One of the biggest trends right now is the “group buying” site – GrouponLivingsocial.comCouptessa and other discount sites where companies offer jaw-dropping discounts to a certain number of pre-determined group coupon buyers.

Sites like Groupon are often a good deal for consumers, but the results can be a mixed bag for the businesses that give the discounts.

If your business allows people to buy your products or services for a huge discount (50% or more), are you really winning the right kind of new customers, or are you just undercutting your profits? If you’re not careful, your business might be hurt by some of these deep-discounting coupon sites.

5 ways that Groupon and other sites might be a bad idea for your business:

  1. Too many discounts: One Chicago bagel bakery featured in this Chicago Tribune article had an overwhelming response to its Groupon offer – and they wound up losing money, selling $80,000 worth of food for only $15,000, and the discount offer did not lead to the additional revenue that they had hoped for. With discounts, sometimes too much success can actually be a kind of failure.
  2. Attracting the wrong customers. Whatever you sell, chances are that there is a certain kind of customer that is ideal for you – these are the customers who love what you sell and are willing to pay more for what you offer. If you attract hundreds or thousands of new customers who only know you for your huge discounts, chances are most of these customers are not the kind you want to keep. Do you really want to fill your store with bargain-hunters and tire-kickers? How many of those customers are really going to come back for repeat business, and how many will pay full price? As the owner of Chicago Bagel Authority said of his experience with Groupon, “We just don’t get the kind of customer that we want to come back. It’s a lot of people that come once for the discount, nobody tips, and they’re all trying to squeeze it into the exact dollar amount.”
  3. Alienating your best customers. If your store gets overcrowded with discount shoppers, or your regular massage therapy clients can’t get in for an appointment because you’re booked for two weeks with customers who are paying half price, or if your business gets overwhelmed dealing with discount buyers and loses track of your loyal regulars, you might end up with the worst of both worlds – no new customers, and losing some of the good customers you already had.
  4. Undercutting your profit margins. At Smart Advantage, we always counsel our clients to avoid competing on price alone. Walmart can afford to compete on price, but unless you’re Walmart, chances are you won’t win by slashing your prices. Instead, find out what really makes your business unique, and market yourself based on your real competitive advantages.Find the right kind of customers who appreciate the value that you provide, and who are willing to pay more. Groupon and these other group buying sites encourage businesses to do the exact opposite – slash your prices in hopes of generating enough new business to make up the difference.
  5. Damaging your brand. Have you ever seen a Lexus on sale for a 50% discount? What about a Patek Phillipe watch? Does Louis Vuitton sell handbags on Groupon for 80% off? There is a reason why luxury goods and premium brands never go on sale – that’s part of their brand. Their price is a reflection of their competitive advantage – they’re sending a message: “this product is so good, we don’t need to lower the price.” In the same way, selling your products and services on Groupon for a massive discount might be interpreted as a sign of weakness or lack of confidence. Customers might wonder why your company needs to sell at such a big discount – is something wrong with your company? Is business slow? Is your product not really that great?

Think carefully before you decide to offer big discounts – on sites like Groupon, or in any other setting. Discounts might bring in a short-term boost in customer traffic, or build a brief online buzz about your business, but too often they just undermine your long-term success. Make sure that any discounts you offer are targeted, well-planned, and integrated with the rest of your marketing strategy.

Instead of offering deep discounts, communicate your Competitive Advantages

Instead of trying to discount your way to greater profits, take a harder look at why your customers really should do business with you: examine your key competitive advantages. Find out what customers love most about your company – find out what they’d be willing to pay for even if you never offer a discount again.

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