Groupon’s Costs: Can You Afford a Free Lunch?

The Gap’s use of Groupon in the middle of the August back-to-school season raised questions of the offer’s viability for retailers. (Read my perspective in August’s blog post – 5 Ways Groupon (and Similar Suppliers) Can Make You Money.) Until now, Groupon’s meteoric growth has garnered media attention and me-too competitors without clear insight into what’s involved for a participating business. Earlier this week, Jesse Burke, owner of the Portland, Oregon-based Posies Café, drew back the curtain in her brave Facebook posting that revealed Groupon’s potential to turn a burgeoning business into a money pit. (Thanks to Redfin for its Groupon commentary which links to Burke’s Facebook posting!)

In today’s weak economy where every company is looking for ways to keep going and, if possible, growing, is it any surprise that small businesses, which do little if any marketing, are willing to jump for a marketing offer that looks great from the outside? For these firms, Groupon appears to offer a cost-effective opportunity in terms of the following.

  1. Broadens your reach through the use of their extensive database. Problem: While this sounds good, each business needs to attract the right target customers. Groupon members, as Poises Café discovered, tend to be discount hounds and price-focused buyers ready to leave as soon as a competitor makes a better offer. Poises Café would have done better targeting telecommuters and/or retirees who need to get out of their houses.
  2. Increases sales because Groupon users will buy more than the face value of the coupon. Problem: Poises Café found that Groupon buyers who spent close to the limit, tried to use multiple coupons for a single purchase, and didn’t tip on the full amount of the bill. Many Groupon users selectively use coupon discounts to maximize their shopping dollar. Very few are prospective high purchasers testing new product offerings. Instead Poises Café could have offered free refills or a free take-home dessert. Or, they could have implement a multi-purchaser card like many coffee shops do.
  3. Eliminates the need for other marketing when you use Groupon. Problem: One great campaign doesn’t make a marketing plan. On-going marketing and messaging is needed to get consumers to come back and purchase again. For this reason, retailers send regular circulars and professional services send client reminders. Posies Café could have used Foursquare or other local online services as well as building their own email list. Even the win-a-free-lunch raffle works.

Jesse Burke revealed the core elements of a Groupon offer from a retailer’s perspective. As a marketer, assess each component of your offer to ensure that it works to achieve your business goals. Based on Burke’s posting, here are the three major factors to consider:

  1. Groupon coupons are effective for six months starting the day after the offer is featured. Problem: Posie Café’s Groupon offer ran much longer than a promotion should have; months rather than days or weeks. Time limits are a critical component of an offer. Further, according to Burke, customers tried using Groupons before and after the promotion as well as multiple coupons for one purchase.
  2. Groupon strongly suggests that retailers give a minimum of 50% off. Problem: While retailers may offer significant price savings, they’re careful to limit merchandise selection and/or the quantity of such offers. In Posies Café’s, the discount extended to their entire offering. To make it worse, customers shorted the wait staff by only tipping on the amount they paid.
  3. Groupon asks for a minimum of $10 or 50% of the coupon’s revenue. For Poises Café, Groupon kept 50% of the $6 that customers paid for $13 worth of merchandise. Problem: There’s little chance that this revenue ($3 for $13 of merchandise or 23%) covered Poises Café’s variable costs. Moreover, because the promotion extended over a long period of  time, the revenue from the promotion needed to cover all costs, which was impossible with such a small level of sales.

In marketing, like life, if something seems too good to be true, it probably is. While Groupon’s offer appears to be nirvana, the businessman’s challenge is to determine whether there’ll be long-term growth. When you plan any marketing offer, first calculate the potential benefits and costs to ascertain whether you’ll make sufficient sales to cover your expenses and whether it will yield long-term benefits.

Have you used Groupon or a similar vendor? If so, what was your experience?  Please share your thoughts in the comments below.

Happy marketing,
Heidi Cohen

For additional commentary, e-Consultancy provides a good perspective on Groupon.

Photo credit: Pink Sherbet Photography via Flickr

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