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Groupon is one of the e-commerce success stories of the last year. The group buying site's revenues are skyrocketing, and its half price deal with Gap sold 441,000 units last week. That translates to $11 million in sales in one day. Groupon has now announced that more national deals will roll out soon.

This is clearly good news for Groupon. But will it be good for Groupon's partners? Maybe not.

On average, Groupon gains about 500,000 subscribers a week. Last week, after running the Gap promotion offering $50 of merchandise for $25, the site added 750,000 new subscribers.

For Gap, there are clear benefits from the Groupon partnership. In addition to the $11 million spent at Groupon that day, Gap is expecting customers with Groupons for $50 of merchandise to spend more once they're in store (the coupon is not redeemable online). If they spend somewhere around $75 to $100 as Gap is expecting, that will come out to $33 million to $44 million in sales when all the Groupons are redeemed.

But it's not all revenue for the retailer. First, it's not likely that all 441,000 purchasers will show up to redeem their coupons. While many will, all of that revenue won't be going to The Gap. Groupon does not reveal individual revenue sharing deals, but on average it splits profits with its partners 50/50. Which means that on top of the already discounted merchandise that Gap has on offer, the retailer will bring in even less from each Groupon user.

As Mashable points out, the chain could lose over $8 million on the nearly half a million customers who walk in the door with a Groupon.

Online deals can work out extremely well for small local retailers looking for name recognition and new customers. Well-known brands could simply foster the impression their retail products are overpriced if they frequently appear on such sites.

Gap is hoping customers who may have moved on to new brands will come in with Groupons and start shopping with them again. Perhaps that will happen. One of Groupon's key selling points is that unlike other advertising options, a Groupon deal contributes directly to sales. A major ad campaign from The Gap rarely has a hard number, like $11 million in sales, to prove effectiveness.

Yet this Groupon deal wasn't exactly free. Part of what led to the deal's success came from the social media campaign around the offer. According to ClickZ:

"A marketing mix involving social media, affiliates and an ad on Digg supplemented Groupon's email program in the effort."

It's not clear who paid for the ads surrounding the deal. In addition, Gap has not yet said whether the offer will be a loss leader for the company.

In this instance, the novelty of a national retailer working with Groupon generated plenty of press and word of mouth. That isn't sustainable for national brands that follow.

For Groupon, the Gap campaign was a complete success. At one point, the site was selling more than five times as many deals as usual. And its prowess is growing. According to Groupon, 35,000 businesses are currently waiting to be featured, and 700 new U.S. businesses approaching it each day.

Those brands should examine what they're getting before jumping in. According to the Wall Street Journal, only 22% of Groupon customers return to a business after redeeming discounted coupons.

For a small local store, publicity could be enough. But for the national retailers Groupon is now courting, that's not good news.

There's no longer much concern that Groupon users won't meet the minimum to make a deal go live. It's what happens after the group sale that companies need to worry about. And businesses who don't do their homework are getting hurt by Groupon partnerships.

Beyond selling items at a discount, companies are splitting discounted revenues with Groupon. There's also fulfilment to worry about. Groupon often doesn't have tight control over how many people will actually purchase any given deal.

According to Jennifer London, a small business owner the Journal spoke with, the response to her Groupon was more than expected. But few buyers turned into regulars. Without a limit set for her offer, she sold more smoothies at a loss than expected. The only thing that saved her were Groupon users who never bothered to redeem their offers. As she said:

"I definitely would have lost money if everyone had shown up."

That's not a position national retailers want to be in.

Meghan Keane

Published 26 August, 2010 by Meghan Keane

Based in New York, Meghan Keane is US Editor of Econsultancy. You can follow her on Twitter: @keanesian.

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Comments (1)

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Ariya Priyasantha

Groupon is just another coupon distribution site, aside from the group buying aspects it's not too different to others such as myvouchercodes.com. 

Retailers assume that customers using these sites will generate repeat visits for them - and that's a mistake. Usually they are loyal to the distribution site (e.g. Groupon), and usually fickle toward the retailer. 

For couponing to work, it needs to be part of a wider CRM strategy - and controlled by the retailer. This is where mobile couponing is particularly useful - consumers always have their phones when they shop.  

With real time, secure issuance of coupons to phones and redemption at point of sale (redemption rates up to 50%), retailers can control the offers, collect tactical CRM information and use it for subsequent targeted campaigns to actually drive repeat business, rather than hoping for the best.  

over 6 years ago

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