Groupon should only be used this way

Too many small businesses have used Groupon like a drug, hoping that an injection of discounted sales will provide needed cash flow today; worrying about the ramifications of discounted sales later. All this of course is under the guise that exposing your business to hundreds of new customers will benefit the business in the long term, or that these Groupon users will decide to purchase more than what’s being discounted, thus raising your average purchase price. There are generally two kinds of business, and Groupon will only work for one of them.

The first business is one with high variable costs. These are expenses that are inextricably linked to making a sale; things like labor and inventory or product cost. In other words, to make a sale you must be either selling some product or performing a service with labor cost tied to that service. Examples would be a retail store, a massage therapist, a computer repair person. Open your accounting program and check your income statement. If you have considerably high Cost of Goods, or if your labor costs are a disproportionally large percentage of your sales, you fall into this group. For these kinds of businesses, Groupon is a bad idea. Your sales are so horribly discounted that you will never recover enough money to cover both the cost of the sale and your overhead expenses. Taking this one step further, don’t assume that these new customers will return, and that over time you’ll recover the cost of the discount. More often than not, a customer that uses Groupon or other coupons will only shop when there is a sale.

The second kind of business is one with very low variable costs, or no cost of goods; a bowling alley for example. Whether they have one or twenty customers, the doors will remain open and the lights will stay on. Adding more bowlers in this example simply helps cover the cost of fixed overhead. There is a point however where it will become a determent, and that’s when the business needs to add more staff, or the new (discounted) customers begin to displace full price, regular loyal customers. An example of this is when a golf course fills all available Saturday slots with Groupon customers, rather than the regular full-paying golfers.

My fear is that too many businesses are agreeing to use Groupon, or any other discounting marketing strategy, without working through the accounting first to determine the real cost/benefit. Rather than doing the hard work to build a truly loyal customer, they are using this as a crutch to help their business survive another month.