Before making your Groupon, here are a few things to keep in mind...

The popularity of group couponing service Groupon has exploded in the last few months, with merchants of every kind and size offering deep discounts on their products and services. The big question for businesses is whether the additional business that Groupon brings in is really worth it. After evaluating Groupon for several months, there is our take.

Customer Acquisition Cost

• First, it's important that you know your customer acquisition cost. This requires you to track your marketing advertising spending and to figure out, on average, how much you are spending for each customer you get. If you know this number, you can easily evaluate whether the financial implications of Groupon are worthwhile. Groupon's commission is 50% of whatever revenue your coupon brings in. So, if you are offering $20 worth of services for $10, Groupon will take $5 of that and you will actually be getting $5 for $20 worth of services -- or, $15 less than you normally would if you brought a customer into your business with traditional marketing and advertising.
  
  If your customer acquisition cost is $15 or more, then this is probably worthwhile.

Types of Customers

• Another factor to consider is whether the types of customers that you will attract with a Groupon are going to continue to patronize your business when the Groupon is over. In most cases, Groupons will be loss leaders. As such, they should be used to gain new customers who will provide repeat business, with the assumption that the value of the repeat business will more than make up for the loss you incur via the Groupon. If you business offers a premium priced product or service, you may find that the Groupon will bring in bargain hunters eager for a one time deal and not loyal customers who will stick with you when you charge your regular prices.

Volume of Business

• Finally, an important question to ask yourself as a business owner is whether your business is prepared to handle the volume of business that Groupon will most likely bring in. There are plenty of stories in the news about businesses that ran Groupons only to be overwhelmed by the response -- which seems great until you consider the cost to your reputation when you are unable to service these people.

Unfortunately, many businesses have rushed into Groupon without considering these factors and as such, the results have been mixed. In a study conducted by Rice University's Jesse H. Jones Graduate School of Business, 32% of businesses found their Groupon deals to be unprofitable and 40% indicated they would not run a promotion through Groupon again. The study also found that:

• Groupon promotions offer the most benefit for businesses in which the promotion does not cannibalize sales to existing customers.
• Among the service businesses (restaurants, educational services, tourism and salon and spa), restaurants fared the worst and salons and spas were the most successful.
• Businesses with unprofitable promotions reported low rates of spending by Groupon users beyond the Groupon's face value and low rates of return to the business again at full price.
• Respondents indicated they had largely negative perceptions of Groupon's competitors.

While the allure of Groupon has grown, it seems that bottom line results for the businesses that will have used the service have not always matched the hype. We think a cautious approach is wise. If you are considering Groupon, set a limit to the number of people who can purchase your offer so that you won't be overwhelmed, and make sure your staff is well briefed to handle the onslaught of new customers. At the end of the day, happy staff make happy customers!

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Submitted by Kathleen L. S. Booth
Chief Executive Officer
Quintain Marketing