How Groupon Can Hurt Your Business

how-groupon-can-hurt-your-businessOver half a million merchants from every corner of the globe have used the online daily deals site juggernaut that is Groupon Small business owners implement Groupon (and other online daily deal site) promotions with such frequency that issuing a Groupon has almost become a rite of passage for all small businesses looking to drum up some business. But just because everyone is doing it doesn’t mean that Groupon is actually helpful for small businesses. To the contrary, in many situations, using Groupon and similar sites can actually hurt your business. Here are seven ways how Groupon can bury your business alive instead of helping it thrive:

  1. Unfavorable profit split: Let’s say that your small cupcake store normally sells two dozen cupcakes for $50. If you want to do a Groupon promotion, Groupon will usually ask you to substantially discount your prices—usually by at least 50%. This means that you’ll have to offer two dozen cupcakes for $25. Then Groupon will typically take half of the promotion price (Groupon’s cut will be half of $25: $12.50). Also, you most incur the cost of supplying the customer with $50 worth of cupcakes for $25, which will slash your earnings in half. With a 50% discount in effect, you are ultimately selling your product for a measly quarter on the dollar ($12.50 instead of $50). If your business expenses to produce the two dozen cupcakes (i.e., ingredients, labor, rent, etc.) are more than $12.50, you’re actually losing money by offering the Groupon deal.
  2. A small business can become overwhelmed, leading to a drop in quality: Assume that you sell 3,000 Groupon deals for your cupcakes and then 1,500 deal holders place cupcake orders in the first week. If your business is only used to handling 300 cupcake orders a week, your business will be probably be overwhelmed by the massive influx of business and as a result, the quality of your product will likely suffer. New customers will be unhappy with the inferior product and will not become repeat customers. Your old customers will receive a lesser product than what they are used to and may decide to patron another cupcake bakery in the future.
  3. Loss of control of your brand: Copywriters for daily deal sites like Groupon often use incorrect information gleaned from the Internet and review sites like Yelp to write up a description of your business and your product or service. This can result in inaccurate or misleading copy, which may cause you to lose some control of your brand image.
  4. Dilutes your reputation: You company offers real value in the goods or services it provides. When you’re willing to slash prices in half for a Groupon deal, you’re saying that your company is flexible when it comes to the value it places on its products as it’s willing to lessen the value. A Groupon deal can also give off the impression that you’re hurting for customers since businesses with a superior product or service don’t need to use Groupon. (You don’t see Prime112 offering $100 worth of food for $50 dollars on Groupon, do you?) If you’re trying to build a reputation of exclusivity for your business, offering deals to the masses through sites like Groupon hurts this reputation.
  5. Upset “regulars”: Let’s say you own a yoga studio and have a group of loyal, regular customers who buy an unlimited monthly yoga package at your studio every month for $200. If you offer the same unlimited monthly yoga package for new customers for $100 on Groupon, you’ll seriously upset your regulars. They’ll feel like you pulled a fast one on them and may leave your studio since they’ll be paying twice as much as the new studio customers despite the fact that they’re your best customers.
  6. Attract the wrong type of customers: A majority of Groupon users tend to be just “deal-a-holics” who will patron your business one time with their Groupon discount but then never have any intention of visiting your business again and paying full price.
  7. Smaller tips: At restaurants and other tip-based service business (i.e., nail salon, massage studio), Groupon holders typically only tip on the discounted total amount, leading to smaller tips for your employees. These small tips can lead to employee fatigue, discontent, underperformance, and frequent turnover.