Personal budgets are tight, but a booming online industry is loosening up some great deals for savvy consumers. In most major cities, you can find local sites that organize promotions at restaurants, spas, and entertainment venues. On some sites, you can get coupons for a set discount, but other group buying sites, like Groupon, have a more complex and impressive model for greater savings.
Groupon deals become official only when a predetermined number of customers join the offer. Consumers can score a major deal if they’re willing to commit money in advance and wait in the hopes that enough people will join in so that the deal “is on.” Businesses get comfortable offering incredible discounts because the exposure to Groupon’s audience can build awareness among millions of potential customers. Groupon sends their “Deal of the Day,” for example, to a subscriber list of 70 million customers.
Offering a deal on Groupon can have the same power as an expensive marketing campaign, but with a lower cost, better returns, and more customer engagement. It can be a great deal, but it’s not as simple as it seems. So how can your small business leverage Groupon to bring in customers without depleting your cash reserves? Carefully consider the decision to get involved, and then meticulously plan your campaign.
Reasons Not to Offer a Groupon Deal
Participating in a Groupon promotion may bring in customers, but the deal can cut into your profits too much to be worth it. In fact, a Rice University study showed that a third of businesses that ran Groupon promotions didn’t make money, and some of them even lost significant revenues. Don’t make their mistakes. Learn how the promotion plan works, and analytically consider if you should get started at all. Don’t do it if you:
1. Run a Tight Profit Margin
Most Groupon discounts are for around 50% of a business’s regularly advertised price. But while that might be an acceptable loss to attract a new customer, Groupon will take 50% of the revenue that your deal generates, cutting your income to 25% of your normal rate. That result can be financially devastating if your business is already based on small profit margins.
For instance, if you charge $80 for an hour-long massage, you’d offer it for $40 on Groupon. After Groupon takes its half, you’re left with just $20 for a sale that would normally bring in $80. Groupon can bring you hundreds or thousands of new clients, but can you afford the large-scale loss to bring in the high quantity of new customers?
2. Rely on a One-time Sales Model
The losses are especially damaging if you don’t expect repeat customers. For example, if you make custom wedding dresses, or provide landscaping design, you’re looking for customers to recommend your work to friends, but you don’t expect them back any time soon. If the customers you find on Groupon aren’t coming back, then it’s going to take a lot longer to recover the lost profits from your deal. While you might eventually get some referrals, you’ll deplete a lot of your working capital too quickly to reap the benefits.
3. Don’t Have Sufficient Equipment or Staff
A Groupon promotion can bring in a huge rush of customers in a short period of time. That may sound like great news, but if you run a small business with a short staff, you’ll be caught unprepared. If you don’t have enough clerks minding the store, you won’t be able to provide proper customer service to keep your new buyers coming back to pay full price. If you do your work at home, like selling baked goods from your own kitchen, you can quickly run out of inventory and be left with only angry customers and empty racks. When your deal backfires like this, you’ll never recover your losses. In fact, the negative word of mouth that follows can put you out of business. It’s one of the dangers of overly fast small business growth.
Great Times to Run a Groupon Deal
How can you be one of the two-thirds of successful businesses from the Rice University study? Pick the circumstances and strategy to boost your profits, expand your customer base, and convert Groupon customers to regular buyers. It’s a great time for a Groupon campaign if you:
1. Are Opening a New Location
Many small businesses can’t afford to forego full-profit sales to existing customers, so they reserve Groupon deals for new customers, leaving a bad taste in the mouths of those loyal customers. To avoid this trouble, a Groupon campaign is useful when you’re opening a new location. In this case, you can alert potential customers in a new area about your product or service by inviting them to give your business a try with a fantastic offer. You’re announcing your new place and bringing in brand new customers without cutting into profits from existing customers. Just keep your profit margins in mind as you construct your deal.
2. Have Excess Inventory
A large, underused inventory can negatively affect a business because it represents cash and assets that you’re not using. Especially in today’s economy, your small business needs all the cash you can get your hands on. Standing inventory is your enemy. A Groupon promotion to unload your excess is a great way to convert your products to cash. Particularly if you sell seasonal items or foods that expire, you can accept a more substantial cut into your profits to just get some sales going. You can afford to offer this type of sale to both your existing and new customers, since lower profits are better than no profits at all.
