to think about how you can interest that demographic by branding the event differently.

Here are few free options for doing your own demographic market research.

In summary, Groupon can be a fantastic tool for your business to grow.  By considering your business along all the dimensions I’ve written about in this article you can have the best shot of making your event a success, and establishing realistic expectations of how your event will perform.

If you have run any Groupon events for your business, and have thoughts on this topic, please feel free to add your comments below!