The Cost of GroupOn v Google AdWords

Rafi Mohammed posted a nice article in the Havard Business Review about the recent hoopla surround Google’s recently-rejected $6B bid for GroupOn, the two year old coupon site.  In Mohammed’s article he mentions,

For the businesses that are using [GroupOn]—and ultimately, for Google, which is betting big that Groupon can continue to grow profitably—there’s a big unanswered question: are these highly-discounted promotions really good for your company?

Let’s take a quick look at the numbers.

According to the article, “Groupon typically takes 50 percent of the revenue customers ante up.”

In the case of Blue Ribbon BBQ, ($15 worth of BBQ for $7), they’re potentially taking close to a 76% discount off their existing pricing.  Considering they sold 16,000 coupons, the total opportunity cost to the deal was approximately $190,000 in revenue after their discounting and fees.

For comparison, according to Google’s AdWords Traffic Estimates, there are1.8MM monthly searches for the basic term “barbecue” in the Boston-MA area with an estimated average CPC in the $0.40-$0.65 range.  (Keep in mind there is probably a relevance / Quality Score penalty for a software testing company bidding on BBQ)  Assuming they pay a premium o $0.65 per click they can capture roughly 300k unique clicks to their site – all from within the Boston area.

The question is; would a Blue Ribbon PPC click convert to paying customers at a rate of better than 5.3%?  It’s tough to answer this question, and tracking could pose a challenge without an online-coupon code to track.  If there was any lingering skepticism, I think Mohammed’s last point tips the scales in favor of Google;

The last strategy—hoping that people who become one-time customers via Groupon will become regulars—is the shakiest proposition. Think about it: how many times have you purchased a product at a significant discount (50% or more) and then repeatedly returned to pay full price?

So would you risk $190k in a day on an unproven marketing tool?

12/23/10 Update – We used one of my coupons this evening, and took a moment to ask the gentleman behind the counter about the campaign.  Aside from saying that for the first few weekends following the Groupon sale they had record crowds, he did mention two things that grabbed my interest.  One, that they negotiated with Groupon for a 35% fee (down from 50%) and two, that they really won’t know if the campaign has been a success until October of 2011, when the coupons expire and they can review the prior 12-months sales.  Again, I find it very interesting but suspect that the model will really only work for items that have very little variable costs associated with them… like the Boston Celtics tickets that are available at the moment.

1/17/11 – I’m just now reading an interesting article published on Harvard business Review, “To Groupon or Not To Groupon: New Research on Voucher Profitability“.  One paragraph to note, “vouchers are more likely to be profitable for merchants with low marginal costs (who can better accommodate a large discount) and for patient merchants (who place higher value on consumers’ possible future return visits).”  This is important to note, especially for small business owners who might not be able to handle the scale of Groupons sales.  HBR also notes that it is critical to track customer sales, whether for discounting or repeat purchases – which can often be down through credit card invoice analysis.

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