Groupon - is it bad for business?

To the casual observer, it might seem like Groupon is taking over the world.

Despite having only been in operation in the UK for a matter of months, the voucher site has already become stratospherically successful. Consumers have embraced it as a way to make their precious pounds go further, while businesses have welcomed the chance to increase footfall.

But Groupon has also endured its fair share of criticism – and, as more businesses deal with the service, doubts about its usefulness are growing.

So what exactly is Groupon – and should you be using it?

What is Groupon?

Groupon is an online service offering gift vouchers redeemable at a range of businesses. Customers buy the vouchers, which they can use to pay for specific goods or services. The vouchers themselves are heavily discounted. So it is common, for example, to see Groupon offers along the lines of, for example, “a £100 meal for £30”.

Businesses do not pay Groupon directly to use the service. Instead, as Groupon is keen on highlighting, it simply takes a cut of the vouchers sold. So, their success is contingent on the success of the voucher sales.

Once you have come up with an offer, and it has been accepted by Groupon, their editorial team will work on some copy for the website and, eventually, your voucher will go live. Customers who have bought the voucher will redeem it with you, and you will be paid by Groupon.

What are the benefits?

There are several potential benefits for small businesses. Perhaps the most obvious is an increase in sales volumes. Given that Groupon’s daily emails are sent to tens of thousands of recipients, the potential to give your business a short-term shot in the arm is significant.

Many firms also think of Groupon as a marketing tool. As well as increasing sales and footfall, it can help to raise awareness of your brand. Groupons are often forwarded between friends and, even if the recipient doesn’t end up buying, they will at least have seen the name of your organisation and developed an idea of the products or services that you offer.

What are the drawbacks?

But while Groupon has been useful for many businesses, there is an increasing recognition that it has some pretty severe possible drawbacks. Indeed, a much-repeated story holds that one business in the States ended up unable to pay their wage bills because of the unexpected volume of Groupon sales – on which they were making a loss.

This is obviously an extreme example, but it is indicative of the problem at the heart of the Groupon model. Many firms loss lead on their Groupons, either in order to increase footfall or simply as a marketing tool. While this might well be a good long-term strategy in some cases, it has significant risks. You need to ensure that you can afford to honour the Groupon vouchers that you sell – and you should think carefully about making sure that you can at least cover your costs.

You should also recognise that there is an ‘opportunity cost’ associated with Groupon. This is perhaps best illustrated by considering a restaurant. For each table you fill with Groupon-wielding customers, you are ‘costing’ yourself the opportunity of filling it with full-paying punters. This is a factor that is often forgotten – but it is one that can make a significant difference to your bottom line.

Finally, you should understand Groupon’s pricing structure. They company has been careful to keep this off their website, but previous partners have published details online. According to these firms, Groupon demands that the offer should include a discount of at least 50 per cent. After this, Groupon takes a commission of 50 per cent of the total voucher sales.

Groupon can be a fantastic way of increasing footfall and raising the profile of your business. But before diving in, you should make sure that you understand the potential drawbacks – and that you are sure you can afford them.