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Many businesses and retailers are evaluating one-day discount coupon services like Groupon and Living Social to figure out whether they make sense to include in their overall marketing strategy.

Like any marketing effort, there are pros and cons.  And with the coupon services, there are many factors to consider and small business owners should not make a decision blindly without doing their research on the financial metrics or consulting with an experienced marketing professional. 

Discounting your products or services can wreak havoc on your brand image as well as to cut into profit you may already receive from current customers, thereby devaluing your brand over time.  On the flip side, taking advantage of these collective-buying-power coupons may get you an infusion of cash that your business sorely needs.  With any marketing effort there is risk but there’s also the chance that the potential benefits far outweigh the risk.  Bottom line is that you need to weigh all the facts in order to make a decision of whether utilizing discount couponing is right for your small business.

There’s a great article that appeared recently in the New York Times about “Is Groupon Good for Small Business?”  And yet another that appeared in Inc. Magazine about “How Groupon Can Boost Your Company’s Exposure.”  It is important to do the math and compare with other marketing efforts. 

Equally, it is important to realize how consumer buying habits have changed, mainly due to our sluggish economy and also to advances in technology brought on by social media, smart phones and iPads. If you’re still spending gobs of money on yellow pages advertising, then you might want to rethink that strategy. 

Here’s how 1-day discount coupon services like Groupon work for the consumer:

How should the business owner view these direct response offers?

These discount coupon offers should be utilized as part of a business’s overall acquisition marketing effort and businesses should understand the metrics behind how much it costs them to acquire a customer based on all the other similar efforts they have tried.  In addition, the coupon offers could activate previous customers to purchase again so that you can increase share-of-wallet.  Ideally, you don’t want all your Groupon or Living Social business to come from current customers, as there are better ways to reach them to thank them or give them offers such as email marketing, text message marketing or simply the old-fashioned personal phone call.

The small business owner also has to understand and plan for various scenarios:

1. If you run a coupon offer and the minimum quantity is not met, there is no charge to the small business or retailer.  But there are benefits and perhaps residual business just because of generating awareness and ad impressions of your business name.  There’s no downside if this were to happen and, for anyone who has run a traditional tv, radio or print campaign, you know there is value in that piece alone.  Be sure to find out how many people are on the Groupon or Living Social email list for your market beforehand, so you know how many total unique impressions are possible.
2. If you run a coupon offer and the minimum quantity is met, then that’s where the charges kick in.  First, there is the fact that you’ve developed a deeply discounted offer.  Second, you will pay a large fee to the discount coupon service – we’ve heard the fees can range from 20-50%.  You can try to negotiate that fee but small businesses aren’t as likely to be able to make much headway there unless they can demonstrate the potential for large sales volume.  Third, there may be credit card fees.  And fourth, if you’re selling product versus services, you have the cost of the product so be sure to negotiate a better price with your supplier before you run the daily deal – get the supplier’s buy-in.  Understand that you may take a hit on profitability in order to gain X amount of new customers.
3. Be ready for a deluge.  We’ve heard that many times the business got more coupon purchases than they could handle effectively and this caused many problems for them.  While getting a slew of new customers is a very good problem to have, be sure that operationally you have instituted a back-up plan if this were to happen.  If you’re concerned, be sure to set a cap on the number of coupons that can be purchased and carefully write any exclusions to the deal in the fine print.

In addition, the small business owner has to understand that they won’t receive 100% redemption of the coupon deal.  The reports we’ve been hearing is that redemption rates runs 80-95%.  This, interestingly, helps your profitability in a good (but odd) way so keep this in mind as yet another metric that has to be part of the mix.  It is important to measure every aspect including coupon redemption rates.

We’re very concerned about helping our clients protect the value of their brand and ensuring that offering an occasional deep discount doesn’t devalue the brand’s equity as so often that can happen.  If you test a coupon offer and find that discount coupons work for you – or they have potential to work for you, be careful about running them too often.  Once or twice a year – Spring and Fall – might be enough. 

So figure out what is optimal frequency for your type of business without having negative impacts that damage your brand.  The last thing you want is for customers to frequent your establishment or online business only when there is a discounted deal.  But even long-time customers appreciate that once in a while, and they often think of it as an extra-special thank-you for their repeated business over the years.

Lastly, if the discount coupon does brings in a lot of new customers to your retail establishment or online business which would be the best-case scenario, don’t think that it stops there.  Just like any other acquisition marketing effort, it must be immediately followed with a customer retention and upsell/cross-sell strategy. 

It doesn’t make much sense to put a bunch of new people

 in the bucket if you’ve got big holes in the bottom, does it? 

So add them to your customer database and treat these new customers as if they have been a customer for a long time. 

Anyone hear of Carl Sewell?  The then Cadillac dealer who wrote a book about Customers for Life?  He treated every customer as if they had spent $300,000.  Because that was, back then, the average amount one customer would spend with his dealership during their lifetime.  I’m sure it’s way more now – he has multiple dealerships and runs them with high customer service to this day.

So if you test a Groupon or Living Social discount coupon and it seems like a lost leader initially, be sure to ask yourself what you are doing to upsell or cross-sell those new customers or to encourage repeat business next week, next month or next year.  If you don’t have those things in place, you’re likely to have these new customers come in for a cup of coffee, but never buy a latte, a Frappuccino, a bag of coffee beans or a scone.  I mean, really, when was the last time you walked in to a Starbucks and simply bought a cup of black coffee and walked out?  Very few people do that!

The bottom line?  Use one of the most fundamental principles in direct marketing:  test, test, test.  Plan effectively, set up metrics, and use what you learned to make the offer better next time. 

And you might just have to be prepared to hire staff, which would be a very positive thing considering our present economic situation.

Related articles:

• LivingSocial Success Story (degashouse.com)
• Sold Out: A Groupon Success Story (trilixgroup.com)
• When a Groupon Promotion Went Wrong (entrepreneur.com)
• Bing Announces Deals (bing.com)
• Some Retailers Eat Losses via Discount Sites (businessweek.com)
• Groupon, LivingSocial offering bigger coupons (sfgate.com)
• Should My Business Be Running Deals on Groupon? (blogs.constantcontact.com)
• For coupon overreachers, a chance to recoup (boston.com)
• How Amazon Could Shake Up the e-Coupon Market (dailyfinance.com)
• Why Groupon Sucks (zacharyadamcohen.com)
• As Daily Deals Go National, Will They Get Less Generous? (mint.com)
• Groupon coming to cash registers as coupons get technical (slashgear.com)
• Gowalla to Launch “Groupon or Living Social-type” Rewards at SXSW (fastcompany.com)
• Quite A Deal: ‘Groupons’ to Earn $4B by 2015 (clickz.com)
• How to Plan and Execute a Successful Deal on Groupon (blogs.constantcontact.com)
• Billion Dollar Market Forming Around Groupons People Wish They Hadn’t Bought (businessinsider.com)