One of the big benefits of Groupon is, unlike traditional marketing, you don’t have to spend any money upfront. But Groupon marketing, as in life, there’s no free lunch. Why? Because if you strike the wrong offer you could actually lose money, hurt your relationships with your existing clients and damage your brand. But don’t expect your Groupon representative to tell you about the downside. So you’ll have to do the math yourself to see if you’ll want to do the promotion. Here’s the way to calculate your profit/loss on Groupon/E-Soupon. 1. Your cost of sales — that is, the actual cost percentage for a new customer. In a salon/spa you have hours to sell, your costs might be 50 percent of the sale price. In any case, don’t
include fixed costs that you would be incurring any way. 2. The amount of the average sale. If the coupon is for $45, will the customers spend more that? I heard of a salon complaining that nobody spends more than the value of the coupon. 3. Redemption percentage. You don’t really know until the end, but a minimum of 80 percent (following the 80/20 rule) is a good guess. 4. Percentage of your coupon users who are already your customers. This number varies tremendously depending on the size of your city, how long you have been around plus the design of your deal. 5. How many coupons does each customer buy? (The more they buy, the fewer people are exposed to your product or service.) Again this depends on the design of your deal where you can limit it to one per customer. 6. What percentage of coupon customers will turn into regular clients? Again, it can seem as if they are all bargain shoppers who will never return without a discount, but that’s almost impossible. Is it possible 80% percent won’t return? Absolutely. 7. What is the advertising value of having your business promoted to the number of people on Groupon’s (or another “E-Soupon’s” list? 8. How much does it normally cost you
to get a new customer through advertising? Everything is relative. Let’s look at an example of how this might work for a salon. Suppose you sell 388 haircut and treatment coupons with a face value of $90 for $45. Then let’s assume the following: 1. 50 percent costs (labor cost and product). 2. $50 average ticket ($5 more than the coupon). 3. 85 percent redeemed. 4. 40 percent used by existing customers. 5. One bought per customer. 6. 20 percent come back again — or send friends. 7. $1,000 advertising value. 8. $50 typical cost to get a new customer through other advertising methods. Now, let’s do the math: Number redeemed: 388 x 85 percent = 330. Revenue: 388 x $45 x 50 percent = $8730 (Groupon sends a check for # of coupon sold). 330 x additional $5 = $1650 (additional money spent by each customer). total revenue = $10380 (plus, you also get the $1,000 advertising value of having all those people introduced to your product or service). Expense: 330 x $50 (average ticket) x 50 percent cost = $8250. In this example, the salon took in $10380 at a cost of $8250 which means they made $2130.00 on the deal. (if you decide to factor in the $50 spent by each existing client participating in the deal vs. the regular price $90 and you show a $3150 loss) The key question is how many return customers the salon will get for that expense. Multiply the 330 x 60% (first time customers only) again by 20 percent (the percentage of new customers who return), and you get 40 new repeat customers. The question the salon has to answer is whether it was worth the trouble to get 40 customers — especially given that it probably annoyed some of its existing regulars. On the other hand, maybe it kept some of its employees busy when they otherwise would have had short hours. But keep this in mind: because of the volume, if you change any of the variables, you can get very different results. For instance, if the customers had spent only the deal price of $45 instead of $50, the salon would have actually lost $480.00 on the promotion. So is Groupon the best or worst ever marketing? It all depends on a few little numbers. Here is the big difference between traditional advertising and Groupon/”E-Soupons”: Traditional advertising requires spending some money and knowing that it can be lost if the ad doesn’t work. With Groupon, you spend no money up front but you mess with your formula for making money. Like all advertising, Groupon’s a gamble – you can win big and you can lose big. How you play the game is up to you.