The Groupon Effect and Your Online Business

There’s a lot of Groupon-bashing on a lot of blogs and online business sites and reading through those articles, it’s easy to see where they’re coming from. Using Groupon without first thinking of the effect had caused a lot of problems for several small businesses, including near bankruptcy. To understand the concept of Groupon and your online business, let’s look at how Groupon operates.


What is Groupon and How Does it Function?

Groupon is an online coupon site which relies on group buying. Basically there’s a huge discounted amount, but it only kicks into action when a certain amount of buyers show interest. The revenue generated from this split between Groupon and the small business, with Groupon holding on to any unclaimed funds.

This works great for businesses that are trying to break into a particular market or that are just in need of added exposure. Groupon has a huge database of subscribers who open the mails they send out each day to find out if there’s any discount they might be interested in. Most Groupon subscribers open those mails because even though there is usually the obligatory massage and manicure, there might be a surprise or two in there.

While this works well for some small businesses, it has turned out to be a huge disaster for others.


Some Problems Small Businesses Face with Groupon

There are a number of problems small businesses face when they use the marketing services advertised by Groupon, I’m not going to go into detail, you can read this article if you want to know more.

One problem is that Groupon users are not long-term clients. This is the biggest issue for a lot of business owners because they discount their products and services heavily in the hopes that the Groupon client will become a regular client. It doesn’t work that way.

You can’t expect a client who paid $10 for a service to suddenly pay $200 for the same service, not when there are other service providers giving similar services for the same $10 or less. That’s just how it is with Groupon buyers; they will go back to the site and look for another discounted offer as some businesses have discovered to their detriment.

Another problem small businesses face is that they lose a lot of money and barely make their capital. Let’s imagine that the production cost of a product is $9.30, and that same service is offered at $23 on Groupon. Let’s do a little math here; let’s say Groupon takes 50% of that sum (and I’ve heard they sometimes take more) this means that the business is only left with $11.50, which is $2 more than the production cost and most businesses don’t figure in labor.

Now I’m not very good at math but it’s easy to see that this is a complete loss particularly if it is for a service/product which usually goes at a higher price. Some business owners have concluded that using the coupon site is not worth the effort.

This is where your online business comes in (I was coming to that.)


How Can Your Online Business Tap into the Groupon Effect?

Let me start by saying this idea is not original. I live in Kuala Lumpur and we get Groupon here. One phenomenon I’ve noticed recently is that there’s a lot of online offers; e-learning, online services and even eBooks. There are several reasons why your online business can benefit from Groupon:

  • Your overhead is low – you’re probably not paying for office space and all the other overhead issues associated with brick and mortar businesses;
  • Your profit margin is higher – since you have almost no overhead and you’re not paying to print physical products, this greatly reduces your production costs.
  • Using automation in your business – if you’re offering an e-course, the use of autoresponders or other automated software cuts down your labor significantly.
I don’t know if you see where I’m coming from. This is better than paying for solo Ads because accessing the huge database of Groupon subscribers is free for a cut in your profits. Even if you are doing this for much less than you usually would, unlike with brick and mortar businesses, the more people who buy your discounted product, the more money you make.
Of course this is a generalization and it may not work for you. I’m just saying that when we’re growing our online businesses, we need to learn to think outside the box when it comes to marketing techniques for online businesses.


Some Tips to Bear in Mind if You’re Doing Discounts

Regardless of whether you run an online business or a brick and mortar business, there are some tips you should keep in mind.

1. Don’t offer a discount if you can’t afford to run at a loss. If running a discount will cost you the rest of your business then don’t do it. If you are barely going to break even and you know you can’t afford to do that, then don’t.

2. Don’t be afraid to take a risk, particularly if you have nothing to lose. No, I’m not contradicting myself. I read this story of a woman who offered a discount for her cup cakes and got hundreds of buyers. She barely made a profit (just a smidgen) but her conclusion was that it was better than being out of business, which is where she was headed. So the profit might not be much but it is word of mouth right? And guess what? You CAN convert those buyers into loyal customers which brings me to the next point.

3. Don’t over-discount. I see it all the time as a buyer and I shake my head. I went for a facial a few weeks ago (my first facial) and it was fantastic. I had a wonderful time. Then they tried to do an upsell and sell me other things which I might have bought if the price was right. For goodness sakes, I bought a coupon for less than $20. Then you’re trying to sell me something for over $100, it’s not going to work. If the upsell had been a bit higher, something within the range of $25 – $50 it might have tempted me.

The lesson here is that if your usual service/product costs $250 then don’t offer a discount at $25. Those who buy that discount usually wouldn’t buy at the usual price. Instead offer your discount at a closer price like $150. If you don’t want to do that, why not create a special $100 class and offer it at $65 or less? It’s easier to upgrade from $60 to $100 than to $1000.

Groupon and similar coupon sites have worked for many businesses and they can work for your online business. I only have one advice, use wisdom before you jump. :)

Have you tried using any of these sites for your online business and what was the effect? Share with me.

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