By Kathryn Mackenzie, Editor, Hoover’s, Inc.
If you haven’t heard of Groupon, chances are you don’t spend much time on the internet (or watching Super Bowl commercials). Group buying sites such as Groupon, Living Social, and Twongo, are all the rage right now among consumers looking for a bargain. For the purposes of this article, I’ll use Groupon as my primary example simply because it’s the largest and most well-known, but similar sites are popping up left and right hoping to cash in on this booming market.
While we hear a lot about how consumers are saving money left and right, Groupon also represents a new, relatively untapped marketing opportunity for small business owners who see Groupon as a fantastic way to rope in new customers. Which has been proven to be true, but it can also be a nightmare for small business owners who haven’t done their homework.
First, let’s look at some of the benefits of using Groupon. It is an incredibly effective way of getting a large number of customers through your door, and not just any customers, but customers who fit your target market. Second, there’s no upfront cost to use Groupon, and the total cost per customer is generally lower than other forms of advertising such as radio spots, billboard, and direct marketing campaigns (without the added time and money you would otherwise spend on market research).
On the other hand, when Groupon says they will bring you customers, don’t underestimate them. Stories are popping up every day of small businesses being completely overwhelmed by the sheer number of people who come pouring through their doors during the Groupon campaign. Additionally, group purchasing websites are attractive to consumers because of the deep discounts they offer (Groupon advertises discounts of 50 percent to 90 percent), and many of the same businesses that report being overwhelmed by new customers also report losing thousands of dollars to coupon users who don’t purchase anything beyond the discount.
So how do you know if group purchasing is a good marketing tool for you? There are a few simple tips that can help keep you and your business from ending up overwhelmed and underpaid.
Before you sign up ask yourself if your business can actually benefit from this type of advertising. The longer Groupon is around, the clearer it becomes that the businesses that seem to benefit the most from using the group purchasing model are those that offer services rather than goods. Why? Simply put, it’s harder to run out of a service and you’re not losing the cost of reselling items you’ve already purchased. If you are a tiny, three-employee cupcake shop, and you’ve already busted your budget on the ingredients to create your beautiful cupcakes, and you then sell those cupcakes for up to 90 percent off their purchase price… you see where I’m going with this. On the other hand, if you own a fitness facility and have been looking for inexpensive ways to boost personal training sales, Groupon could be a great marketing tool, provided you’ve got some extra trainers on hand.
If you decide Groupon is right for your business, do your homework. While Groupon has a sales team in place to guide you through their process, it’s just that, their process. They don’t know the ins and outs of your business, and the best way to make sure your experience with Groupon is a good one is to customize your agreement with them.
One component that is particularly important to those business owners who have used Groupon is to make sure to place a cap on sales by limiting the number of discounts available. Placing limits on the number of times a Groupon can be passed around is a good way to keep your business from being overrun by hordes coupon users. By spending the time to customize your group purchasing agreement, you can make sure you’re covering overhead costs while still drawing in new customers.
Finally, negotiate, negotiate, negotiate. They don’t advertise it but Groupon and its competitors don’t always have set commission rates. In one case a sales person told a small business owner that Groupon would keep 100 percent of the sales the company made during the Groupon campaign. When she balked, he negotiated down to a 50/50 split. While 50/50 seems to be the lowest they’re willing to go, you certainly don’t want to be the business that settles for less by not asking for a better split. If they ask for 60/40, tell them you want the 50/50.
Competition among these websites has become fierce, and in response to that and a few well-publicized horror stories from small business owners, Groupon launched a new website to help business owners navigate the Groupon waters. Through GrouponWorks.com business owners can calculate how many vouchers they should offer based on their capacity, receive specialized industry data, and get advice about how to turn a Groupon customer into customers of your very own.
A recent study of 150 businesses that ran and completed Groupon promotions between June 2009 and August 2010, found that the promotion was profitable for 66 percent of participants and unprofitable for 32 percent. My guess is that those 66 percent that made it work spent some time doing their Groupon homework before they launched their campaigns.
Oh, and by the way, if you were wondering if there are similar group purchasing websites for businesses, there are, but they haven’t caught on quite like their consumer-directed brethren.
At GroupPrice companies can sign up to receive a free email from the website that will show them deals customized for their city. Discounts range from 30 percent to 60 percent and are for such items and services as information technology services, software applications, legal services, and marketing tools. Just like with Groupon, GroupPrice users are encouraged to spread the word via social media websites to entice their associates to get in on the deal.
For small business owners in the UK, Huddlebuy offers discounts on tech goods, software, telecom services, office space, legal services, and accounting. Deals are available for a limited time and there are limited quantities of each service or item offered. What’s different about Huddlebuy is that buyers have the opportunity to get in on deals they missed by requesting that the website contact the supplier on their behalf. Users can also request a deal and Huddlebuy will attempt to get it on their site.