If you’re running a startup or small business, you’ve probably dreamed of the massive influx of new customers a Groupon promotion can bring in your door, virtual or otherwise. It’s like going from zero to 60, sales-wise, in one day.
Look before you leap. There’s mounting evidence that not all businesses will benefit from partnering with daily-coupon sites like Groupon and LivingSocial. In fact, depending on the nature of the promotion, you might actually end up in the red.
Take U.K.-based Need a Cake bakery, which got so swamped with orders following a Groupon deal, ended up with a loss of nearly $20,000.
That’s because owner Rachel Brown underestimated the popularity of the promotion, which offered a dozen gourmet cupcakes for $10–a discount of 75 percent. A whopping 8,500 customers bought in, forcing Brown to make 102,000 cupcakes–and give them away at a huge loss.
(Groupon typically takes 50 percent of the coupon price, meaning Need a Cake pocketed just $5 for every dozen cupcakes, instead of the usual $40.)
Sobering stories like that are not uncommon. One need look no further than last year’s “Groupon in Retrospect” to see how a promotion can wipe out a small business. (Curiously, this particular owner says Groupon took 100 percent of the proceeds, which seems like a sucker bet any way you slice it. But even 50 percent means just you get just 1/4 of the already heavily discounted price.)
For a complete rundown of Groupon’s potential perils, see Jeff Korhan’s “Why Groupon is Bad for Small Business.” Among other things, he says, it creates the expectation that your super-low prices will always be super-low–and that puts you in an impossible position with your new customers.
My big complaint with Groupon is that it offers no lead generation: you don’t get one sliver of personal information from the people who bought your deal. That means you can’t follow up with them; they’re literally anonyous one-time customers.
Now, it goes without saying that for some businesses, these coupon offerings work, and work well, otherwise Groupon wouldn’t be a multi-billion-dollar company. The question is, can it work for your shop? That depends on any number of factors, of course, but there are some steps you can take to make sure your promotion is a success–or, at least, not a disaster.
1. Do the math. Before signing up for a coupon promotion, crunch the numbers to make sure the deal won’t wipe you out. Figure out how big a discount you can realistically offer to make each new customer worth your while. Sure, you have to spend money to make money, but this could inadvertently lead to spending too much and making too little. (Read more: “Doing the Math on a Groupon Deal.”)
2. Cap the deal. Groupon doesn’t let you limit the number of coupons sold (which is what bit Need a Cake in the butt). But other coupon-deal sites do. It’s crucial to know your limitations. If your business can’t handle more than, say, 1,000 orders, don’t run the risk of selling 5,000. Insist on a sales cap that fits your needs.
3. Capture customer information. Groupon may not give you the names and addresses of your new customers, but that doesn’t mean you can’t collect that data when they walk in your door. Just say you want to be able to notify them of future promotions–which, of course, you do.
Want to learn more? TechCrunch has a helpful article on making the most of Groupon. In the meantime, if you’ve used Groupon or a similar service to promote your business, we want to hear from you! Leave a comment telling us how the promotion went, or send an e-mail to email@example.com.