Groupon and its clones are the latest trend in using the Internet to drive “bricks and mortar” revenue. However before you jump on the Groupon band wagon, there are five major red flags every business owner and manger must understand so as to make a sound decision to Groupon or not to Groupon.

New Customers, Sure, But Whose Customers?

The primary appeal is, of course, a slew of new customers, some of which will “stick” and become regulars. Which leads us directly to our first red flag. Just whose customers is Groupon sending to you? Are they yours? No. They are Groupons. What’s worse is that Groupon’s customers are coupon clippers who are notorious for chasing the deal of the day.  With Groupon, you get coupon clippers, not premium buyers or relationship buyers. Don’t be surprised if your Groupon buyers are here today and gone tomorrow at your store…but still avidly buying from Groupon!

Lacking Ways To Capture Incremental Sales

Red flag number two is not having systems in place to convert some percentage of the Groupon customers to longer term customers. Regrettably, many businesses report zero incremental sales. Is this Groupon’s fault? Most certainly not. Groupon promises to provide a swarm of coupon clippers, nothing more. It is up to the business to have systems in place to encourage, nay, manufacture the incremental sales. Sadly, most businesses do not have systems that capture customer information for use in direct marketing and email marketing, or even make a simple “bounce back” offer encouraging first time customers to repeat within a month or so. This gap in a businesses strategic marketing plan should be addressed before going Groupon. Without it, the business is leaving significant money on the table.

Groupon’s Economics Work – For Groupon

Money is red flag number three. Groupon is a loss leader. Plain and simple. The business model is great – for Groupon and it’s clones. They get 50% of the revenue off without any cost of sale and without bearing the lost profit on the offer, which is typically $20 for $40 worth of merchandise or similar.  For most businesses, there is no margin in a half-off deal, much less a half off deal where a third party gets 50% of the remaining revenue. Do you really need Groupon if you run a half-off sale? I doubt it. If you have any cost of goods sold, chances are good your profits will be nil or you’ll even take a loss. How’s about making it up in volume?

Scary thought to be sure, but without a marketing system in place to generate incremental sales from some percentage of the Groupon redeemers, the economics aren’t viable. For the money most businesses lose with Groupon, they could orchestrate their own marketing campaign to “buy their customers” with a generous promotion and generate fantastic word of mouth.

Most Local Businesses Can Do Better Without Groupon

Most businesses don’t need Groupon and it’s clones to succeed. What they need is to command their local trade area so people will call on them because they are better than the next place. There are plenty of ways for a business owner to accomplish this. Some of them are found in this blog.

What’s been your Groupon experience? Great? A mistake? I’d love to hear your story!