3. Need a Quick Cash Boost for a Service-based Business
Banks aren’t lending to small- and medium-sized businesses, so if you’re running a service business, you may be desperate for working capital during tight weeks and months. If you run a tax service, hair salon, or writing business, for example, you’ll have those times when you need to make quick sales just to have the cash to meet payroll obligations. You probably don’t have any excess inventory, so all you can really do is offer some cut-rate service and get some free advertising.
That’s where Groupon comes in, especially if you offer a deal that encourages new customers to return later or purchase additional services. For example, an income tax preparer could offer a discount on preparing a return, but not include filing. A writer can offer a deal on one page of website content, and hope the consumer needs more than that. And the hair stylist could offer a discounted cut, but charge regular price for color. Don’t mislead potential customers with a bait-and-switch; just pick a service that encourages them to buy more from you.
Tips for Groupon Campaign Success
If you’ve made your decision and you’re in position to capitalize on a Groupon offer, follow these five steps to success.
1. Price Is Everything
Carefully choosing your price point is a major factor in determining whether or not you’ll be successful. Unless you’re offering an exclusive service or selling hard-to-find items, Groupon users seem to expect savings of at least 40% before they’ll commit to an offer. You’ll likely need to offer more than half off to really tip the scales and get noticed. But you need to watch your own numbers to make sure that you’re not giving up too much either.
Crunch the numbers on deals between 50% and 75% off and figure out how much of a loss you can accept for the sake of attracting new customers. Compare the long-term potential to the short-term losses. If the prospects are risky and the losses potentially crippling to your business, try a different marketing tool than Groupon.
2. Choose Your Minimum
You’ll also choose a minimum number of commitments that you require for the deal to be “on,” and if not enough Groupon users accept the offer, then everything gets wiped out. Think carefully about how many new customers you need for the deal to be worthwhile for you. And don’t forget that too many can be a bad thing if you’re not ready to meet a high level of demand. You can protect yourself from a bad deal or an overwhelming burden by picking the right target number.
Especially if you’re running on an online store or local business, assume that the Groupon users will move quickly to get the deal. If you can’t take on 500 new customers in the course of a week, then set a much lower minimum.
3. Offer the Right Product or Service
Offer a discount on an enticing item, but not your best seller. If something’s in high demand, there’s no need to discount it. Instead, use Groupon to sell slow-moving inventory or an underused service. Ideally, you’ll pick something that can lead a customer to eventually buy a high-ticket or top-selling item. This way you’ll generate cash by getting rid of extra stock, and you’ll make customers aware of the benefits of products or services that may have gone unnoticed. Further, more unusual items and services will standout to Groupon users, as well as the staffers who pick items for the “Deal of the Day.”
4. Break It Up
Hit and run customers aren’t anyone’s idea of building a steady clientele, but that’s exactly what you’ll get in most Groupon sales. Your goal should be to build relationships, so you need to encourage more than one visit from customers. Break up your deal in a way that requires the purchasers to make more than one visit to your shop, restaurant, or website. If you’re selling spa items and your package includes three services, limit the customer to one service per visit.
Over time, get to know your new Groupon customers and make sure that each one appreciates the service and forms good relationships with your staff. That’s the perfect formula to get them back after they’re finished with the discounted services.
5. Promote It Yourself
The simplest move is to set up your deal and leave advertising to Groupon. But while they do a great job, the business owners who make a significant profit and retain new customers are the ones who spread the word about the deal on their own as well. Offering an amazing deal through Groupon is a great way to engage and energize your existing customer base. You can afford that hit on projected revenue from existing customers if you know they’re going to bring in two or three new clients. Post the deal on your company site, hang a poster in your doorway, and take advantage of the free advertising that comes from word of mouth from your loyal customers.
Just as with any promotional idea, Groupon can be a fantastic way to bring in a large influx of new customers. But as with any business venture, it’s easy to move too quickly and make big mistakes.
You have to be ready to take a hit on your profits, especially after Groupon takes its cut. And you must be ready to meet the needs of new customers and exceed their expectations. Offering a major deal is about attracting and impressing new customers, so don’t do it if you can’t follow through.
Promotions like a Groupon deal are an amazing way for small businesses to level the playing field and compete with the big players. But be smarter than those big guys: Make sure you can profit in the long run and build relationships with your new and excited customers.
Have you ever run a Groupon campaign? What success stories or major problems have you found?