E-commerce subscription sites, such as Groupon and LivingSocial, claim to offer small businesses a better discount marketing solution than traditional coupons. However, it’s important to understand how they work, their similarities and differences, and their revenue models before choosing one over the other.
It may be helpful to explain how sites such as Groupon and Living Social actually work. These daily deal sites offer local businesses a sales promotion tool through quantity discounts. Both Groupon and coupons are known as “loss leaders,” meaning they market attractive deals designed to bring customers through the door. Different from coupon marketing, Groupon’s deals are distributed only to the website’s subscribers, and a minimum quantity must be sold for the deal to be activated.
What does this actually look like for small businesses? A small business begins with an incredible offer—generally 50% off or more on a particular item or service. For example, a pizza shop decides to run a Groupon offer. Normally an extra-large pizza costs $20, but on Groupon they offer the pizzas for $10. They sell 50 pizzas (the minimum required for the deal to be active) netting $500. At the end of the day, they have to give Groupon 50% of their revenues or half of the $500, leaving the pizza shop with just $250. In this case, the pizza shop has lost a whopping 75% on the what they would normally net for these pizzas, which leaves a gross ticket of $5 per pizza to pay for expenses, the cost of the food, labor, rent, etc. By offering such a massive discount and then giving a minimum of 50% of the proceeds to Groupon, most businesses will lose money as most businesses are built on margins of 75%.
“Groupon built its business working for consumers, not small businesses. Groupon’s sales team works hard convincing merchants to accept offers that meet its standards for ‘deal quality.’ To Groupon, a ‘high quality’ deal translates into money for them, regardless of its effects on the merchant,” a recent CNBC article explains.
On the other hand, if the pizza shop opted for a traditional coupon, such as a register tape coupon, the advertising expenses are incurred upfront. With register tape advertising, this initial expense is quite small even in comparison to other forms of coupon marketing. As we discussed in a recent blog, coupons cost businesses less than half of one penny per impression. Similar to Groupon, the goal is to promote an attractive offer to a wide audience in order to ring more customers through the door. However, once the costs of the advertising are covered, the small business keeps 100% of the revenue coming from the coupons, meaning that traditional coupons and register tape coupons reward small businesses for running successful offers, while Groupon offers actually penalize small businesses.
Additional Considerations
Aside from the differences in revenue structures for each, e-commerce coupons like Groupon incur additional costs on businesses as they require additional labor, time, and resources from the business.
A business that uses an e-commerce subscription site, such as Groupon, is required to report and track all of the Groupon redemptions in order to get their share. (Remember, subscribers pay the e-commerce site directly. To receive the 25% cut, a small business must report every transaction.) This may seem small at the outset, but not only is the business getting less for each until they sell, they must keep track of hundreds of pieces of paper in order to get paid.
E-commerce coupons companies like Groupon are subscriber companies. This means that any coupon offer is only seen by the site’s active users. For many businesses, the average Groupon user may not be the right audience, demographic, location, etc. In this case, a Groupon campaign won’t be very effective, nor will it be a good promotion tool. Register tape advertising and coupon distribution methods allow for pinpoint geographic targeting, and for local businesses, this often means more effective marketing.
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