We’ve long wondered about the economics of participating in daily deal sites, also known as group buying sites. You know—Groupon, WagJag, and the numerous other sites with the almost too-good-to-be-true bargains? Although Admiral Road has been approached to participate in group buying sites, we have always declined. We’ve had a feeling that it would be hard to actually make money. But many businesses do take part in group buying, so what gives?

Recently we listened in on a webinar from TD Canada Trust’s Small Business Webinar series. The webinar featured an executive from WagJag as well as two merchants recounting their experiences with group buying. Here’s what we learned about taking part in a group buying program.

The Good

• Great exposure. All site subscribers are exposed to information about your company, even if they don’t take advantage of the deal.
• Advertising can be tailored to a specific geographic market to suit your business.
• Customers purchase on impulse—the time limit and easy click-though purchase makes buying from your company a breeze.
• New customers engaging with your business.
• Up-front cash flow. You receive a cheque shortly after the deal closes.
• Measurable results.
• Risk free—you don’t owe the group buying site anything.

The Bad

• Very slim margins. You’ll need to sell your product or service at a 50% discount minimum. The group buying site then takes 20%-50% of the remainder. It’s unlikely there is any profit for you, and some merchants even offer their product or service at a loss.
• Managing the huge influx of orders or appointments can be hard on the business. You may have to bring on extra staff and supplies in order to meet demand, further reducing your ‘take’ on the deal.
• New customer retention can be difficult. The merchants who had used group buying sites both recounted retaining about 10% of the new customers. The others were bargain hunters who were only looking for the service at a deep discount. This makes the price of customer conversion quite high.
• Your existing customers may get cranky when you’re offering the same product to new customers at a reduced rate.  
• You’re bringing in and spending time on people who aren’t your target customer.
• You risk creating what we call a ‘culture of sale’ where no one ever wants to buy from you at full price.

The Good to Know

• Group buying is best if you have an opportunity to up-sell. The example provided was for half price skydiving. Since the merchant had the opportunity to also sell videos—at full price—it made the whole venture make sense.
• You must have a great web site before you take part in a daily deal. Since prospective buyers will be clicking through, you only have that one chance to make a good first impression. A crappy web site will probably kill the sale.
• You need the systems in place to retain the new customers. If you can’t engage new customers with a specific program or marketing initiative then it may not be worthwhile.

Participating in a group buying deal may be just the thing for your small business. Before you sign up, be sure and do the math and make sure it’s the right thing for your business now. Need some help on the math? Here’s a great article.

As in all things, look before you leap.