If a merchant does the math before committing, the merchant will see that using the 40% OFF Sales will achieve the goal and not loose thousands as he will do if he does a groupon.
The merchant places a $600 Ad in his local newspaper, which he then will pay in 30 days after the money is collected. The sale Ad is for a simple 40% discount off of one product to get customers in the door and will have other in-store specials not published. To ensure the event is a profitable sale and attract and retain new customers.
Doing the Ad program, the merchant is in control of his business and decides what he wants to make and how much he wants to spend. The merchant decides to do a break even ROI to get new customers into the store and sell them other products on sale. A typical reason for doing Ads. The Merchant only wants to sell up to 20 units. He will collect the money at the time of the sale. The cost to the merchant is $150 per unit with a typical retail price of $300 as advertised in the store. The Merchant’s revenue after the sale is $180 per unit netting a $30 profit per unit or a total of $600 for 20 units. This is enough to pay for the Ad and that brought in at least 20 customers and additional shoppers. By doing the calculations, the merchant is able to measure the success of the 40% loss leader sales including the additional earned revenues from the sale and the number of new customers.
If we do the calculations for Groupon we see a different mindset. Groupon is dictating how the program will work. The merchant has lost control as Groupon sets the rules of the sale and the merchant accepts or is out. Groupon collects the money from the buyers and pays the merchant over a 90-day period after the unit is picked up. Groupon sets the number of coupons to justify doing the groupon and signs up the buyers. For this example, Groupon wants 200 customers. Coupons sold and the Buyers show up at the merchant’s store to redeem their coupons and leave. They don’t buy from the merchant as they have already paid and are waiting for the next 50% off deal. A Groupon buyer’s mentality is not to pay full price. Only 50% off! This is the new Mindset created by Groupon. Everything should be sold at 50% off or don’t buy it.
The Groupon calculations are simple. The groupon price is reduced from $300 to $150 so they can attract the buyers. The merchant receives 50% but he has to collect the state sales tax based on the $300 as stated per the Groupon contract. So, the merchant’s 50% profit is now closer to 40% as state sales taxes can range from 9 - 10% depending on the state.
The groupon deal example is for $150 and 200 coupon purchasers. Groupon’s profit from the coupon sale is 50% of (200 x $150) = $30,000 which is split between the merchant and Groupon which equal $15,000. The merchant’s profit is further reduced as the merchant has to collect the sales tax. This could be about 10% less as he pays the sales tax to the state. So the merchant receives only $14,000.
Merchant Looses $16,000 --------- Groupon makes $15,000. --------- The math doesn’t lie.
Groupon is so hyped in the news on the Internet and has become so fashionable and alluring that the merchants are not using their good business sense and not doing the math before committing to do a Groupon. It is time for “Merchant Caveat Emptor”!
Merchants that have done a groupon were interviewed and admitted they didn’t understand the full impact of a groupon on their business before they committed to do a groupon and the ones that did understood the situation fully, decided not to do a groupon. Groupon has to be betting that merchants are lazy or stupid or both and won’t do the math up front!
Groupon Buyers or “Groupon Whores” are extremely cheap and do not pay full price, that is why they buy groupons. They have no loyalty to any merchant, just to any 50% off deal. Not returning to pay full price. There are so many new daily groupons, why pay full price. So how does a merchant ever recover from the 1st groupon disaster? The Merchant can’t recover and it is stated in surveys and audits that merchant will not do a second or third groupon because less then 1% of the original groupon Buyers return to pay full price and become a regular customer.
Groupons are very profitable for Groupon. Groupon is on track to grow revenues to over one billion dollars in 2011 by simply sending out e-mails, using the web and local sales reps to sell the merchants. So how long will this Win-Loose scenario last where the merchant is required to subsidize the advertising media, incurs huge loses so the advertiser can make a profit? This doesn’t make sense? It will only make sense if it is a Win-Win scenario.
Groupon advertising as we know it today will change if it is to survive. The merchants will go to the best deal for them. Groupon has attracted the attention of Google, Yahoo, Amazon, Microsoft, 300 US clones, 1000`s of WW clones. The old media advertisers of coupons, the newspaper conglomerates, are now jumping in. Radio, TV, billboards are close behind. The proven media advertisers will be the game changers, as they will change it into a Win-Win for the Merchant, Buyer and Advertiser.