Software Engineer • Current Employee
Pros: Pros
1. It attracts a lot of consumers. You can reach new customers by appealing to those who are looking for inexpensive deals and a chance to save money. You get to charge lower prices to new customers who aren't willing to pay more. Existing customers are willing to pay full price for products or services. Dholakia says that Groupon promotions offer the most benefit for businesses in which the promotion does not cannibalize sales to existing customers.
2. It advertises your business. A Groupon promotion can be a way to announce the existence of your business to consumers who are unfamiliar with your products or services. You get to entice potential customers to try your goods. The idea is that they are going to like it so much that they will come back and buy from you again. You must make your promotion grab consumers but at the same time increase your potential conversion rate for repeat customers, says Dholakia.
3. It helps move inventory. Use Groupon deals to sell slow-moving items in your inventory or unutilized services. Discounts seem to be most compelling for merchants with low cost of goods sold. Use price deals to promote a product that is not that expensive. A Groupon-type promotion should be something that you do once in a while for a specific, narrow, limited reason, adds Dholakia.
4. It builds relationships. Use price promotion deals for building customer relationships rather than just creating one-time buys, recommends Dholakia. Meaning, instead of a restaurant owner offering $60 worth of food for $30, parcel it out to offer $20 worth of food for $10 over the customer's next three visits. Don't offer discounts on a total bill; rather, offer a specialized discount for various products or services.
5. It generates incremental revenue. If you have a low-cost or fixed-cost structure, you can make money on promotions. Take an owner of a rock-climbing business that has existing equipment and a storefront. The operating costs don't change based on the number of people who show up. A coupon deal can actually generate some extra cash by getting more bodies into the facility. Customers paying $10 for a $20 service still nets the owner $5 per voucher. Dholakia says each merchant must know their costs, factor in a price that draws customers, project the number of customers that will buy the coupon, and estimate incremental revenues.
Cons: 1. Deals attract low-end bargain seekers.
Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not be willing to purchase beyond the value of the coupon. So, there are low rates of spending and low rates of return.
One problem with price deals is diminishing returns; thus, merchants need to put a cap on the number of deal coupons that are to be sold, says Dholakia.
2. Deals hurt the brand.
The obsession with price doesn't necessarily make for a lot of brand loyalty or even brand awareness.
One negative aspect of daily deal sites is that price promotions usually hurt the brand of the company offering it, says Dholakia. It makes customers price-sensitive. When they get something at a much lower price, they then become less inclined to pay full price for that same product or service in the future.
3. Deals don't generate repeat customers.
Groupon has a low conversion rate for repeat customers, according to marketing experts.
You may never see the person again once they use your coupon. Or that person may not be willing to buy from you again without a coupon in hand.
The percent of new customers that redeem the voucher and become repeat visitors of the business is estimated at around 19 percent. It varies by product categories.
4. Deals are not profitable.
Another problem is the split. Groupon keeps 50 percent of the revenues from each coupon deal.
If you do the math, merchants need to have gross margins well in excess of 50 percent for Groupon to work for them. The promotion is very steep, usually 50 percent or more. Most businesses are built on margins of 75 percent, which means if the customer just comes in and buys the deal, the owner is going to lose money, says Dholakia.
Restaurants usually have higher margins. "By offering huge discounts and giving 50 percent to Groupon, they just aren't earning enough to cover the cost of serving that customer."
5. There are better deals out there.
Daily deal sites are not the only game in town. You can run a similar promotion for less money.
There are plenty of marketing programs you can use; does it make sense to use this one, asks Dholakia.
For example, you can offer a discount or promotion on a Facebook fan page. It's an effective way to engage new and existing customers at a very low cost, he adds.