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The Real Cost Of Groupon And Coupon Advertising Websites For Small Businesses
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Unless you've lived under a rock with no Wi-Fi access for the past several years, by now you've heard of these wonderfully enticing coupon advertising websites, offering no up-front costs to advertise your business, promising hundreds and sometimes thousands of actual customers. Groupon and their competitor websites like LivingSocial, Restaurant Dot Com, Try It Local, My Local Shopper, and others are springing up like dandelions across the online business marketing landscape luring small business owners with the promise of instant revenue and little to no risk since they're offering CPA deals - that's "Cost Per Acquisition or Action" (not those trusted public accounts we rely on during tax season). CPA deals only generate a fee when the target recipient has executed a specific action, in this case, bought your coupon deal.

So far so good, right? Not quite...

I WANT HALF

Groupon and the rest require, that's right "REQUIRE" that you discount your service a minimum of 45% upwards of 90%, in order to promote your offer.

Most small businesses generally have a net profit margin in the neighborhood of 30 - 60% on items and services, yours may be slightly higher or lower based on your industry. Remember we're talking net profits, not gross.

In this example we'll use the following data set:

  • Regular Item / Service Price: $20.00
  • Profit Margin: 60%
  • Hard Cost Per Item: $8.00
  • Net Profit Per Item: $12.00
  • Total Items sold: 100
  • Net Profit (loss): $1200.00

For the purpose of this example we're using a generous 60% net profit margin. If you have an item that normally sells for $20 and a profit margin of 60%, you would make $12 on every item sold, and have a hard cost of $8 per item. Now discount that same item / service by 50%, you are now offering it $10. Your hard cost is still $8, you now have a profit of $2 per item sold, a total $200 profit.

Not bad for getting a hundred new customers right? Wrong.

Now come the fees...you didn't think they were doing this for free did you? Remember, It's a CPA deal. On average, Groupon, LivingSocial and the like charge 50% of the discounted ticket price for each item sold. That's right HALF.

After Your Groupon Discount & Fees:

  • Original Item / Service Price: $20.00
  • Discounted Offer Price (-50%): $10.00
  • CPA fees (-50%): $5.00
  • Total Items sold: 100
  • Revenue From Coupon Deal: $500.00
  • Hard Costs $8/ea: $800.00
  • Net Profit (loss): -$300.00

You had to discount your $20 product by half for Groupon to accept the deal, so now it sells for $10. That charming no up front fees clause now kicks in. In our example you sold only 100 coupon offers for a total of $1000.00 in revenue. Your Groupon-esque advertiser is going to take 50% of that fee or $500.00 leaving you with a total of $500.00 in gross revenue. Your hard cost is $8 per item, multiplied by 100 deals sold is now $800.00; leaving you $300 in the hole.

IMPORTANT!! Certain discount coupon providers have a policy of retaining 100% of the revenue generated if the total cost of the product does not meet a minimum sale price threshold. Often that threshold is $10 or less.

But wait, there's more...

PAY ME LATER

When you sell a product or service on the web, the turn around time for release of funds from your merchant account provider is typically 24-72 hours from the time of purchase. Some merchant account providers have shorter windows, others a bit longer. But none-the-less the money goes directly into your small business bank account.

When you sell discounted offers via online coupon websites like Groupon, they (Groupon) handle all of the transactions for each discount coupon offer sold and money gets deposited into their bank account.

Groupon (et al.) provides revenue to the small business, generated by the coupon offer sales, on a payout schedule. You do not get the money as the deals are sold or even within 72 hours of the deal being sold, as with typical ecommerce transactions. The payout schedules vary slightly from company to company, but most follow this method:

  • You get 50% of the revenue generated when your deal expires (we'll talk about this later), in our example that would be $250.
  • At 30 days, you'll receive 50% of the remaining balance, less any charge back fees (we'll talk about this later).
  • At 60 days, you'll receive the other 50% balance, less any charge back fees.

So, not only did you lose money on the deal, you now have to wait up to 60 days after the deal has expired to collect your revenues.

But wait, there's still more...

SURPRISE! SURPRISE!

Remember in our example we sold a maximum number of 100 deals; the reality is with most, if not all, of these coupon websites you have no control over the total number of offers sold. That's right, the 100 deals in our example that generated an easily absorbable $300 loss by most small businesses, could turn into 500, 600 or even a thousand plus deals all generating negative cash flow, forcing you to cannibalize your profits from loyal regular customers.

Regarding the expiration date...you do have the ability to control, with most of the Groupon-type ad providers, the amount of time someone can take advantage of your offer, specifically how many days the ad will run on their web site. But that's it. Many of the Groupon-type ad providers do not allow you to set actual expiration dates on the offer itself, which can leave you in a deeper hole should your costs go up because you had to honor a coupon offer from three months ago.

Chargebacks unfortunately happen; in the case of a typical e-commerce account there is usually a fee associated with each chargeback transaction. Generally this is a flat fee, although sometimes it may be a percentage of the sale, plus the cost of the item. Chargeback fees are passed directly to the advertiser, that means YOU! Make sure you know what the chargeback policy is before you sign up. In our example, we'll assume that it's a flat fee ($20) for the charge back. We will also assume that there are 2 chargebacks out of 100 transactions. That means you will be charged an additional $40 by Groupon (et al.), plus the $10 in revenue you received for the 2 items that were sold, leaving you an additional negative $50 in the hole for this deal.

LASTLY...

You need to give some consideration to the type of clientelle you're looking to attract when you offer drastically discounted products or services. As a rule of thumb, coupon shoppers are price shoppers and they generally are not overly concerned with quality of product or service; so they're willing to settle for a little less, for the sake of a deal. Coupon shoppers tend not to make additional purchases beyond those required in the offer. They also tend to not be repeat customers, at least not without another coupon in hand.

There is nothing wrong with offering coupons or discounts to attract new customers and entice existing ones to spend more money with your small business. And, there's nothing wrong with the people who looking to get a good deal, we all want a good deal.

There are two questions you need to answer as a small business owner:

  • How does this fit into my overall marketing plan?
  • Is there a more cost effective way to accomplish the same goal?

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This article and it's content is the exclusive property of ExpressEmail_dot_US. ExpressEmail_dot_US is a U.S. based, veteran-owned business with offices in San Diego, California and Fort Worth, Texas. ExpressEmail_dot_US, is owned and operated by Synoptic Marketing Group, an Internet Enterprises International company (also U.S. based and veteran-owned) with more than twelve years of Internet marketing, email advertising and web development experience.


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