I’ve talked with many people about Groupon, LivingSocial, Deal Chicken, and other kinds of deep-discount programs.  I have to confess that I’m not a huge fan, because they can be extremely dangerous to your business.

I ran across a couple of articles today that help bring this into focus:

Groupon, Living Social, Deal Chicken – Good or bad for businesses? – Peter Arceo

5 Reasons why Groupon is a Losing Con-Game – Roger Boneno

Both of these guys tell it like it is!

Here are the key points that I want people to understand:

  • It’s INCREDIBLY hard for most businesses to make any kind of profit when you’re only getting a quarter of the revenue you usually get.  Most likely, you’re losing money on every person who walks in the door.
  • You’re not getting loyal customers, you’re attracting people who run from one deal to the next.  Odds are they will NEVER come back to purchase your product at anything like full price.
  • You’re clearly telling everybody that your normal prices are outrageously high.  So you’re creating your downward price pressure – like you need any more of THAT.

So why do these deal sites continue to exist?  It’s a good question, because most businesses that I’ve talked to who have experimented with it will never ever go back.  But there is sort of an attraction to the idea that you can suddenly bring in hundreds or thousands of new customers with little cost.  It seems so easy.

Is there ANY scenario where a deeply discounted offer might have value?  I can think of two:

  1. If you’re trying to get visibility for a new business, and are battling to be seen as an alternative to the entrenched players.  This can get you some visibility, and just possibly create some word-of-mouth because you’re doing something different.  Even a handful of new loyal customers might be valuable.
  2. If you’re testing a new product line that’s a lot different than your current offering.  If you have a frozen yogurt shop, don’t use a deep discount to promote your new flavor, because it will show everyone that you normally charge a lot more than the product is worth.  Use it to test whether you should add a line of bowling balls to your restaurant – you need to get some buzz going about who would be crazy enough to do that.

But ask yourself:  If this is your objective, and you agree to fund your substantial loss as a marketing exercise, aren’t there more effective ways to spend your money?  How about hiring a guy to stand out on the corner juggling bowling balls?