Group Discount Buying Sites, Are They for You?

USA Today columnist, Steve Strauss, reviews the pros and cons of group discount sites such as Living Social and Groupon.

Shopping CartQ: My partner would like us to jump on the Groupon bandwagon for our bike shop and do a promotion with them, but I remain unconvinced. What’s the real deal, anyway?
Mark

A: My wife has always wanted to try Yoga, but for one reason or another, never did. Then one day she stumbled upon an offer from Groupon that was too irresistible to resist: 10 classes for $50. So she signed up and has been going to her classes for the past few weeks. She’s hooked and it looks like the Yoga studio has created a new customer, which of course is the idea.

But is that typical?

Not always. There is a lot to be said for these new breed of group discount buying sites like Groupon or Living Social, not the least of which is that for the consumer, they offer some unbelievable deals. But one main question that small business owners must answer is whether they will be able to convert all of these new looky-loos into return, repeat customers.

If not, then Groupon and its kin are not loss leaders, they are just losses. So the question of the day is whether you should jump on the Groupon bandwagon. Here are the pros and cons to consider:

Pros

Exposure: Undoubtedly, maybe the best part of Groupon is that the huge discounts offered by your business via the site will expose your business to a huge number of new people. That’s tough to beat. In an era when there is just so much darn competition, the ability to make an impression on a lot of potential new customers is not to be underestimated.

Sales: The correlation to all of this exposure is that you will sell more, maybe a lot more. People love a bargain and they love to save money, especially these days. So by offering steep discounts on what it is your business sells, you will no doubt sell more. Now, will you be able to make a profit? That is the question.

Advertising and Marketing: Another significant factor when considering the Groupon model, aside from increased sales, is that it can also be viewed as a unique way to advertise, market and/or brand your business. I always say that being in business is like being in a room without the light on – no one knows you are there. You turn on the light by marketing and advertising your business – that is how new people know you are out there.

So in that vein, if nothing else, a Groupon-type campaign will turn the light on and expose your business to a lot of new people.

OK, so there is a lot of good to be said for Groupon. There is also a lot of bad to be said.

Cons

Conversions? What do you get when you offer a steep discount to the masses? Masses looking for a steep discount. They may not necessarily be looking for your auto detailing service, but can’t pass on the deal. The problem then, and the problem is, will you be able to convert that bargain-hunter into a real, ongoing customer willing to pay your normal prices?
Not a few small businesses who have tried this model have answered that question, “no.”

Loss Leader: Groupon, Living Social, etc. promote loss leaders. Same question: Will you be able to go from loss to leader?

Capacity: I once had a colleague who really wanted to get his pizza restaurant reviewed by the local paper. So we put together some press materials and lo and behold, the restaurant critic bit and came out a few weeks later. That next Friday, there was a five-star glowing review in the paper. Marketing gold, right?

Wrong.

It was a total disaster for my friend. He was completely unprepared for the onslaught of customers that stormed his establishment that night, that weekend. He ran out of dough early, did not have enough wait staff on hand, the line grew to an hour and a half long, etc. In the end, he pissed a lot of people off. What a wasted opportunity.

That is the same risk businesses take with Groupon. If you are not ready for the masses, if it is going to overwhelm your business, don’t do it.
Current customer issues: What will your current customers think and do while you are busy servicing all of these new people who are probably paying less?

So is Groupon and its ilk a Downward Dog or a Warrior? Tough to say. What has been your experience?

Today’s tip: One last, major consideration: Depending on the group buying site you do you deal with, their share of your income will be anywhere from 20% to around 50%.

Have a question about Discount Buying Sites? Connect with a SCORE mentor online or in your community today!

About the Author

Steve Strauss HeadshotSteven D. Strauss is a lawyer and writer and is one of the country's leading experts on small business as well as an international business speaker. The best-selling author of 17 books, his latest is the all-new 3rd ed. of The Small Business Bible. You can listen to his weekly podcast, Small Business Success Powered by Greatland, visit his new website for the self-employed, TheSelfEmployed, follow him on Twitter, and "like" TheSelfEmployed on Facebook. You can e-mail Steve at: sstrauss@mrallbiz.com. © Steven D. Strauss