How Groupon Can Help (or Hurt) Your Business

Last Updated Jan 13, 2011 1:14 PM EST

Groupon is undeniably a great bargain for consumers -- what's not to like about savings between 50 and 90 percent on offerings from local restaurants, spas, cooking classes, museums and other merchants.

But what about those merchants? Is Groupon a good marketing vehicle to excite new business?

The answer: Yes, but not for all types of businesses.

For those of you unfamiliar with the online coupon service, here's how it works. After you register as a user, e-mails daily bargains from merchants in your area. This gives retailers tremendous exposure, at least for one day, and the chance of adding hundreds if not thousands of new customers.

The two-year-old site has resonated with consumers in this era of uneconomic uncertainty, and also allowed small businesses that have done little online advertising to get their name out in a big way. That's why Google offered a reported $6 billion to acquire the service -- and was rejected.

But the price of admission for merchants is not cheap. Not only do they have to offer huge discounts to get into the Groupon system, but they also rebate some of their revenues back to Groupon. Another problem: Your existing customers, who pay regular prices, could nail your profit margin if they purchase multiplevouchers from the service.

Harvard Business School professor Benjamin Edelman and colleagues Sonia Jaffe and Scott Duke Kominers offer a framework to help merchants analyze the Groupon decision based on their own business models. You can read about it on HBS Working Knowledge. "We hope to help retailers predict whether a discount voucher promotion is likely to be profitable for them. Our approach can also help retailers design discounts that better serve their objectives."

Here are some findings by the researchers:

  • As a marketing tool, discount vouchers are likely to be most effective for businesses that are relatively unknown and have low marginal costs.
  • They also seem to be compelling for merchants with a low cost of goods sold and with a highly perishable product. Think restaurants and gyms.
  • Retailers of durable products, like manufactured goods and clothing, probably have less to benefit.
Edelman and his colleagues also offers retailers tips on how to structure a Groupon offer. Merchants should disallow the purchase of multiple discount vouchers from a single customer, or else run the risk that the customer will never come back and pay full price. Also, imprecise wording on vouchers such as "Not valid on major holidays" can lead to customers trying to game the system. What, after all, is a major holiday?

And sometimes you should be careful about what you wish for. Could your business handle dozens if not hundreds of new customers calling the day your offer is published on Groupon?

As a merchant, what have been your good and bad experiences with Groupon or similar discount voucher systems?

(Photo by Flickr user evansent, CC 2.0)

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.