Groupon and similar deal sites convince small business owners to offer deep discounts in the hopes of attracting hordes of new customers. Sadly, some small businesses end up regretting the decision to offer a discount marketing deal. Here’s why:
1. Most discount marketing companies require your deal be at least 50% off your regular price.
2. You have to pay the discount marketing company (Groupon, BuyWithMe, etc.) 50% of the purchase price. So if you agree to sell a $100 deal for $50, you have to give the marketing company $25 for each deal sold.
What is the actual profit margin on this? If your direct cost of sales is at 50%, each deal will cost $25 in negative gross profit. If your deal is extremely popular and you sell 500 units, your total loss is $15,000.
Unfortunately, the new business generated by the discount marketing deal does not make up for this loss. In order to determine if a deal can be a money maker for your business, you need to calculate your net profit margin. To do this, take your revenue and subtract the cost of goods sold, and then subtract your operating expenses. Then you compare it to your overall revenue. The formula is:
Sales revenue
– Cost of goods sold
Gross profit
– Operating expenses
Net Profit
Net Profit ÷ Total Sales = Net Profit Margin
For example, the average net profit margin for most small service businesses is around 5 percent.
At this profit margin, so you would have to sell $175,917 in products/services to make up the loss generated by the discount marketing deal. However, the retention of discount marketing customers is not 100%. According to discount marketing company Groupon, just 22% of Groupon users will become customers. For a deal that sells 500 units, that only translates into a best-case scenario of 132 new clients, 100% of which are accustomed to very low prices.
Are you thinking small business owners who use these discount marketing promotions are crazy? We think they are probably desperate for exposure and lured in by the temptation of many new clients. The problem is the constraints of Daily Deals and similar companies make it hard to have a profitable discount marketing deal.
However, you could try to run your own discount marketing deal and make a profit. You would need to carefully control what you offer, the price at which you offer it, and how many you offer.
A great small business discount marketing deal would be something you offer through your existing clients to get their word-of-mouth marketing. This will save money by cutting out the discount marketing company/middle man between your business and new customers.
Other suggestions you may keep in mind would be to offer a deal on something you sell that has the highest profit margin. That way, you can still make money. By lowering your direct cost from 50% to 40% in the example shown above, you can save $2 per deal. If you get 500 deals, that is $1000 saved.
We found a truly excellent group deal calculator to see what a discount marketing deal will cost your business. You can also meet with Small Business Advisor Gabriel Reyes to go over the numbers and see what would work for your small business. Remember: one-on-one counseling is free for existing business at the Small Business Development Center and the Center for International Trade Development (SBDC and CITD). Call us at 619-482-6391 to schedule your appointment.
Thank you for also showing how Groupon is not the savior that the media continues to hold up in awe. Their model is commoditizing retail, encouraging customers to “never pay retail again” and all based on “the hope” to local mom & pops desperate for customers, of people returning.
I wrote an in-depth 11-part series about the dangers to small business including two case studies, the first part begins at http://www.retaildoc.com/blog/groupon-worst-marketing-business/
Thanks for the comment, Bob. We like the concept of a groupon-type deal but doing it yourself with a little more finesse. You post some fascinating numbers on your site. Thanks.
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