Is Groupon A Scam?
Groupon Pros & Cons
So, you’re a small local business and you’re trying to decide if Groupon is worth your time. Well, no need to make a list of pros and cons — We’ve done it for you!
Since Groupon’s target market is roughly the same as Elite Social Marketing’s (i.e. small to mid-sized businesses looking to promote), we get a lot of questions about whether our clients should do a Groupon deal, too. Unfortunately, it isn’t a cut and dry answer. It comes down to your situation:
Potential for massive increase in foot/web traffic
Potential for increased name recognition
No upfront fee
Deals are not profitable. A big problem is the split. Groupon keeps 50 percent of the revenues from each coupon deal. If you do the math, merchants need to gross margins well in excess of 50 percent for Groupon to work for them. The promotion is very steep, usually 50 percent or more. Most businesses aren’t built on margins of 75 percent, which means if the customer just comes in and buys the deal, the owner is going to lose money. Restaurants usually have higher margins. “By offering huge discounts and giving 50 percent to Groupon, they just aren’t earning enough to cover the cost of serving that customer.”
Severely discounted prices
Potential for failure
Long waiting list
Chance you will stop marketing waiting for your big “Groupon payday”
Deals attract low-end bargain seekers. Because the Groupon customer base is made up of deal-seekers and bargain shoppers they might not be willing to purchase beyond the value of the coupon. So, there are low rates of spending and low rates of return. One problem with price deals is diminishing returns
Deals hurt the brand. The obsession with price doesn’t necessarily make for a lot of brand loyalty or even brand awareness. Promotions are powerful. Deals can be detrimental.
Deals don’t generate repeat customers. Groupon has an extremely low conversion rate for repeat customers, according to marketing experts. You may never see the person again once they use your coupon. Or that person may not be willing to buy from you again without a coupon in hand. The percent of new customers that redeem the voucher that becomes repeat visitors of the business is estimated at around 19 percent.
You can’t just turn the deal off if you are getting overwhelmed or see that the Groupon model isn’t right for your business
Now let’s look at an example, so we can see the pros and cons in action…
Say a restaurant advertises a Groupon for $12 that gets the customer $24 worth of food, and they sell 300 of these deals.
Groupon is going to take half of that, so the gross for the restaurant is $6 per Groupon, which comes to a total of $1,800 gross. Not bad, but when you consider they are giving out $7,200 worth of food just to make that $1,800, it starts to look a lot different.
The Return Customer Argument
A Twitter friend said:
“The hope with Groupon is that the resulting customers would be repeat customers at the full price in the future. “
Indeed, that’s what Groupon is suggesting. They’re pushing themselves as a means of advertising. They seem to think that once the customer knows about your business, they’ll keep coming back for more.
We think that in most cases this is simply not true.
Look at it this way: the people who subscribe to Groupon’s service are willing to spend time every day reading e-mail messages from Groupon that summarize the daily deals. These are people who are very interested in saving money. They’re buying because of the 50% off deal — not because they want the product or service. True — that Groupon voucher will get them in the door, but are they likely to come back and pay regular price for the same goods or services in the future? When they know that they could wait around and probably get another Groupon deal for the same product or service there or elsewhere in the future? We seriously doubt it.
As if to re-enforce this notion, a Twitter friend said:
“So, your saying to not take advantage of the deal that is offered? “
“Yes, that’s what we’re saying. We’re saying to STOP using Groupon unless you want to HURT a business. “
To which he replied:
“This could get into a lengthy conversation, so I’ll just drop it now. I’ll just say that I wish I could always afford to pay retail. “
This confirmed our suspicion: that Groupon users are only interested in buying at discount. This particular Twitter user likely has no intention of being a regular customer for any Groupon merchant. He’s just in it for the deals.
Deep Discounts Hurt Consumers, Too
As more and more businesses inflate their prices to cover the costs of discounts and special offers, the average prices of goods and services rise. Ironically, this means that the consumer’s thirst for deep discounts could be causing overall price increases that make items too expensive for them without the discount.
Think of our Twitter friend wishing he could afford to pay retail. He later tweeted:
“It would be nice if prices were just fair and coupons didn’t exist. Making purchasing decisions would be simple. “
News flash: coupons aren’t going to go away if people keep using and relying on them.
In addition, the demand generated by oversold vouchers can exceed the merchant’s ability to redeem them. Overcrowded restaurants, out-of-stock items, and long delays in scheduling. Not only is this a nightmare for the merchant, but it certainly does not make for good experiences for customers.
