You may have already heard about Groupon, a “daily deal” website. Like other daily deal sites, the deal is good for one day only. Unlike sites like woot!, which offer one item to all comers, Groupon offers specials from local businesses. So a Groupon user in San Francisco will see a different deal than someone in the North Bay or East Bay. And there’s one more twist: The deal depends on a certain number of people signing up for it. So, there’s a built-in incentive for people to tell their friends. Groupons (group coupons) are intrinsically viral.
As an example, today’s groupon for the Napa/Sonoma market is “$37 for $75 of Wine Country cuisine and fine wine at John Ash & Co.” The offer required a minimum of 20 people to participate (which happened almost instantly) and currently has sold 804 groupons (out of a maximum 1,000). Groupon users get a daily email to let them know what’s available.
Groupon makes its money by revenue sharing with the local businesses that offer deals. It writes the sales copy, collects the money, issues the groupon to the purchaser and sends the business a check for its share of the revenue (50 to 70 percent, according to published reports). Because Groupon is privately held, it doesn’t disclose revenues, but Morgan Stanley recently estimated it’s raking in more than $500 million annually. Groupon has certainly caught the attention of the financial community, if only because it recently turned down a rumored $6 billion buyout offer from Google. Groupon is reportedly the fastest-growing company (in terms of gross revenue) in history.
Because Groupon is a huge success, it’s attracted competition: LivingSocial.com and BuyWithMe.com are both frequently mentioned, but there are at least a dozen more. LivingSocial.com has an interesting twist in that, if you refer three others to a particular deal and they purchase it, your purchase is free. The problem for upstart competitors is getting penetration in a given market. Remember how everyone thought they could clone eBay? And neither site does a good imitation of Groupon’s admittedly whimsical copywriting.
Groupon users offer attractive demographics to local businesses seeking to generate traffic. According to information on its website, Groupon customers are largely young (68 percent are in the 18 to 34 segment), college-educated (80 percent have at least a bachelor’s degree), single (49 percent) and female (78 percent).
Unlike offering a deal to your fans on Facebook, Groupon is specifically targeted at bringing you brand-new customers. This can be both a blessing and a curse. A Boston helicopter school offered an introductory helicopter flight lesson for $69 (regularly $225) and sold 2,600 groupons (“We finally had to beg them to shut it down at 2,600.”). You can now limit the number of groupons that can be sold. Universally, this seems to be the biggest challenge that businesses face (and it’s not a bad problem to have, if handled properly).
Groupon has a site dedicated to its business partners, and it’s very clear that it delivers new customers to give your business a try—it’s your job to turn them into repeat customers. You shouldn’t expect to make loads of money from the deal itself. As a rule of thumb, 10 percent of redemptions occur in the first week, 20 percent within the first month and 15 percent in the last month of the offer. Groupon doesn’t provide firm numbers on how many people buy a groupon and fail to redeem it, but merchants are paid on the basis of the number sold, not the number redeemed.
Groupon does a good job of educating businesses on the process. For example, it provides both mobile and Web-based applications to help businesses redeem and track their Groupon promotions (in particular, the total amount spent by Groupon customers). Of course, it’s in the company’s best interest to help businesses see the results of offering a groupon. The biggest single piece of advice could be summarized as “be prepared,” meaning make sure you have stock on hand, are set up for an onslaught of phone calls, have trained staff how to handle coupon redemption, and generally ensuring that new customers become repeat customers. Two obvious items: Capture their email address (Groupon doesn’t share it) and give new customers a second coupon (not a groupon) to encourage another visit.
Does it help local businesses? According to Groupon, more than 95 percent of businesses that have offered a deal on the site would do it again. But, like any business, Groupon has its haters. Clearly, Groupon won’t work well for businesses that aren’t in some way based on the idea of repeat business—assuming a 50 percent discount to the customer and a 50-50 revenue share with Groupon, you’re being paid one-quarter what you’d normally receive for whatever you’re offering.
Even then, for small businesses that don’t think about the consequences, groupons can be deadly. For example, a massage therapist seeking to drive new business might price a $60 massage at $30 on Groupon. If Groupon takes 40 percent, the professional is only getting $18. Without limiting the number of Groupon-based appointments they do each week, they could see a precipitous drop in income. The owner of Posie’s Café in Portland wrote at length about the problem that a Groupon promotion generated for its business.
There are other hidden dangers as well: What if an offer attracts only bargain hunters? What if it attracts people who are already your customers? In both cases, you’re losing money.
For businesses in the North Bay, Groupon is well worth a look, primarily because it offers a specific Napa/Sonoma market. In larger markets, there’s a lengthy backlog of businesses waiting to be featured as the deal of the day. That’s a problem for Groupon as well, and it’s recently announced features to increase the number of deals available: Groupon Stores (much like a Facebook Page, which lets businesses offer deals on their own) and the Deal Feed (personalized deals from across Groupon).
While Groupon clearly has a clever idea and is executing well, the truth is there aren’t an infinite number of new customers for your business. At some point, you will have achieved the maximum penetration of your local market. Personally? I’d have taken the $6 billion.
