Should Your Company Use Groupon to Increase Sales?

Last Updated Sep 30, 2010 8:46 AM EDT

Groupon, the wildly successful online daily coupon company, recently offered a $25 coupon for $50 worth of merchandise at The Gap. The deal was so popular that it crashed Groupon's servers, attracted 445,000 buyers, and earned Groupon and the Gap more than $11 million in revenue (Groupon is being cagey about its cut, but the company typically takes 50% of the revenue on any given deal.) Such is the power and growing popularity of Groupon and an ever-increasing number of smaller competitors (including LivingSocial, GiltCity, Jasmere, BuyWithMe, and Tippr), which operate under similar terms and typically work with small, local companies. The idea is to increase traffic and revenue by offering deep discounts at retailers, restaurants, spas, and the like. So should your company be using an online coupon service? Maybe and maybe not. Here are two companies that had vastly different experiences.
ScanDigital, a company that digitizes photos, slides, and home movies, ran its first deal on Groupon last November and CEO Anderson Schoenrock is a huge fan. "We've run deals in 55 markets," says Schoenrock, who notes that ScanDigital has more that doubled its size in the last nine months, largely due to new customers acquired from Groupon. "It has been a significant game changer," he says. The company offered $100 worth of scanning for $40. Schoenrock concedes that "after a deep discount and Groupon's cut, we struggle to make much, if any money on each Groupon," but he insists that the service is an excellent customer acquisition tool. "We know that our customers will place repeat orders and generate word of mouth business for us. In our case, if we can gain a new customer through Groupon on a close to breakeven basis, then this is a huge win for us." But that's not true for every business. For some, social coupon companies like Groupon are just too much of a good thing.

Such was the case for The Little Room Studio, a small photography studio in Los Angeles that offered a $275 90-minute photo shoot for $59 on Groupon back in February. Groupon sold 859 of the deals, which initially made studio co-owner Natalie Novoa very happy. But the numbers just didn't add up. "Groupon took 50% and $2 an order for transaction fee," she says. "That left us with $27.50 per shoot." Moreover, she had to extend the redemption deadline for customers who purchased the coupon because the studio could not accommodate the large influx of new customers, many of whom waited until the summer to schedule photo shoots. "We haven't had one regular paying customer in six months," says Novoa. "We're working 80 hour weeks with only one day off." She also had to fire a paid assistant and hire an unpaid intern. Nonetheless, Novoa says that she would do business with Groupon again - but only if she could convince the company, which insisted on the $59 price point, to increase the offering to $89 or $99. She's still hoping that, like ScanDigital, she'll see repeat business from coupon holders who will come back to pay full price. But that hasn't happened yet.

Bottom line: If you're considering using an online coupon company, make sure you:

  • Do the math and make sure the discount you're offering won't damage you financially. Don't be bullied into offering a steeper discount than you're comfortable with.
  • Are prepared to serve a large influx of new customers; you may even need to hire more staff temporarily. If quality and/or service might suffer with more business, think twice.
  • Come up with incentives for those new customers to come back at full price, or offer a more modest discount.
  • Understand that many companies use companies like Groupon simply to acquire new customers and are willing to break even or even lose a little money on their offerings.
Has your company used an online coupon company? Tell us about your experience.

For another perspective on Groupon, check out this post by Mark Henricks: Tried a Groupon Campaign Yet? Don't
Groupon image courtesy of Flicrk user Duane_Brown, CC 2.0