How to avoid being a Groupon horror story

This post was prompted by the unfortunate experience of Back Alley Waffleswith Groupon, featured on July 23, 2012 by the Washington Post. Based on the account of the story, it’s hard to tell who is at fault. Creating a successful offer is the responsibility of both the business and Groupon. But if the deal goes wrong, the business feels most of the pain. 

Daily deal promotions can be powerful promotional tools for almost any business. Like any powerful tool, if wielded ineffectively they can have a devastating effect on your business. This is especially true for Groupon promotions, the largest daily deal service in almost every market.

When used effectively, these promotions can drive significant traffic. Even healthy businesses can see a 30% increase in number of customers during a 6-month redemption window. It’s important to craft the promotion to avoid the pitfalls that have affected merchants like Posies CafeNeed a Cake, and The Point.

Your Groupon account manager should cover these issues, but it’s always good to be informed when it comes to major business decisions. Any mistakes will hurt you more than they will hurt Groupon.

 1) Cap the offer to a number of vouchers you know you can support. 

Expect to see a significant rush during the first and final months of the promotion. Based on data from 30 daily deal promotions, redemption rates vary from 50% – 85% of purchased vouchers. Expect 20-50% of those redeemed in the first month and 20-50% redeemed in the final month.  Figure out the number of incremental parties you can support in a single month.  Multiply that number by two to get the voucher cap (this assumes you restrict redemption to 1 per party/table).

2) Know the payment terms.

Back Alley Waffles was stung by this one. The Groupon standard is two payments. The first is 80% of the revenue share and is sent within a week of the promotion close. The second is 20% of the revenue share and is sent about 2 months after the competition of the offer. You have the option to receive the payment via check or ACH. For Living Social, the standard is to receive the whole payment about 3 weeks after the close of the promotion. This data is based on a sample of 10 promotions, so the terms may be different for you. Be sure to read the agreement and ask your representative.

3) Plan for a drop in cash flow.

Many businesses run a daily deal promotion and use the up-front cash to remodel or make a big purchase. This can be a good decision as long as you do not relying on those funds to operate your business. The situation could be made worse if your promotion is structured to discourage over-spend. Expect low over-spend when  you set the voucher value to be close to your average check size. Make sure you have enough cash on hand to operate your business even if a significant portion of your transactions don’t contribute cash (just the use of the voucher).

If we missed anything that affected your business, give us some feedback in the comments.

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