What consumers don’t seem to realize is that their thirst for deep discounts can be fueling a market trend that is, over the long term, destructive.
- Businesses desperate for sales and willing to take a loss on deep discount sales will fail when repeat business does not materialize at regular prices. This means fewer businesses and less competition in the market.
- Businesses that manipulate regular prices to ensure profit on deep discount sales will inflate retail prices beyond what many consumers are willing to pay. This means less affordable products and services.
- Business that oversell deep discounted products or services may fail to provide products and services timely or satisfactorily. This means a lower level of service.
How does any of this benefit the consumer?
Terrible Offers to Get Customers in the Door
Of course, the really savvy businesses will try to use Groupon as a means to get customers in the door by offering nearly worthless items at a discount. Another one of our Twitter friends alluded to this:
“I signed up for Groupon and I’m not impressed. Feels like daily spam with nothing of value. “
Could it be that some businesses are getting wise to the pitfalls of using Groupon? Could it be that the ones that aren’t desperate for customers are keeping clear?
Why We’re So Passionate about This
As you’ve probably figured out by reading between the lines, we disagree about the viability of your business if you use this Groupon thing. (And not just Groupon; all of its copycat companies, too.)
- Groupon is misleading business owners. Groupon pushes itself as a marketing tool that you pay for only when you get results. But a true marketing tool would get long-term results, not one-time results.
- Groupon is extremely expensive. Don’t just look at the 50% commissions on the sale price. Instead, look at the whole cost, which is 75% of the retail price. Offering a Groupon deal is the same as giving customers 75% off.
- Groupon is making a lot of money — far more than its clients. Is it right that any advertiser should make more on a business’s products or services than the business itself?
It bothers us that so many small businesses are being hurt by Groupon-like deals. In many cases, these are companies that are cash-starved and desperate for revenue. The idea of selling 1,000 vouchers at $50 each — $50,000 cash up front! — is extremely appealing to these people. They don’t think about what it will cost them to redeem these vouchers: products, equipment, services, employees, scheduling. They don’t think about how crowds and word of the discount might affect their relationship with current customers.
And Groupon doesn’t do a thing to enlighten them about the potential drawbacks.
It also bothers us that so many consumers who are obviously clueless about the costs of running a business will snap up these Groupon deals with no intention of becoming loyal customers of any Groupon merchant. Don’t they see how they’re potentially hurting the businesses they visit with their Groupon voucher? Don’t they care?
How about these words from a Twitter User:
“Skeptical as I may be, the limited funds in my bank account make me a consumer first and an observer second. As companies line up to split prices in half and make them even easier for consumers to find, I’ll be there right alongside soaking up the deals. I did, after all, milk AllAdvantage for triple digits before the goons running the place depleted their venture capital and shuttered the place for good.
In other words, if this ship’s going down, I’m raiding the buffet before hitting the lifeboats. Join me for an oyster?
F**k the businesses and the economy that they fuel. Suck up all the cheap deals you can while the businesses stupid enough to offer them are still around.”
As one of our Twitter friends said:
“The only one who wins with Groupon is Groupon itself.”
We couldn’t agree more.
So, if you are thinking about offering “Deals” on Groupon, I would like you to consider this:
Advertising through social media is powerful because you can target your exact demographic. We can help you reach people based on:
- Demographics: Run laser-targeted advertisements to people based on their interests and online behaviors. We can target specific ages, locations, income levels, and much more!
- Email Lists: Send your email list to us and we can run custom ads to your email database. If you have the emails of previous leads or customers, you can say “Hello” to repeat sales and new referrals.
- Website Visitors: Add re-targeting pixels to your website and advertise to recent website visitors. Only 1-2% of visitors convert on their first visit. We’ll use re-targeting to increase your rate of conversions.
- You Can PROMOTE Your Business to Highly Qualified Leads Using Our Methods. We don’t target everyone with a pulse. We analyze your business and locate your DESIRED Customer Type when they are ready to buy…Not those that are just looking for a “Deal”
- Our social media advertising services help you generate immediate results on social media. We connect your products or services to thousands of people who may be interested in them. Our social media advertising services will allow you to leverage the most cost-effective and highly-targeted form of advertising available today.
- Social media advertising is the most cost-effective form of advertising available today. On average, you can spend $5 and reach 1,000 people. In comparison to traditional media, our social media advertising services are 3x less costly.
If you or someone you know may be interested in getting Highly Qualified Leads for your business, enter your name and email address below. We would be happy to discuss increasing your advertising ROI.