Groupon Advice for Retailers: What Does It Really Cost You to Utilize Groupon?

Guest blogger Michael Koploy is an ERP Analyst at Software Advice, a company that provides retail pos software reviews. For more on Groupon advice for retailers, check out Retail Software: Your Groupon Advisor.

The guest post below is written by Michael Koploy:

So, you’re a small retailer that is just starting your business, or becoming one of the en vogue hot spots in your community. If so, you may have come to the conclusion that the next step to market your business and brand is to participate in an online promotion with Groupon.

Sure, consumers love Groupon, Living Social and other social deal sites. And why not? They enable buyers to try out local services, entertainment spots, and restaurants–all at a discounted price.

While Groupon may work for deal-savvy consumers, the fact of the matter is, these deals are not so ideal for every retailer. For starters, many small businesses simply cannot handle the volume of customers that are flowing through the doors, waving their Groupon printouts and requesting to redeem their amazing online deals. More importantly, retailers cannot approach these social sites as consumers–they must think about how the promotion fits into their strategy.

There’s been a lot of bad press about angry retailers who used Groupon–highlighted recently with a series of articles by Rocky Agrawal, such as here. While it is possible Groupon has taken advantage of a select few small businesses, it’s more likely that these retailers were uneducated as to what type of marketing / promotion they really wanted–and could actually handle. To help retailers make better decisions, they need to also understand how sites such as Groupon really work.

Here are some quick Groupon factoids for retailers:

• Groupon promotes a deal online. These deals usually exist in the 50 – 90 percent range. If enough consumers don’t purchase the deal, Groupon doesn’t charge the retailer, and they receive some free online advertising.
• If enough consumers do buy the deal, then Groupon takes a cut of the proceeds (usually around 30-60 percent, depending on the terms worked out with retailers). Groupon pays the remaining amount out to retailers in three installments over 90 days.

The result? Retailers are offering their product or service for about 75% off. This deep discounting probably isn’t ideal for most, but there are a few select instances where this works. For example, if you offer a service that is perishable and have very high profit margins, offering your product for a deep discount may not hurt you as much as a retailer that makes a very small profit amount off each item.

Unfortunately, for many retailers, Groupon does not, in fact, result in many repeat customers. Uptal Dholakia of Rice University reports that many retailers don’t see repeat customers from online social promotions, and that many coupon redeemers don’t spend beyond the promotion offering.

This seems grim, but it really just means that retailers need to be proactive and be in control of their financials and marketing efforts–before ever considering a Groupon deal, or speaking with any of their sales reps.

A simple way to do this is by using retail software to gain a better understanding of how your business is financially holding up, as well as managing your existing marketing efforts. For small business retailers that don’t currently have any software, here’s a guide to some inexpensive options. If you’re looking to invest in a new system or upgrade your existing one, here’s what to look for:

• Inventory Management Software. Use these applications to decide which of your inventory–perishable or not–is in surplus. Products that fall in this category are a great place to start looking when deciding on what to promote via Groupon.
• Retail Accounting Software. The best way to decide if a Groupon promotion is right for you, is to look how your business is doing and simulate what will happen if X number of customers pay X amount for your products. Many retailers have said that Groupon was a bad experience because they were caught off-guard by how much they lost; don’t make this mistake. There are a lot of great cheap options out there, like QuickBooks and Peachtree.
• Retail CRM Software. Many small businesses are attempting to market their business in all the right ways–online and offline advertising, social media marketing, and creating a social presence to connect with customers. These are all great, but if you’re not measuring your effectiveness, you may be throwing money away and not even know it. There are great standalone options like Salesforce.com for this. If retailers want to integrate CRM into their business strategy, something like Microsoft Dynamics RMS is a great fit.

Have you ever used Groupon as a small business? If so, what were the results you saw?

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