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All You Ever Wanted to Know About Groupon

But, let's get one thing straight: Groupon can be a great option for some businesses. There are no upfront costs, and in almost all instances, there is an implicit guarantee that Groupon will deliver a significant amount of people to your door. Ever run an ad in the local newspaper? Something time-sensitive, maybe? Of course, there's the upfront charge, leading to a virtual guessing game as to how many sales will be made.

With Groupon, a merchant gets targeted local advertising that produces almost guaranteed results. As the No. 1 deal provider, Groupon has so much leverage with its user base that businesses are literally knocking down the doors to get a deal listed. According to Groupon, there's a nine-month waiting list for companies that want to be featured on the site.

Many forget about incremental margins when thinking of Groupon and merchants. Most are focused on the fact that on an average $50 coupon (sold for $25), a business owner only collects roughly $12.50 per deal sold. Doesn't seem like a lot, especially if you run a business that has low margins to begin with.

But let's think about a typical restaurant. In most circumstances, labor costs will remain fixed no matter how many people you're serving. If your restaurant is consistently running below 100% utilization, the fact is that this sort of promotion can be worthwhile.

Bringing in customers who may never have visited your business can be invaluable. An empty restaurant is a morgue. But one that's bustling with laughter can be a good thing, especially for a restaurant. I myself will never walk into a restaurant that's empty. But if its crowded, I want to wait. Food must be good, right? Sure, it's a loss leader, but so is any form of advertising, and sometimes, as with newspaper ads, the results don't pay off.

Of course, there are the Groupon horror stories (I spoke of Posies cafe in my last story), and there will continue to be. The business owners that don't crunch the numbers or put a limit on the number of deals sold will end up suffering. A recent MIT study noted that a company's Yelp rating declined significantly after conducting promotions with Groupon. (See chart below.)

In sum, Groupon probably will survive. By spending extreme amounts of money in building a huge subscriber base, the company has established itself as the leader in the deals market. While the market has some obvious challenges, it is also evolving. There will always be deals on food, travel and services, yet the format in which the deals reach a customer will likely change.

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