The one key rule for surviving a Groupon deal

The one key rule for surviving a Groupon deal

Summary: Learn how a Groupon deal can be very compelling for buyers, but for sellers, it can be brutal.

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TOPICS: CXO
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When I started DIY-IT back in September, I promised I'd not only talk about DIY tech, but also about tips and techniques for small business operators. Since we're entering the official start of the Silly Season, I though it was time to bring the small business aspect of DIY-IT into focus. I'm kicking it off with a cautionary tale of marketing, sales, and Groupon.

If you own or run a business, you know that you can't sell if people don't know about what you offer. There have, historically, been two key ways to create awareness: PR (getting covered in the press) and marketing (advertising and promotion you pay for to get awareness).

Since 2008, there has been another way: Groupon. Groupon is a deal-of-the-day service that has grown to have enormous reach. It works by partnering with vendors to offer coupons to customers. The idea that makes Groupon powerful is that deal doesn't become active until a certain number of people buy into the group coupon (group+coupon=Groupon).

Groupon essentially becomes social selling.

If you want the deal real bad, you'll tell a few of your friends, and eventually enough buzz will be generated that a bunch of people will want the deal and buy. This, to any marketer, is promotional gold.

Groupon makes its money by taking a portion of the deal. And this is where it can be absolutely poison to any company who uses Groupon for promotion. It works like this. You (as the seller) offer an incredibly compelling deal.

Let's say you're selling premium cupcakes, like Rachel Brown in London does. A dozen of these premium cupcakes sells for the equivalent of about $40, or $3.33 a cupcake (they better be awesome cupcakes). Rachel (true story) wanted more cupcake customers, so she did a deal with Groupon to offer cupcakes for 75% off, providing a dozen cupcakes for $10, or about $0.83 a cupcake.

You can see how a 75% off deal becomes very compelling for buyers, but for sellers, it can be brutal.

Do the math. No, seriously, do the math. Normally, Rachel gets about $40 for her dozen cupcakes. Now, she's getting $10. But she has to split that $10 with Groupon, so she really only gets $5, a whopping $35 less than she would with a normal sale.

Here's where it got really bad for baking Rachel. There's no published limit to how many customers can get the Groupon deal. Apparently, Londoners love them their cupcakes, and, by the end of the promotion, 102 thousand cupcakes were ordered. That's 8,500 dozen -- each of which was sold at about a $3 loss.

The hit to her bottom line (more than $20,000) was one thing. But she and her batch of Brit bakers had to work overtime to crank out the 102 thousand cupcakes. So, not only did they lose money, they worked to exhaustion to do so.

Don't be stupid

At the beginning of this article, I promised you the one key rule for surviving a Groupon deal and here it is: don't be stupid.

I feel for Rachel, I really do. I've run a business and been so desperate for customers that I'd do almost anything. Almost. But there are limits and Groupon pushes them.

Groupon's sales people will tell you that it's okay to take a loss, because you're creating so much extra awareness, but that's not really true. People who will happily buy cupcakes for 75% off are not likely to come back and pay full freight. The extreme discount is often the draw, not the original offering.

If you're considering doing a Groupon deal, take this caution in mind. Never, ever do a Groupon deal where you're taking a loss. In fact, don't ever do a Groupon deal where you're not making some money. Think it through carefully.

Fire up a spreadsheet and calculate how you'd do if you sold, say, ten of whatever you sell. Then scale it. Calculate what would happen for a hundred, a thousand, ten thousand, a hundred thousand, even a million. If you can't withstand the potential demand -- even at what you might consider completely ridiculous volumes -- don't do the deal.

Awareness alone isn't good enough. You need awareness with profitability.

Just ask Pets.com about that.

More tips on Groupon: How to Use Groupon Without Losing an Arm

Topic: CXO

About

David Gewirtz, Distinguished Lecturer at CBS Interactive, is an author, U.S. policy advisor, and computer scientist. He is featured in the History Channel special The President's Book of Secrets and is a member of the National Press Club.

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25 comments
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  • RE: The one key rule for surviving a Groupon deal

    I thought we got over the "I'm selling at a loss but making up for it in volume" sillyness after the dot com bubble.
    dsf3g
    • Sadly....

      @dsf3g ... we're not...
      daftkey
    • RE: The one key rule for surviving a Groupon deal

      @dsf3g Hey, it worked for Amazon... ;)
      masonwheeler
      • RE: The one key rule for surviving a Groupon deal

        @masonwheeler - It'd be different if you could sell the cupcake itself at a loss but count on buyers to come back week after week for years to come to buy fresh icing to top it with.
        aaseeger
    • RE: The one key rule for surviving a Groupon deal

      @dsf3g great work but.... do you no a new cloud service was just announced and that just got great features here: http://www.technologyfazer.com/the-razer-cloud-based-synapse-2-0.html
      nomikhokher
  • More than a $3 loss

    You're not including Rachel's costs in your calculation of her loss. She's paid for the materials -- flour, eggs, sugar, etc. -- and the labor to make the cupcakes -- including possibly overtime pay. She's paid for the power to run the mixers and ovens much longer than usual. Her cost may be another $1 or more per dozen.

