Should You Groupon?

You probably see many different group buying deals each day, from a $20 meal for $10 at the café down the street to a buy-one get-one-free glow in the dark mini-golf game.  And you may wonder if your business should get on the bandwagon and offer a group buying deal through Groupon, LivingSocial or one of the many other group buying companies.

But before you make the call, you should ask yourself three important questions to make sure that group buying is the right thing for your company.

1. Are You Prepared for the Increase in Business?

You should first determine if your company can handle the increase in business that the deal will bring while still providing quality service to both your new and existing customers. If the people who buy your deal are unable to get an appointment for six months, receive products made in haste or encounter overwhelmed staff members, then they will probably not come back. And you will lose out on the main benefit of group buying — an increase in long-term customers.

Determine how many new customers you can realistically handle and consider putting a cap on the number of deals that you sell. It is more profitable in the long run to provide an excellent experience for fewer customers than to bring in a large group that leaves mostly unhappy.

Also, the reason for running a group deal is to acquire new customers — not give a steep discount to your current customers — so avoid sharing your deal via Facebook or other channels where existing customers may pick up the deal.

2. Negotiating Smartly with Cash Flow In Mind

Cash flow issues are one of the top ways business die. A group deal can kill your company because most group buying websites pay you on net terms (Groupon for example pays merchants 80% of the collected amount in 5 days with the remainder coming 60-90 days after the deal is run). So while the group buying site is holding your cash for 60-90 days, you’ll need to ensure you have enough cash on hand (or flow) to pay your staff and buy materials. Fall short on either and you can end up a creek without a paddle.

There are other idiosyncrasies of a group deal such as if a coupon is frequently redeemed — which happens — the business sponsoring the deal is on the hook for the loss. Also, pay attention to how they are passing the credit card fees on to you.

And lastly, and most importantly, consider the amount of revenue you are set to receive. Some aggressive sales guys will seek 100% of the revenue, leaving you with a bill (but a whole bunch of new customers) while a shrewd business owner can end up with about half of the revenue and all those new customers.

3. Can You Retain the Customers?

Many is not most companies break even or lose money on the group buying deals themselves, the main goal of participating is to gain new customers for the future. Before considering the deal, consider how you are going to get the customers coming back. At minimum, you should be getting the customers’ email addresses and reaching out to them consistently after the deal. Similarly, getting them to like you on Facebook can be fairly powerful. And of course the best way to retain your new customers is to provide them with excellent service and products.

4. Can You Create the Right Deal?

A key to success with group buying is to create the right deal that will both bring in a large number of the right customers and make a profit for your business. If you offer a deal that is not enticing to potential customers, then no one will purchase it. But on the flipside, if you offer a deal where you lose money, then the deal was not a success for your business either.

Knowing your numbers and possibly bringing your accountant into the deal is key. You’ll need to know where your margins are, in addition to knowing what products really drive your business and what your average purchase is. With that information, you should create a coupon that is a tad under an average ticket would be, so that you make some additional money.

5. Track. Track and Track More

Make sure you are tracking each coupon that comes in the door. Know what they spent. Look at whether or not they spent more than the coupon or less. Look at how profitable (or not) each of these customers was and look at the number of customers become repeat buyers.

Ultimately, a successful group deal lies in preparation, good negotiation, and maximizing both the lifetime value of these new customers.  Failing to do any of these things can lead to varying degrees of business disaster.

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