Groupon for Dummies

Over the last few months many of my clients have asked me about Groupon, how it works, and if they should use it for their business.  Based on these conversations I felt compelled to get away from our normal blog discussions on advanced internet marketing techniques and do something simple for a change.

Groupon was founded in April 2008 by Andrew Mason.  It is headquartered in Chicago, IL and currently covers over 300 markets across 35 countries.   Its first deal was offered in October of 2008 – offering a half price coupon for the pizza joint on the ground floor of their building.  Groupon’s 2010 revenue is estimated to be $175 Million.  The basic premise of Groupon centers around selling extremely attractive coupons on a per market basis.  In order for the coupon to be “active” a minimum number of individuals must purchase the coupon.  Groupon only features one offer per day in each market (although secondary offers are shown based on the registered users profile).  The offers are marketed via Groupon’s website, a daily email, social media, and Groupon’s current subscriber base.

Groupon splits the revenue for the sale of the coupons on a fifty/fifty basis with the vendor.  Since Groupon splits the revenue with the vendor and offers only one deal per day per market – only competitive offers are selected.  In fact, 7 of every 8 offers suggested by Groupon’s vendors are rejected by Groupon.  This filtering process ensures that the majority of offers on Groupon are very attractive and they currently enjoy an 85% redemption rate.

This all sounds great – So what’s the catch?  Groupon is a great tool for exposure and can help in driving much need traffic to a retail storefront.  They have several case studies where thousands of people showed up at a small retail store to redeem their coupon.  The issue is that because of the competitiveness of the offer, the fact that the revenue is split fifty/fifty with the vendor, and the high redemption rate - the initial offer is not necessarily profitable for the vendor.  Current research shows that the return visits from the customers driven by the coupon are not enough to create a positive Return On Investment (ROI) for most vendors.  That being said – businesses that have low variable costs of goods sold get a great return.  Some examples of these businesses would be events, museums, spas, etc – where adding one additional customer does not add much cost for the business owner (so any revenue added is “gravy”).

In summary, Groupon is a great tool for driving awareness and traffic to many types of businesses.  It just needs to be understood that although driving a lot of activity there is not necessarily a defined ROI.  Before a business jumps in we suggest that one clearly defines the goals for the campaign, establishes key performance indicators, and clearly thinks through the business case so that any possible disappointments are avoided.