Late last year, we wrote about the pro’s and con’s of group deals for small businesses. It was one of our most viewed blog posts of 2010, because they are very popular and somewhat controversial. Now we have some facts based on a new study about deal sites like Groupon and Living Social, and how they affect small businesses.
If you want to read our explanation of why group deals often work out to have a negative impact on small businesses, check out our blog post from September. To summarize:
Let’s assume 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. But the retention of discount marketing customers is not 100%. And those (as few as 22%) that do return, will expect heavily discounted prices.
New numbers are coming about the loyalty of customers generated by group deals. According to a study from Rice University, “Fifty five percent of businesses reported making money, 26.6% lost money and 17.9% broke even on their promotions.” This runs against the pitches group deals must use to sell small businesses on their services. But even if you look at the 55% figure as positive, the customer data is not inspiring.
“Although close to 80% of deal users were new customers, significantly fewer users spent beyond the deal’s value or returned to purchase at full price.” A full copy of the report is available.
These types of statistics make you wonder how many small business owners will continue offering group deals, and if this type of marketing is a fad that may not last much longer.
In any case, the SBDC is here to help if you are considering the financials of a group deal. Call us at 619-482-6391 to schedule a free appointment to discuss the numbers with a small business advisor.