Groupon–What You Need to Know

What is Groupon
Groupon has become a valuable marketing tool for many businesses. Simply defined, Groupon is a deal-of-the-day website that features discounted gift certificates usable at local or national companies. Here’s how it works:

  • Each day Groupon features a great deal-of-the-day in a specific region for a product or service at an incredibly low price (usually 40%+ off).
  • Consumers in that area check Groupon’s website daily or opt-in to receive email alerts.
  • If enough people sign up for a deal, the deal will activate; something Groupon calls “collective bargaining” which essentially encourages viral sharing and also promises the merchant a minimum number of customers. If the minimum number of people do not sign up (let’s say 100 people for 50% off of a manicure-pedicure at a local nail salon) the deal will not activate and customer’s credit cards will not be charged.
  • Speaking of credit cards, payment is made by the customer to Groupon and the merchant never pays a dime to Groupon. This is seen as low risk advertising for most merchants.
  • Groupon usually gets half of whatever revenue the merchant brings in. Discounts vary and so does the cut that Groupon gets. On average, merchants end up collecting only about 25% of what they would normally make, since they cut their price in half and then give up half of what they collect.
  • To make sure the deal reaches its minimum, customers share the deals with their friends. Specific Groupon deals can be made as gifts or gift certificates can be purchased.
  • In summary, Groupon makes it easier than ever to assemble large group of people to get amazing deals while providing low risk advertising for merchants.

Where’s the value?
Despite collecting only 25% of what a they would normally make, merchants are seeing this as a new form of advertising that works. For one, it provides businesses the ability to attract and acquire new customers. With amazing deals that are specific to local areas, Groupon creates buzz. It also encourages viral sharing in which case friends share the deal with their networks and minimum quantities can be reached quickly.

Businesses only pay for sales made and there is a tipping point for the deal-of-the-day to be honored. Caps can be set to further minimize risk and manage uptake. Another benefit is that Groupon provides upsell potential (see GoToU Topic #90 on Upsell). In other words, if that new customer buys more than the face value of the Groupon deal, the business can offset the lower margin Groupon deal. Lastly, it’s likely that once you have acquired a new customer via a Groupon deal, they will ‘come back for more’ contributing to customer retention of your business (knowing the Lifetime Value of your customers would come in handy here).

What are some of the disadvantages?
Groupon has been scrutinized by some, saying that it only attracts those who follow bargains and not necessarily brands. Some businesses also say Groupon doesn’t work and/or takes too big a slice of every daily offer (generally about one half). There is also the potential of the deal being too successful at margins below cost, so merchants have to be acutely aware of their deal, set limits accordingly and manage expectations closely.

Is Groupon for You?
Like any form of marketing using Groupon for your business should be strategic; what are you looking to accomplish (i.e. number of new customers)? What are your margins for doing this? What is success and how will you track it?

If you do not plan to turn a new deal of the day customer into repeat business you may not benefit as good as the customer in the long run, using Groupon. In “Groupon for Biz? Yes or No” from the SMB Collective, they offer some suggestions for getting the most out of Groupon for your business:

  • Prepare staff, inventory, distribution, call centers, and any other aspect of your business for a huge influx in traffic when the deal launches and just before it expires.
  • Set limits on the deal; only sell a set quantity of deals and know there’s a chance your investment may not be profitable.
  • Remember to measure the hidden benefits of these deals, too. Your business is generating buzz among customers who may never have been to your website, and you’re hoping to generate repeat business and a long-term relationship.

How legit is Groupon?
Groupon started in 2008 and has experienced rapid growth:

  • Subscriber base increased from 152,203 in June, 2009 to 83.1 million at March, 2011-06-18
  • Featured merchants have grown to 56,781 in 2011 up from 212 in the second quarter of 2009

Groupon just filed for a public offering and is investing significantly in continued growth and sustaining a first-mover competitive advantage, despite the several imitators that have emerged including, local newspapers and a potential Facebook rival offering.

Groupon is certainly a tactic worth considering for your business, assuming the number make sense. Let’s not forget about the Customer P&L and the value of Successful Marketing Return on Investment = Increase Customer Acquisition + Increase in Customer Retention – Decrease Costs to Serve the Customer.

About the Author
Angelo Biasi is General Manager of SMART Marketing Solutions, LLC, a leading full-service integrated marketing company in Naples, FL since 2001. He has helped create and execute marketing plans and integrated marketing solutions for companies such as Playtex, Bic, Rogaine, Tauck, and over 35 colleges and universities, to name a few. Angelo has an MBA in Marketing from the University of Connecticut and has taught Marketing at New York University for over five years. For more information or to learn more, email him at abiasiatsmartmarketingllcdotcom, visit or call 239.963.9396.

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