Daily deal sites like Groupon are launching all over the world to fulfill the voracious appetite of deal-hungry customers that want to obtain deep discounts from both national and local merchants. Groupon and other group buying websites are making money hand over fist by merely featuring the merchants’ 50% off deals to their enormous list of email subscribers. Many people, including myself, have criticized the daily deal business model as an effective tool that business owners can use to generate more revenue. The fact is that many local merchants will actually lose money by offering these 50% off deals because they only earn 25% of what they’d normally make on each sale (Groupon gets half of the other 50%). Despite that fact however, local businesses are requesting to be featured again and again on social buying sites like Groupon. What most critics don’t realize is that it’s not the deals that make these collective buying sites so powerful. On the contrary, it’s Groupon’s ability as a more effective local advertising platform that has earned them the coveted title of the fastest growing business of all time.
Why Groupon’s Worth It For Local Businesses
Unlike many traditional advertising options, such as print, radio, and television ads, Groupon can deliver measurable results for local businesses that need new customers now. Customer acquisition is the life’s blood of every successful business and conventional advertising mediums can’t produce the customer acquisition rates that Groupon supplies. That’s exactly why Groupon is able to charge merchants such high rates and why it’s a very real game changer for the local advertising market. No other advertising medium can rival Groupon’s ability to push foot traffic into local storefronts, let alone do it in such a measurable and expedient manner.
Are Groupon’s Merchant Stats Accurate?
Groupon proudly displays claims that over 95% of the businesses that use its services “are satisfied with their Groupon experience”, they “would use Groupon again”, and they would “recommend Groupon to other businesses”. A recent study performed study by Utpal Dholakia, an associate professor of marketing at Rice University’s Jesse H. Jones Graduate School of Business, has finally put those claims to the test and provided some real data to backup the cost effectiveness of Groupon. Dholakia surveyed a total of 150 businesses that ran promotions with Groupon between June 2009 and August 2010. The study covered 19 U.S. cities and 13 product categories ranging from restaurants and spas to educational services and tourist attractions. Listed below are some of the key findings from Dr. Utpal Dholakia’s Groupon study.
Key findings of the Groupon study:
- 66% of businesses that used Groupon were able to attain a profit from their deal offering
- 42% of businesses said they would not run another Groupon promotion
- Restaurants faired the worst of all categories; 20 of 48 reportedly lost revenue with their Groupon promotion
- Spas had the greatest success; 14 of 17 reported a profitable Groupon promotion
- Of those businesses that gained profits, 50% of redeemers purchased beyond the coupon’s value
- Of those businesses that gained profits, 31% of redeemers purchased a second time
- Employee satisfaction with a Groupon promotion was the strongest predictor of profitability
- A promotion’s effectiveness in reaching new customers was another predictor of profitability
- More sales are achieved with 1) deals that set a maximum sales number limit, 2) a longer promotional duration, and 3) restaurants
Tips For Businesses Using Groupon
Dr. Dholakia suggested that businesses offer structured deals that spread out the coupon’s discount over several visits. For example, instead of a one-time coupon that offers $30 worth of services, the business should offer a deal that includes three coupons that are each worth $10 in services. Doing so may help develop a rapport with the customer to encourage return visits and increase the probability that the business would make a profit with their deal promotion. Other suggestions include offering discounts on specific items rather than the total bill, cross-selling products and services to customers, targeting less popular product or service items, and setting coupon redemption dates to increase off-peak or seasonal traffic. Using our Groupon calculator you can clearly see how businesses are able to earn revenue from daily deal sites if their promotion is carefully constructed.
Groupon As A Better Local Advertising Platform
Despite the criticism that one-third of all businesses don’t profit from Groupon promotions, it’s actually pretty amazing that an overwhelming majority (66%) of merchants do. Businesses should NOT expect to turn a profit when they discount their products by 50% and split the remaining 50% with another party like Groupon. Incredibly, however, the majority of merchants are able to do so without paying any upfront costs, gaining hundreds to thousands of new customers, and injecting a huge amount of cash flow into their business within just a few days. What other advertising platform can do that? None. And that’s how Groupon is changing the advertising game for the better and why daily deal sites may be the most effective advertising option available for local business owners.
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