It seems that you can’t avoid Groupon in the news lately. Consumers are mad about using Groupon since they can find great deals at often unheard of discounts. Even for customers, there is a often a down-side with reports of customers mobbing unprepared businesses and leaving frustrated or unhappy with the experience.
My review of multiple profit estimates shows that without a high rate of repeat business, your Groupon gains will likely end up as a big loss! However, if you can handle the volume of business and are considering offering Groupon at your business, you should download my spreadsheet to estimate the short and long term profitability of your participation.
1) The example used in the spreadsheet is based on a local restaurant. Their standard entree cost is $32.55 with the Groupon deal offered at $14.79. The fee to Groupon is half of the $14.79, leaving the business with $7.40 to cover $8.90 in marginal food and staff costs.
2) It is estimated that about 28% of people would have eaten at this restaurant in the next few weeks without Groupon, so there is additional lost revenue from their full-priced visit not occurring. The loss per existing customer who uses this Groupon offer is $26.66.
3) Additional spend of $12.50 per new customer (for instance, a dessert or drink beyond Groupon) yields a net profit per new customer using Groupon $6.54.
4) The restaurant estimates that 4,600 Groupons will be sold, yielding an immediate net loss of $12,679 and a cost per new customer of $3.83, because 3,312 new customers are exposed to the business.
5) The restaurant estimates that 33% of new customers will return an average of 1.5 times in the next year. Their estimated spend on their post-Groupon visits will be $42. This brings the one year net profit into positive territory at $37,350.
Notice that the immediate cost is $12,679 but the long-term profit is $37,350. This is a one year ROI of around 295%. When using this spreadsheet, you should estimate best and worst case scenarios for future visit rates and spend amounts, this would give you an idea of how much risk is involved in Groupon for your business.
6) I added a section with my own estimates of Groupon’s gross profit. This is for entertainment purposes. My estimate is that Groupon makes a gross profit of $20,219. However, unlike the restaurant, their profit is much more of a sure thing!
Download the Groupon madness spreadsheet here! Orange cells in the spreadsheet should be changed to reflect your business conditions and best estimates for how Groupon customers will behave in your business.
UPDATE, I added another fun feature to the spreadsheet, a calculation of cost per ad impression for all of those who saw your Groupon but didn’t purchase it. Suppose 100,000 received and viewed the offer but only 4,600 buy the Groupon for your business. You have received this additional advertising at a cost of $0.13 per person. I use the immediate profit/loss for this estimated cost per impression.
Tags: Analyst · Articles · Coupons · Discounts · Groupon · Insights · Lifetime Value · LTV · Marketing · Strategy7 Comments
Posted on November 23rd, 2010 by
Wow Stephen amazing insights as usual.
We haven’t grappled with the Groupon world yet, but would now be able to do so, with our eyes open.
Hi Jacqui, thanks for the kind feedback!
I have updated the spreadsheet and the scenario. The formulas were somewhat unclear and now parts 2 and 3 in the spreadsheet should be much clearer to read.
Also, I have added a second tab to the spreadsheet for a “funnel” overview of new versus existing customers spend and profitability.
Interesting analysis, Stephen. Is there any evidence about whether existing customers habits are changed by the use of Groupon? That is, are existing customers likely to visit more, less, or just as often after using a Groupon?
Great question Shawn, I would love to see an analysis like this but haven’t yet for Groupon.
I know that there is a real risk of “training” customers to expect discounts and even of channeling customers to using Groupon. They may end up finding your competitors or just plain decide why pay full price?
Great job with this! There was a recent study that provides a lot of stats you can use to modify the inputs, e.g. likelihood of Groupon user to spend over promo, here:
http://is.gd/hugSy
Great link Jim and thanks for the kind feedback.
I really enjoyed one of the summary of positive and negative comments in this article, here is one that summarizes my biggest fear about Groupon and similar deep-discounts for a premium, high-quality business.
“It is obvious that many Groupon users are only looking for deals…not a business that they will return to many times. They buy the maximum number of deals allowed and then move on to another salon that has deals as well. The percentage of people actually looking for a new stylist was low and not many of them returned.”
– Salon/ Spa, Western US
Here is the link from the Groupon paper by Prof. Dholakia at Rice Universty.
There’s another factor to account for:
What proportion of Groupon deals purchased are never used?
If a purchase is never used, it is pure profit for the issuer. (Groupon profits regardless, presumably unless the certificate is returned by the buyer.) Of course, for the duration of the purchase’s validity, it’s also a liability for the issuer.