Is Groupon a Good Incentive for the Small Business Owner?

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Groupon is The Small Business Owner’s “First Time Home Buyer’s Incentive.”  Sure, the First Time Home Buyer’s Incentive increased the sales of new homes to first time home buyers last year – up until it expired.  Now, sales of homes to first time buyers are down, and it’s contributing to the overall housing crisis.

Is that a huge surprise?  Once you discount your product over an extended period of time, you condition your target audience to expect to pay that discounted price.  The lower price becomes the “new normal” and your buyers are going to wait until they see a deal like that again before they spend their money.

This is what is troubling about Groupon and other “deal” sites.  Not that they offer “deals” – everyone loves a deal, and pricing incentives can be a great way to drive new business for a business owner.  However, Groupon deals tend to be at such drastically reduced prices, the business owner is barely able to make a profit on the sales.  Sure, they bring in lots of new customers to get the deal, but what happens the following week when prices go back to “normal”?

Let’s take Posie’s Bakery & Cafe as an example. The owner researched Groupon and thought the idea clever, a great marketing tool. She connected with a Groupon rep who told her when the customer pays less than $10.00, Groupon usually takes 100% of the money, but then reassured her most customers pay more than $13.00. Also, by taking advantage of Groupon’s network, she’d never have to advertise again.

Does a major discount benefit the customer or the business? Or Both?

From her experience, the owner learned there is no cap on how many Groupons are sold to help protect the business from too much loss. A good deal for Groupon, not necessarily so for the business owner.

She also learned not every Groupon customer was a perfect one-time customer, much less a candidate for a long-term customer. Those were the ones who didn’t follow the Groupon rules, tried to push the envelope to get an even better ‘deal,’ and who complained about everything.

After three months of offering Groupon, the business owner found the results were hurting them financially. At one point she and her husband had to take $8,000 out of their personal savings to cover payroll and rent. You can read Posie’s story here.

If you don’t have a strategic marketing plan to convert these deal-seeking buyers into long-term paying customers, you may simply be giving away your product or service for free, with no hope of a return on your investment.  Worse, the influx in volume may be too great for some small businesses to handle, resulting in customer service issues and alienating existing customers who no longer receive the service they have become accustomed to.

The one that benefits from every promotion is, of course, Groupon. Mashable reports they make $800 million in annual revenue.
Here’s the main point; deals are great, but don’t let “discount-itis” get the best of you.  Make sure the deals you create are a “win-win” for you and your potential customers before you take the leap.

 

 

08.31.2011

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