Does Groupon Work for Small Business?

Does Groupon Work for Small Business?

Each week, I talk to 5-6 potential clients, mainly small business owners. While my focus is largely on small business PPC, in these conversations I learn about their other marketing efforts as well. Groupon comes up a lot. Many of the small business owners I talk with have tried it, but aren’t really sure if it’s profitable for them.

If you do any research on Groupon, you’ll quickly find there are polarized views on the channel. For every story of massive losses using Groupon, there is another about meteoric sales success. Fortunately, as Groupon has matured, more research and data have become available to enable business owners to effectively, and objectively, evaluate it as an advertising channel.

In this post, I’ll explain what benefits Groupon advertising provides to small businesses, how to evaluate if Groupon is a good fit for your business and outline some alternatives that can also be considered.

Groupon Provides Two Main Benefits

According to Ben Edelman, Associate Professor at Harvard Business School, Groupon benefits business in two main ways — advertising and price discrimination.

The advertising benefit for small businesses exists, but is limited. It’s important to remember that Groupon isn’t free. It’s advertising that you pay for out of your future profits. For some businesses, this advertising can be very expensive. There are other channels like Facebook and Adwords that may provide more targeted advertising at a lower cost. See more on that below.

The main benefit from Groupon is price discrimination. By using coupons businesses attract customers that would not normally buy their goods or services. This provides an opportunity to upsell customers when they use their initial coupon. It also, in theory, provides businesses a chance to build long-term, repeat customers from coupon holders. However, studies reflect that customers who are introduced to a business via Groupon, do not often return. More often, regular customers buy the Groupon to save on purchases they may have made anyway. For example, according to this CNBC article, “A study by Lightspeed Research shows that 63% of Groupons are purchased by existing customers. Just 2% of buyers who returned had never purchased from the merchant prior to the Groupon.”

Groupon Works Better for Certain Types of Businesses

Businesses that benefit from Groupon tend to have high profit margins, perishable products, or unused capacity for their services. For example, restaurants with lower food costs (<30%) or services like spas, gyms, or hotels that regularly operate with unused capacity. For these types of businesses, Groupon allows the business to discount their products or services to maximize capacity or minimize their outright loss. This is the main way that Groupon provides real value for a small businesses.

If this description doesn’t fit your business, Groupon is unlikely to benefit you. Skip to the next section to read about Groupon alternatives. If it sounds like a good fit, read on.

If you think Groupon may be a good fit for your business, you’ll want to do a bit more due diligence to evaluate the channel’s profitability for your situation. Warning — there is some math involved! Jay Golts wrote an excellent article in the New York Times that walks through the process. You’d be well-served to read this or another such resource prior to launching a Groupon campaign.

Alternatives to Groupon

Groupon didn’t invent coupons, so you do have some alternatives if you don’t think Groupon will work for you. You can create and distribute your own coupons and leverage other marketing channels to advertise those coupons to your target customers. Two potential ways to do this include:

• Facebook Claim Offer Ads, which allow you to create ads on Facebook for your coupons or discounts. The advantage of Facebook is the flexible demographic targeting options. You can entice consumers that you know are in your target audience, and potentially avoid customers who are “Groupon hunters” and unlikely to turn into repeat clients.
  
• Create a coupon offer on your website or a landing page service like com or Leadpages.net. Use Google AdWords to send targeted traffic to the offer page and convert visitors to potential customers. AdWords has a wide array of targeting options ranging from keywords, to topics, to demographics.

In sum, while Groupon offers real benefits to small business, it tends to only work well for to certain types of businesses. To ensure you are investing your advertising dollars in the most effective channel for you, it’s worth taking the time to evaluate a variety of options to see which will be most profitable for you.

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