Groupon and other popular group buying sites are very effective at generating hundreds to tens of thousands of new sales for a business owner in just one day. Group buying websites are able attain such impressive sale numbers by partnering with merchants that discount a product or service by at least 50%-off the original retail price. Group coupon vouchers are sold directly from the group buying site which can later be redeemed at the merchant’s place of business. With Groupon taking a 50% cut of each voucher that’s sold, the total expense of attaining those sales from a merchant’s standpoint can be quite overwhelming. Depending on the price of the voucher, it may not be cost effective to use group buying sites like Groupon to generate sales.
Groupon Versus Promoting Your Own 50%-off Sale
Let’s consider the option for a business to run its own discount sale compared to using Groupon. As an example, let’s say you’re selling $20 worth of service for $10 and Groupon is able to generate 500 group coupon sales for you. Typically Groupon takes 50% of the voucher sales which would be $2,500. If you ran your own group buying event, you’d be able to keep that $2,500 and use it to promote the 50%-off sale instead. Twenty-five hundred dollars worth of online advertising can go a long way and if you can effectively incentivize the sharing of your own group buying deals, you can stretch your ad dollars even further. Remember, as a business owner you’d not only be gaining new sales but you’d be growing your customer contact list too. Thus, the chance of gaining a repeat sale is dramatically increased compared to using Groupon since it doesn’t share email addresses with merchants.
To make a more accurate comparison of running your own half-off sale versus using Groupon you’d need to know 1) how much an average customer’s contact information is worth for your business, and 2) the advertising costs required to generate one 50%-off sale. In the example above, you’re essentially paying Groupon, $5 for each sale ($2,500/500 sales). Could you attain one 50%-off sale for $5 worth of well-targeted ads on Facebook or Google? If we assume that Facebook charges you only $0.05 per click, that’s 100 chances per $5 you have to make a sale and gain that important new email contact. A 1% (1 sale/100 clicks) conversion rate doesn’t sound too difficult considering that you’re also offering a 50%-off coupon. Furthermore, as the price of any product or service your selling increases, so does the cost of using a group buying site to promote your business. In comparison, the potential for gaining the same number of new customers or more using advertising alone is increased as the price of the product or service you’re selling increases. That is, if you sell a 50%-off Groupon voucher for $20 instead of $10, you’re now losing twice as much revenue ($20/2 x 500 = $5,000 versus $2,500) that could have potentially been used to attain the same number of new customers at a lower cost using advertising alone. As you can see, at some point it becomes more costly to use Groupon than it is to promote the 50%-off sale yourself.
Below we’ve plotted the expense per sale as a function of Groupon voucher prices and the total expenses accumulated using Groupon versus voucher price. To calculate the total expenses for using Groupon, multiply the number of expected sales by one-half the voucher price (Groupon’s share is typically 50% of voucher price). For a more detailed estimate of the costs involved in using Groupon to promote your business, check out the group buying calculator.
As you can clearly see from the data above, a business owner’s costs rise dramatically as the price of the voucher increases. If the Groupon expense/sale is greater than the advertising expense/sale it’s not cost effective to utilize Groupon as a promotional tool for one’s business. And let’s not forget that Groupon doesn’t share the customer’s email address with the merchant which negates any potential repeat sales that could be gained through direct marketing efforts. This is one major flaw in the group buying business that seems to be consistent when you compare group buying websites against one another.
Groupon Versus Normal Customer Acquisition Costs
In order to make a well informed decision as to whether or not you should use Groupon, you need to know what it costs to acquire that new customer. This will differ greatly based on which industry your business is associated. Some industries have a very high repeat sales rate for customers whereas others have a very high customer turnover rate. These factors are also greatly impacted by the quality of the service you deliver to your customers as well. In general, the cost for acquiring new customers is usually several folds greater than the expenses to keep any customer. Acquisition cost should be something you know as a business owner but if you don’t you can always run an experiment to track this the next time you launch a marketing campaign. Another simple experiment to acquire this useful data would be to take a couple hundred dollars and use it towards online advertising via Facebook or Google. It would also be very interesting to know the conversion rate of a 50%-off sale campaign versus a regular campaign that’s ran on each advertising platform. Once you have those statistics you can accurately compare that data with the cost of using a group buying site to promote your small business.
Do Groupon Buyers Become Repeat Customers?
Another important metric to consider when making your decision is the potential for the customer to generate a single 50%-off voucher sale versus becoming a long-term repeat customer. Strengthening customer loyalty should be a top priority for every small business owner. Once you’ve spent the money to get new customers in the door, your highest priority should be to deliver the best possible services to ensure that they return. Unfortunately Groupon hasn’t reported the average return rate for Groupon buyers that redeem their vouchers. This data would be extremely helpful to know as it would clearly identify the point at which its not cost effective to utilize Groupon for your company’s promotional needs. The only way to discover this without Groupon reporting it would be to gather that data from Groupon’s past clients. Specifically, it would be beneficial for businesses that are considering Groupon to know the following averages:
1. The percentage of Groupon buyers that redeem their coupons before they expire
2. The percentage of customers who order more than the value of their Groupon voucher upon redeeming it
3. The typical sales amount (as a percentage of the voucher’s price) that exceeds the price of the Groupon voucher upon redeeming it
4. The percentage of Groupon buyers that were first-time customers of the business for which they redeemed the voucher
5. The percentage of customers that return a second time after previously redeeming the full value of their voucherIf you liked this article, please take this time to share it with your Facebook friends using the Facebook button (see Facebook post button to the left) or retweet it using Twitter (see retweet button to the left). You may also want to follow us or subscribe to the site to stay up-to-date with this article. If you'd rather follow us from your Facebook account, join our Facebook fan page or subscribe to our NetworkedBlogs profile.
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