Why Groupon is NOT a Good Business Strategy

In a tight economy, most people love a good deal. Heck, I love a good deal even when the economy is purring. So it’s really no surprise that Groupon is taking off. According to their site:

Groupon negotiates huge discounts—usually 50-90% off—with popular businesses. We send the deals to thousands of subscribers in our free daily email, and we send the businesses a ton of new customers. That’s the Groupon magic.

Check your email, Facebook, or Twitter feeds and watch the deals roll in. Today’s feature in my area is $12 towards a meal at WAH-BO Grille for a $6 price. 50% off! Awesome!

Here’s the problem…Groupon, and coupons in general, are a “lead with price cuts” strategy. Guess where those price cuts end up hitting? Yup, they go directly to your bottom line and eat into profits. In the marketing classes that I teach at WPI, I start ever semester with some basics about good business. The first thing I tell them is that business is about profits. I don’t care what you pull in for revenue; I care how much profit you make and is it enough to grow the business (or sustain it if you’re a not-for-profit)?

Why would you even consider a price discounting strategy? You as the business owner offering Groupons have to make some potentially dangerous assumptions for this model to work. You are assuming that you will find new customers with these offers, not just give current customers a cheaper meal. And you are assuming that these new customers will come back in the future and purchase at regular price. Both are dangerous assumptions. It is quite likely that your current customers will find these coupons and use them to purchase a meal at the lower price. And it’s just as likely that the new customers you attracted with coupons are discount chasers. They are loyal to the coupons, NOT to your establishment.

Here’s an interesting look at the Groupon problem, complete with a financial analysis to demonstrate the risks:

Why Groupon May Not Make Strategic Sense for Your Business

One Comment

  1. Jerry says:

    Groupon can be great for a small business or a costly mistake. It is better with service businesses with high profit margins compared to retail stores and restaurants.

    The key to making profit with groupon is the planning before the sale starts. How are you going to train employees, getting the contact info and how to follow up, how to handle the influx of new business and much more.

    It is not just picking a product or service and hoping for the best. Unfortunately, many small business owners do this. For example, I have purchased over 20 deals and zero businesses have tried to get my contact info or follow up with an offer. That needs to be done.

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