Here’s a question I hear asked often: “How do I get into that ‘Groupon pie’?” Or, as it is sometimes said:
“What is a Groupon?”
Groupon is the industry leader in a litany of websites that claim to offer “deals” on local establishments. In general, these are grouped under the term “Deal Sites”.
As I run a local marketing company, I have had a great interest in these “Deal Sites” since they first appeared. Here’s the skinny on them.
“What is a deal site?”
Deal sites like Groupon and LivingSocial (which are the two biggest deal sites, but by no means the only two, with over 150 million and 60 million subscribers, respectively) work by structuring deals with local businesses to offer something unique. : a greatly reduced price on a valuable good or service.
We will use a dentist for this explanation, but of course many other companies use these deal sites. Dentists can offer a service like teeth whitening, which only costs them pennies (other than the cost of hiring their staff), for around $250-$300 normally, but offer it for half the price on a site like Groupon or Living Social.
The idea is that businesses can profit from selling large volumes of their goods and services at a discounted price, as much or more than they profit from selling to one customer or customer at a time. It’s the same principle that makes it cheaper to buy the largest volume of detergent or a multi-pack of socks, only it applies to other goods and services. In fact, Groupon’s name is a portmanteau of the words “group” and “coupon.”
This provides an incredible incentive for many people who wouldn’t (or couldn’t) afford such luxuries the chance to indulge. Businesses benefit greatly from a massive influx of mostly new customers and money, even at half price, because such deals often attract hundreds or thousands of people who take them up. Even $100 x 100 people is nothing to sneeze at (that’s about $10,000). And those are all potential repeat customers.
How do deal sites make money?
Now, that $10,000 (which is already a discounted cost for the services or goods being sold), is divided between the offer site and the business offering the offer. Most deal sites will collect 50-60%, so the actual amount the company collects from that $10,000 would generally be $4,000-$5,000.
Therefore, in general, they will only collect about a quarter of what they would normally collect by offering a similar good or service at the normal market price. Generally, if it is well structured, all parties will win. Again, that’s hundreds or thousands of new customers to add to a company’s database, which is well worth the reduced initial cost.
Is there any risk in using deal sites?
You’ve heard the success stories about these sites. But, if you’ve watched everything, then you’ve also heard horror stories of companies trying to offer a deal on these sites and losing thousands of dollars, almost going bankrupt, and even having to go out of business because they didn’t. I don’t know what they were doing What gives?
Well, remember that most businesses will only earn a quarter to a third of what they normally earn for the goods and services they offer. They make up for the small margin in quantity sold and by reaping the benefits of exposure to potentially repeat customers. Some companies, however, just can’t scale well.
There was a bakery in the UK that often sold around 100 pies a month, who decided to run a Groupon deal of a dozen pies for around £6.50. They sold 8,500 deals. That’s over 100,000 cupcakes from a business that typically sold about 1/100 of that volume in a month! They ended up being unable to fulfill many of the orders and had to expand their business momentarily to accommodate the volume, ultimately costing them over £12,000 in the bid. Not only that, but many people were upset with the massive delay in getting their £6 cupcakes, and being internet savvy people in general, they rang on the various review sites, to KILL the reputation of this business.
Oh! How can I securely bid on one of these sites?
Experience is essential. If you don’t know what you’re doing, you won’t often go well in these deals. You need someone who has experience in these businesses to help you. Finding a reputable local marketing company with expertise in this area can go a long way toward success, although estimates show that less than 4% of local marketing companies offer such a service, so you may need to do your research. .