Is Groupon the new Marketing Crack?

Tweet With the recent news of Groupon's compelling Gap case study, where the Gap sold $11 million in Groupons, Groupon has vaulted itself into marketing strategy discussions around the world. 

Given too that we are in the 4th Quarter -- traditionally the time where marketers are planning strategy and budget allocations for the upcoming year (as well as last minute current year tweaks) I wanted to get your thoughts on Groupon as a marketing tool. Specifically, I'm interested to hear your thoughts on how good of a deal Groupon really is for marketers.

Now for those that don't understand how Groupon works, let me enligten you. For instance, on the Gap promotion, consumers received a $50 off coupon in exchange for $25 charged to their credit card. So right away, the Gap is selling $22 million (based on purchase of the Groupon) for $11 million. Further, Groupon, not Gap collects that $11 million and retruns half of it ($5.5 million) to Gap. So in the end, Gap has sold $22 million of merchandise (if everyone that bought the Groupon redeems it) for a mere $5.5 million or 75% off.

On the surface, that may not sound like a great deal. So why would Gap or any other advertiser do this? Because it's a no cost marketing vehicle. You see, under the Groupon model, the advertiser doesn't "pay" for the Groupon. They are only "charged" when a consumer redeems their Groupon. Hence, advertisers, especially smaller ones see this as a risk free marketing channel because there is no upfront cost to them.

While true, I think there are two important points that most marketers might be overlooking.

First, what is the margin on your product/service? If the Gap sells me $50 worth of goods, they have hard costs associated with that sale. They have the costs of goods sold, labor, rent, etc., that factors into their final cost. So, if they're selling it to me at 75% off, the question becomes are they making or losing money on each sale? This same analysis goes for any company that might try Groupon. At the end of the day, you're agreeing to sell your wares at a 75% discount. So while you may be driving new traffic, that is folks that otherwise would not have bought from you, that traffic may or may not be profitable on the first visit. It would also be really interesting to see the average total spend by each Groupon customers, ie., did they spend just the $50 or did they spend $100. That too would be a big factor I think in any decision to make Groupon a regular part of a marketing plan.

Which leads us to the second question. Do Groupon users convert to repeat business? According to Groupon, only 22% of its customers become repeat customers post Groupon. I guess this means the remaining 68% (on average) will only return when offered another Groupon is published. Here again, we have to ask if the Acquistion Cost is worthy of the investment? The Gap promotion resulted in 440,000 consumers buying the offer. Let's assume 100% of them redeem it. That means the Gap's acquision cost was $16.5 million ($11 million discount + $5.5 million revenue share with Groupon) or $37.50 per customer (assuming that all of the merchandise sold could have been eventually sold at full price without any mark-down or traditional sale).  So they spent $37.50 per customer to make $12.50 per customer in sales. Hmmmmm...that's a pretty hefty acquision cost for a retail brand.

But remember, the reason the Gap and pretty much all Groupon marketers do Groupon is because it's risk free and you only pay the advertising agent (Groupon) when your ad (Groupon offer) converts. Hmmmm, sounds a lot like PPC/Google Adwords sales model. And we all know how companies love to buy Ad Words... which I jokingly refer to as Marketing Crack because once a brand finds success in Ad Words, it gets really, really hard to convince them to redeploy Ad Word dollars into any other channel that doesn't offer a PPC or pay-for-conversion model.

So we've established that Groupon works as a traffic builder. And we've established that the traffic is largely offer driven vs brand driven. And we've established that the acquisition cost of a Groupon sale is pretty darn high. So, with all of that in consideration... what do you think? Will Groupon become the new Marketing Crack or will companies experiment and move on?

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