Group buying websites, also known as collective buying sites, like Groupon are attractive to local small business owners because they possess the group buying power to generate hundreds to tens of thousands of sales from new customers within a single day. They are able to do this by convincing their clients (local merchants) to offer incredible discounts that are greater than half-off the original price, incentivizing the sharing of group buying deals, using a countdown timer and limited quantities to create a sense of urgency for purchasing deals, and by permitting users to buy and exchange the deal vouchers as gifts. Local business owners also like using this form of promotion because they can accurately measure its effectiveness when customers redeem their vouchers. A typical response from several past Groupon clients suggests that most businesses merely break even but is this really true? In this article we will examine the expenses a local business owner may encounter by utilizing a site like Groupon.
Groupon Data And Assumptions
According to data provided by a sandwich shop owner from Chicago that used Groupon to promote his business, 56% of Groupon buyers redeemed their vouchers within four months, 40% of them bought additional beverages or snacks upon redeeming their voucher, and sales remained elevated by 20% several months later. Using this data we can make some calculations to estimate the expenses that a typical business owner may accumulate when using Groupon. Let’s consider the sandwich shop’s experience with Groupon again given the following assumptions:
- We offer $20 of services for only $10
- We achieve 500 voucher sales
- 65% of the vouchers are redeemed within the expiration date
- 40% of buyers that redeem the voucher purchase an additional beverage or snack at $3 each
- 20% of buyers that redeemed the voucher return at least one more time to spend the same amount of money
Groupon ROI & Deal Performance Estimates
First, discounting services by 50% means that the business owner automatically loses $5,000 (500[$20-$10]) and Groupon keeps 50% of the sales (500 x $10 x 0.5 = $2500). Out of the $5,000 (500 sales x $10/voucher) in revenue that’s generated from the sale of the vouchers, the business owner will only receive $2,500 ($5,000 – $2,500 = $2,500). If 65% of buyers redeem their voucher (325 people) and 40% of them buy an additional beverage or snack at $3 each (130 people) this amounts to $390 ($3 x 130). Now let’s consider that 20% of buyers that redeemed their voucher return at least one more time within the year to buy the same thing or spend the same amount as the voucher price they previously used. This would mean that the business acquired 65 return customers (325 x .20 = 65) that spent $20 each for a total of $1,300 (65 x $20 = $1,300). In the end, the business owner’s total earnings from the group buying deal reach $4,190 ($1,300 + $2,500 + $390) but his total net profits are -$5,810 (-$10,000 + $4,190). In order to make up for these losses, the owner would need those 65 returning customers to come back 9 more times ($5,810/65/[$20 x 50% profit margin]) and spend at least the same amount of money ($20). If those 65 customers don’t return 9 more times each, he is essentially losing $11.62 ($5,810/500) for every voucher that’s sold or $17.88 ($5,810/325) for each voucher that’s redeemed.
Groupon Customer Acquisition Cost And Limitations
Our findings above beg the question: could the business owner acquire the same number of new customers at less expense using other promotional means? Perhaps the merchant could have created his own 50%-off sale and promoted it via Facebook Ads instead? In this case, to outperform Groupon, the business owner would need to generate a sale of his 50%-off coupon for less than $11.62 assuming that all other results are similar. At $0.5 per click, that’s 232.4 ($11.62/$0.05) chances to make a sale or a minimum conversion rate goal of 0.43% (1/232.4 x 100) that must be achieved.
Groupon’s 50% service fee of all voucher sales means that the expense per voucher sale increases linearly as the price of the voucher increases. That means that higher voucher prices diminish the cost effectiveness for businesses to use group buying deal promotions. Using our example above, this business owner would accumulate a net loss that’s equal to 58.1% ($11.62/$20) of the value of each Groupon voucher that’s sold or 58.1% of the total voucher sales revenue. For instance, if you offer a 50%-off Groupon deal that generates 1000 voucher sales that are valued at $40 each, you would stand to lose $23,240 (1000 x $40 x 0.581). Of course, that’s assuming that your business, and its new customers, would behave exactly as the sandwich shop’s did for which we based the estimates. It’s unlikely however that all businesses that utilize Groupon for promotional needs experience similar results. It’s more believable that our estimation, and therefore the performance of Groupon deals, may vary depending on several important factors such as the type of business, its location, and the redeemable value of the Groupon voucher.
Groupon Cost Calculator
We’ve created a Groupon calculator and embedded it below to help you estimate the expenses of using the service to promote your own business. Simply enter your group buying business promotion values/estimates in the cells highlighted in yellow and the remaining estimates will automatically be calculated for you.
UPDATE: One thing not included in the above estimates are the extra costs for hiring additional workers to handle 1) appointment scheduling, and 2) the huge influx of customers coming in to redeem their vouchers. Business owners should consider this and set a maximum limit on the number of coupons they can sell as well. Otherwise promoting one’s business on Groupon could do a lot more harm than good!If 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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