Should Groupon be Part of your Marketing Mix? Print

Thousands of businesses have run deals through Groupon to attract new custom. Should you consider Groupon as part of your marketing mix? Some will say that Groupon is more of a channel player than a marketing vehicle. I see it as both.

Groupon (derived from "group coupon") is a deal-of-the-day website that features discounted vouchers usable at local or national companies. Groupon was launched in November 2008. By October 2010 the company served more than 150 markets in North America and 100 markets in Europe, the Middle East, Asia and South America and had 35 million registered users.

 

The company offers one "Groupon deal” per day in each of the segments it serves. The Groupon works as an assurance contract; if a certain number of people sign up for the offer, then the deal becomes available to all; if the predetermined minimum is not met, no one gets the deal that day. This reduces risk for retailers, who can treat the coupons as quantity discounts as well as sales promotion tools. Groupon makes money by keeping approximately half the money the customer pays for the coupon.

For example, an $80 car detailing could be purchased by the consumer for $40 through Groupon, and then Groupon and the service provider would split the $40. That is, the service provider gives a car detailing valued at $80 and gets approximately $20 from Groupon for it. The consumer gets the car detailed, in this example, from the service provider for which they have paid $40 to Groupon. Unlike classified advertising, the merchant does not pay any upfront cost to participate.

How Groupon WorksIn general sites like Groupon prey on small businesses’ insecurities, attracting businesses that are unable to market their products and services effectively. Analysts suspect that too many small businesses see this marketing option as a panacea. Small businesses flock to Groupon because they are seeking the widest possible distribution for their products or services.

They think listing a deal on Groupon will drive traffic to their products - that customers will browse and buy beyond the ‘Groupon deal’ - and even potentially build some form of customer loyalty and future repeat buyers. The short-term benefit appears to be brand extension and the hope of additional sales.

Groupon is attractive to consumers who are looking for massive discounts, often 50-70% off, with Groupon taking a chunk of the remaining price. This leaves very little – if any – margin for the business owner offering the deal.

For most small businesses Groupon is largely considered a loss leader (a product sold at a low price, at or below its market cost to stimulate other sales of more profitable goods or services) So is Groupon just for small businesses that are lazy about marketing?

For all of Groupon’s might and distribution reach ultimately it will be up to you as the service provider to ensure that you offer a strong service or product and user experience which makes customers return again and again for more. You may think that it’s easy to retain this huge influx of new customers, but Groupon’s own write-downs due to the increasing volume of refunds suggests that even the first hurdle of gaining the customer can be complicated.

Moreover, consider that it’s been a tough few weeks for the group-buying website Groupon. CEO Andrew Mason has told employees that the Chicago-based company doesn’t “have any margin for error”, as its share price slumps to around $10.5 from a high of $31 in November 2011 (just after its IPO).

According to a December 2010 report conducted by Groupon's marketing association and reported in Forbes Magazine and the Wall Street Journal, Groupon was "projecting that the company is on pace to make $1 billion in sales faster than any other business, ever". However, a report from Forrester Research in October 2011 suggested that the Groupon business model was a "disaster" and that the firm had become an example of "how fast an Internet darling can fall."

Groupon seems to be somewhat out of control, dragged down by an increased demand for refunds and increasingly complicated arrangements. The company’s accounting method was described as “both unusual and fragmentary” by financial analysts following its Q4 earnings being revised down from a $15m profit to a $15m loss - quite a surprising swing into the red.

But apart from the company’s poor financial health, every business needs to assess:

  • Whether the heavily discounted promotions offered via Grouon will bring you sustainable customers
  • Whether the loss leader model works for your business in the long term
  • Whether Grouon can substitute for well balanced marketing strategy for your business
  • Whether selling at 70% discount via Groupon delivers a better bottom line than spending say 15% of your revenue on marketing and keeping your prices on par with the market

Difficult questions to answer especially for small businesses that have very shallow analytical data, but one thing is for sure, selling at 70% discount can’t be a sustainable business strategy so if you can’t make the customers come back for more at your regular prices then Groupon is not for you.



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