Susan Solovic, The Small Business Expert is an award-winning entrepreneur, an attorney, a New York Times best-selling author, a media personality and a highly sought after keynote speaker.

Considering a Groupon? 5 Pitfalls You Must Avoid

Considering a Groupon? 5 Pitfalls You Must Avoid

A friend lives in a townhouse and it’s about time to pressure wash the exteriors. The homeowner association got a few bids, but one owner spied a Groupon deal, which would have been significantly less expensive. He tried, unsuccessfully, to talk all the other owners into jumping on the Groupon deal.

Had he been successful, imagine what the owner of the pressure washing business would have thought. First he’d be elated that so many people snagged his Groupon, but when he started to do the work and realized he was going from neighbor to neighbor in this one townhouse complex, he probably would have been steamed.

Chances are the homeowners would have all scheduled their cleanings at different times so his crews would have been driving to, setting up, and breaking down at the same location multiple times. It would have been extremely inefficient.

Groupon, and similar discount systems, have worked out well for many small business owners, but often the story is exactly the opposite. You need to understand some of the pitfalls of using deep discounts for customer acquisition and have a clearly defined rationale for choosing Groupon or one of the other “daily deal” kinds of promotions.

Here are five questions to ask and points to consider.

  1. Are you making a single sale or starting a relationship? How often does a homeowner hire a pressure washing service? Answer: not often. The owner of that small business couldn’t reasonably expect consistent follow-on business from the customers he served via the Groupon deal. A restaurant, on the other hand, if it impresses a Groupon customer, might expect to gain a “regular.”
  2. Have you done the math? If you’re selling a product, be sure you know exactly what your costs will be if the Groupon offer achieves its maximal limit. Will you lose money on every sale and can you afford that, especially if almost all of the demand crashes down on you at once? This leads us to the next point.
  3. Groupon buyers are often procrastinators. I’ve heard from some small businesses that have posted Groupon deals that the people who take their offers tend to wait until just before the expiration date to cash in their Groupons. Typically, the business generated by these kinds of deals doesn’t spread out nicely over its given period of time. This can be especially disastrous if your Groupon deal expires around the Christmas shopping season. You’ll find yourself deluged with orders from Groupon customers and regular customers. You may struggle to meet demand and end up with some unhappy Christmas shoppers.
  4. Groupon buyers are often low-end shoppers. Some people look for “deals” more than they look for specific products and services. They get their emotional satisfaction from thinking that they got a “steal” rather than from the inherent value of the product or service that they are buying. Rather than stick with your small business and buy more of what you offer, they just start looking for the next insanely discounted thing to buy.
  5. Deep discounts can hurt your brand. Ultimately, if you’re trying to differentiate your small business in the marketplace, you need to do it with something other than a low price. You don’t have Walmart resources that allow you to operate on razor-thin margins. Further, when your full-price customers or clients see your Groupon deal, your small business may be devalued in their eyes.

As I said at the beginning, Groupon, and other daily-deal deep-discount strategies can work, especially if you use it to kick off a long-term relationship with a customer. After all, virtually every small business customer acquisition strategy comes with a fairly high price tag. Just be sure that the lifetime value of your customers are worth the initial investment.

These deals can also be useful if you have some old inventory you want to liquidate or think the exposure your business gains could be effective advertising. For example, when the pressure washing business trucks are out in neighborhoods, they are painted with the company’s name, logo and telephone number. Had he gone back to those town homes repeatedly, people might have noticed and said to themselves, “Hey, all those homeowners seem to like doing business with this outfit. I’ll give them a call…”

Click Here to read the Archives of Susan's Articles

The information contained herein may not represent the views and opinions of Zions Bank or its affiliates and is intended for informational purposes. It is presented for general informational purposes only and does not constitute tax, legal, investment or business advice.