3 Things to Consider Before Launching a Groupon Campaign

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

Advertiser Disclosure ▾

This page contains affiliate links from which we receive a compensation. Like many publications Wise Bread is supported by affiliate commission from partner companies whose products appear on our site. This may influence which products we write about and the location and order in which products appear. We aren't able to cover every product in the marketplace.

Wise Bread Picks

• Travel Rewards Credit Cards
• Cash Back Credit Cards
• 0% Balance Transfer Credit Cards

Today's hot Internet property is Groupon, the social media coupon marketer many small businesses are adding to their marketing mix.  Many small businesses have benefited from the Groupon's ability to generate foot traffic and introduce them to new customers. But be forewarned: a Groupon campaign can be a monster that quickly sends you thousands of customers regardless of your inventory levels or readiness to process them. So, before you make the decision to augment your marketing efforts with a Groupon campaign, you have to do your homework.

Know the Basics

These are the basic terms of a Groupon campaign:

• Steep discount required — Groupon asks for a discount of at least 50 percent;
• You can limit the window of availability but not the number of people who purchase the deal (a minimum number of customers that must purchase the deal can also be set);
• Groupon is going to take at least 50 percent of the revenue generated;
• If the price of your deal is less than $10, Groupon keeps all the revenue;
• You don’t get the revenue right away — Groupon pays you over 3 installments;
• There is a substantial human resource burden required to process in-store redemptions;
• Forty-two percent of respondents in a recent study said they would not use Groupon again.

Learn from Others

Unfortunately, there’s no shortage of stories illustrating the disaster that ensues when a poorly planned Groupon promotion is launched.

Take Jesse from Posies Bakery and Café in Portland Oregon. Although there were plenty of warning signs, the temptation of growing her business was too great. When the promotion ran, her staff was overwhelmed by sometimes rude Groupon customers and her cash flow was smothered by the steep discount. Groupon’s CEO did respond to this story after it went viral and cited other businesses in the Portland area that have had successful campaigns.

On the other hand, Elizabeth Lunney from ABC Language Exchange in New York learned some tough lessons but was able to adapt and make this platform work for her business. This is mainly due to the fact that her language courses come at a high price point, which is more attractive to Groupon based on per coupon revenue, and costs for her service are fixed. With careful planning, ABC was able to put new Groupon customers into empty classroom seats (teachers are paid hourly, not per student); even with the steep discount, the additional students didn't upset Lunney's cost structure. Lunney was also able to negotiate lower percentage payments to Groupon, which may not be possible for small business owners selling low-priced goods.

Do the Math

So, nevermind the hype surrounding Groupon and the great pitch you’re getting from their salesperson, you have to make an educated decision. The only way you’ll know if a Groupon campaign fits your business is to run the numbers. Consider the following scenario:

• You’re going to offer your $100 product/service for $50;
• After paying Groupon, you’re left with $25;
• You’re not going to get all of the revenue at once.

Then ask yourself if the revenue matches your business model:

• What are your fixed costs/variable costs?
• Can your business handle an influx of hundreds or thousands of new customers?
• Will these customers purchase more than the face value of the coupon?
• Will these customers return or are they professional “couponers”?
• What happens to your brand when you drop your price by 50%?
• What happens to customer service levels during this flood?
• Will this be profitable?

Let’s face it; business success is based on profitability. Developing a strategy that attracts unprofitable customers, cannibalizes revenue from your current loyal customers (and potentially alienates them) is counterproductive.

Establish your marketing goals and then run the numbers against them. A Groupon campaign could work for your business, but maybe it would be disastrous. Either way, however, it’s still incumbent upon the business owner to understand the risks and walk away if the numbers don’t make sense, even if it's the hottest marketing strategy in town.