Last updated: October 12th, 2015
Groupon is social media meets coupons, giving businesses the opportunity to discount their products to gain additional traffic and giving customers the chance to get discounted items.
Sounds like a deal, right?
Here is what you do not know about Groupon. While they do offer a larger traffic stream to your store, Groupon forces businesses to give 50% or higher discounts to utilize their services. What’s more, Groupon then takes 30% to 60% of the discounted price as their own income revenue.
So let us say that you are a restaurant owner and your restaurant charges $50 for a dinner-for-two, which included an appetizer, two main entrees and two desserts. According to Groupon, you must have a deal that is half of the total cost, so you make a $25.00 Groupon deal for a “Dinner-for-Two.”
Now let us say that you are a business located in a small town and the Groupon deal lasts for a month. You will have an influx of 200 customers who utilize the Groupon deal, 100 customers of which are brand new to your restaurant.
- 200 x $25.00 = $5,000Here you have the formula for the number of customers multiplied by the new Groupon meal cost. You have an income of $5,000
- 100 x $50.00 = $5,000Here is the formula for the number of customers you previously already had as customers, noting they would have been more than willing to pay the standard $50.00 price for the meal. You have an income of $5,000.
According to the above standards, you will notice that you broke even with the Groupon deals – gaining the same revenue, as you would have without the deal, but potentially gaining 100 new customers who will return for a non-Groupon deal.
However, this is NOT the Groupon way.
You now must take your $5,000 and take out 50% (their average fee) to give to Groupon.
- $5,000/2 = $2,500
Now you will notice that your Groupon deal has only brought in a revenue of $2,500 – making that drastic cut in cash flow.
Now that we have only covered the basics, we will now have to go into additional detail about this situation.
- 200 people ate for the cost of 50 people in your restaurant.
- On average, companies spend 30-35% of their total food costs on purchasing the meal.
Based on these two factors, we can determine that your restaurant has only brought in 25% of its total revenue on those 200 meal specials then it would be normally priced.
Since the cost of each meal to the restaurant would cost approximately 30-35% of the normal pricing, we can deduct that the restaurant did not gain a profit from that transaction.
In fact, the restaurant paid 5-10% of the meal out of its own pocket – which means it came out of YOUR pocket.
So Is Groupon for Me?
As stated above, Groupon can take away from you if you are not careful. These prices were just on a smaller scale. Many restaurant owners in larger cities pay a larger portion of money from their own pockets to cover the expenses lost from Groupon offers.
If you are a company who does resale, you might want to rethink Groupon, as it might be more detrimental than beneficial for you in the long-term.
So Who Can Benefit From Groupon?
In short, Groupon is only for service businesses such as aquariums, private rehab facilities and museums where nothing is being sold.
For example, coupons might include 50% off admissions – where no loss of profit is being made and the company only stands to gain from the transaction. Aquariums, theme parks and museums were going to be in the same condition they were in if those customers did not show up, so even though they are only getting 25% of their admission fee – it is 25% more than they would have been getting it before.
Be wary of Groupon unless you have a solid marketing strategy setup for yourself.
About Author: Courtney Gordner is a blogger with a passion for all things internet, social media and SEO! Read more from her on her own blog, www.talkviral.com