How effective are Groupon promotions for business?

Written by Sean Mc on December 13, 2010
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Not many people turn down an offer from Google, especially a figure rumoured to be around $6 billion, but that is exactly what Chicago-based Groupon Inc. have done. The company reportedly turned down an acquisition offer from Google in a bid to stay independent, and considering its success over the past few years, it is not surprising to see why.

Over the past two years, Groupon has grown from a start-up web company to a tech industry superstar, that today has over 3,000 employees, a turn-over of at least $500 million and is present in over 35 countries. Earlier this year, the company was valued at $1.3 billion and this is expected to rise substantially over the next few years.

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So what makes Groupon so special and how has it grown so fast over two years?

Groupon specialises in offering consumers steep discounts online for local businesses such as restaurants and salons. Earlier in the year, the company implemented personalised information, sending out offers to users based on their location and purchasing history. As such, this sent Groupon’s deals through the roof as well as their profits, as the company takes approximately 50% of the revenue from each deal it runs.

Groupon has also dominated social media marketing circles, with offers spreading virally through Twitter and Facebook. A term for those who stay on top of the latest company offers has even been coined – The Grouponer.

Of course in these hard economical times, it makes sense for companies to embrace such offers in order to get as many customers in to their stores, especially if they are smaller and more independent companies. A food business based in east USA said of the promotion, “Groupon is wonderful because it was so many followers. We have been solicited by many other social networking sites but Groupon is truly the most popular and effective. We all use Groupon personally, and so it was great to be featured on there. It definitely spread our name to a whole new market who may have not heard of us otherwise and really did help us to expand our business.”

Exposure is key and with Groupon promotions becoming more and more localised, it means users can find the best deals and services for them within their home town or city. In fact, Groupon says they have become so ‘in demand’ by companies, they have a waiting list of over 35,000 businesses wanting to be featured on the site nationwide.

However while Groupon seems to be going from strength to strength, it is uncertain how well businesses have done with their promotions. According to a report by Utpal M. Dholakia titled How Effective are Groupon Promotions for Businesses? (September 28, 2010 , a survey was conducted from June 2009 to August 2010 of 150 businesses who had run Groupon campaigns to see how successful they had been.

According to the report, the promotion was profitable for 66% and unprofitable for 32% of respondents. While this may be a decent ratio, further study of the report revealed a definite ‘you get what you pay for’ vibe from the study. Compared to those companies that saw profitable Groupon promotions, those that ended up with unprofitable promotions were reported as also having significantly lower rates of “both spending by Groupon users beyond its face value (25% vs. 50%) and return rates to purchase from the business again at full prices (13% vs. 31%).”

But are Groupon’s offers worth the steep discounts that they offer? According to the report, which asked a number of questions to companies about their experience with the Groupon promotion including how effective it was in generating new customers as well as revenue, 42% of those asked said that they had not had enough success with their campaign to run one again. Even among those that had generated profits, 20% said they would not run another Groupon promotion. They cited that “social promotion users were not the relational customers that they had hoped for or the ones that are necessary for their business’ long-term success.”

The extreme price sensitive nature and transactional orientation of these consumers also played a factor. One restaurant that had run a deal said, “Many of the Groupon user [sic] used it for only the value of the coupon (in our case $50) and nothing more. The return business has been non-existent. It was very harmful to our bottom line during the months we ran it. We still get people coming in to redeem their Groupon even though the promo has been over for 4 months, and they are very upset they cannot get the full discount.

Some used even more negative using phrases such as “rip off”, “imitators” and “ineffective”.

However, that is not to say that Groupon does not have its supporters. In fact, with the amount of social media and mainstream media buzz, it has generated, there are already a host of similar companies rapidly trying to catch up with Groupon’s success.

It would appear that due to its alluring features and broad-based consumer appeal, Groupon will continue to do well with many companies, especially on the back of social media networks, but a more sustainable long-term business model has yet to be seen.

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3 Comments

  1. BabySport.com says on December 18th, 2010

    Lets try to get BabySport.com on groupon!! We applied but have not heard back from Groupon yet. Come on…rally BabySport.com

  2. infographic – How effective are Groupon promotions for business | SocialWayne - location-based marketing, gadgets, QR Codes, technology and social media news by Wayne Sutton says on December 20th, 2010

    [...] Looking for some numbers about the fastest growing company in the world, Groupon? The team at Money Savings Blog created an awesome infographic, called “How effective are Groupon promotions for [...]

  3. ELON Thinning Hair Systems says on December 21st, 2010

    Having a product which women (35+) are desperate for and is recommended by dermatologists across the country for hair loss, we thought that Groupon would provide greater awareness for our company. After some investigation, we have decided not to go with any of these sites. The customers are looking for severe discoounts and that is not what our business model is about. We are about the success rate and high professional recommendations we receive. Since the ELON Thinning Hair System takes time to see results, we felt that many of the Groupon buyers would think that they could try it once and be done (which is not the case). This would create a negative appearance and we also wondered how many would take the time to visit ouor web site (www.elonhair.com) and review the informational content to understand their individual condition. All together, it does not appear that it would meet our criteria for a successful campaign. Michael J. Greco, Dartmouth Pharmaceuticals, Inc. 800-414-3566

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