Chicago-based Groupon has spawned an industry of deeply discounted coupons.
How it works: There’s no upfront cost to merchants, who can offer an $80 product or service for $40, then split that $40 with Groupon. Creative copywriters sweeten the deal, and time limits hasten sales. Women are the main consumers—and of course, what makes these offers social is that users pass them along to friends.
We spoke with the owner of a tree nursery in Virginia who explained that using Groupon is basically a form of advertising. It gets people in the door. From that point on, the product or service has to stand on its own.
The concept does have growing pains. Merchants risk becoming swamped by an influx of customers, or of attracting only bargain-hunters who never return. Rice University reports that more than a quarter of merchants offering a daily deal lose money on it.
Then there’s the Yelp factor. (Yelp is an app that searches for places to eat, shop, drink, etc., and offers reviews from an active community of locals in the know.) Coupon users routinely check on what their neighbors say about a merchant before buying a coupon.
Despite a valuation of $13 billion for Groupon at its initial public offering in fall 2011, it’s not clear if the business will hold up.
Bottom line: If this model catches your fancy, try it, with precautions. Make sure you’re solid on Yelp. If you’re afraid of a customer deluge, cap the number of coupons. And never take your eye off quality.