    What's devious about Groupon and its clones is the way they present themselves: as a method of risk-free advertising. But there's plenty of risk if your deal sells your product or service below cost. There's the risk of selling too much and generating a huge loss.
    @...
    • RE: The one key rule for surviving a Groupon deal

      @@mlanger They never suggest you do more than 50% off. If you do, it's totally at your own risk.
      Droid101
      • Depends on the product and your margins..

        @Droid101

        To be fair, there are other factors. In the case of something like premium cupcakes, the margins are usually high enough that you should be able to handle a large mark-down and still survive. Had she even made the deal $15 for a doz instead of $10, I'd be hard-pressed to think that she would be at a loss (and based on this article, she wouldn't have been.

        On the other hand, if you're an electronics retailer and offered 50% off a laptop computer, chances are you'd be regretting that move.
        daftkey
  • RE: The one key rule for surviving a Groupon deal

    Actually, you can set a max cap on how many Groupons can sell.

    From section 3.2 of the terms and conditions: If you indicate a maximum number of vouchers in the DR, Groupon will stop promoting your Offer once such maximum is reached.

    So, you're right. Don't be stupid. Set a maximum!!
    Droid101
    • RE: The one key rule for surviving a Groupon deal

      @Droid101 That's what I was thinking, too. There's certainly been a limit on each of the few Groupon deals I've bought.
      scottishwildcat
  • RE: The one key rule for surviving a Groupon deal

    Calculate your cost, sell for slightly above it, set a maximum and go for it. But do not sell at a loss, unless you are sure you can handle it.

    By the way, I would never spend that much on a simple cupcake.
    cmwade1977
    • RE: The one key rule for surviving a Groupon deal

      @cmwade1977

      <i>By the way, I would never spend that much on a simple cupcake. </i>

      You probably wouldn't spend more than a buck-fifty on a cup of coffee, either, and you're probably still in the majority. Regardless, Starbucks says there are enough people in the world that disagree with you to make such a business model successful.
      daftkey
  • DON'T BE STUPID...YOU'RE IN BUSINESS TO STAY IN BUSINESS

    Why would someone who can do math do a bad deal? Duh.

    On a positive note, though, usually 15% of buyers never redeem their purchase for goods. I'm sure that # ebbs and flows depending on location, price, time of year, and product. Plus, you get the money upfront from Groupon AND purchasers tend to over-buy mostly because of impulse so you make profit on other products purchased.

    Still, let me be clear that stupidity on the part of Groupon who allowed the deal AND by the business owner who was desperate for ANY business (even BAD business) should be avoided.

    But again, on a POSITIVE note, the best business people learn from their mistakes and figure out how to make this turn out for their best. Best of luck, Rachel. Cheers!
    kaneb80
  • RE: The one key rule for surviving a Groupon deal

    http://i530.cn/UW

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    ladgfie
  • RE: The one key rule for surviving a Groupon deal

    I find it baffling that a business owner who presumably knows what their numbers need to be to stay afloat then suspends reality to participate in a Groupon offering. It makes me wonder about Groupon's selling tactics.
    judithrubin
  • RE: The one key rule for surviving a Groupon deal

    I advise auto repair shop owners. I've had this same conversation many times. They do an oil change special for example that loses money and they promote it heavily. I've had shops do that and call to ask me to change the management program because it looks like they are losing money on that promotion. Doh!!!
    mswift@...
  • RE: The one key rule for surviving a Groupon deal

    Groupon is amazing for buyers. I always assumed the seller sets the buying limit. That's shocking. It's probably worth using once, to get your name out there.

    Sellers do re-sell the same item again though, so there must be something in it for them.
    bradavon
  • RE: The one key rule for surviving a Groupon deal

    He said they were sold at a loss of $3 per dozen. That means that all of her costs were already figured in.
    cversich@...
  • RE: The one key rule for surviving a Groupon deal

    Amazon are there who had groupon sales.. They should have a limit of selling their product.
    <a href="http://www.sfplanet.com/category/shop_by_brand.incipio"> Incipio Cases </a>
    petersf
  • RE: The one key rule for surviving a Groupon deal

    How is this a computer related article? WTF? the whole articled should be flagged as "spam"
    pupkin_z