Grouponomics or Freakonomics?

Success stories abound about how Groupon (and its ilk: LivingSocial, Google Offers, Facebook deals, etc.) is helping local businesses acquire new customers. Running a Groupon deal delivers a huge inflow of new customers and by the looks of it, it seems like a great way to grow business. The deals that Groupon offers to customers are hard to resist, and businesses often see hundreds or thousands of sales in a matter of days. Groupon offers, on average, are at a 50% discount on merchandise prices, so there is no question that they are great for customers. But, what about the businesses? How do you know if Groupon is right for your business? And how much should you pay Groupon if you can negotiate with them?

With Groupon, you typically have to offer merchandise/services at a 50% discount to be featured as a Groupon deal. Groupon then takes a 50% cut of the discounted fee charged. That leaves the business, for purchases made with a Groupon, with a maximum of 25% of the revenue they typically get (excluding, of course, any spend in excess of the certificate value). Finally, a Groupon potentially results in spikes in traffic to other paid marketing sources (mainly PPC/Affiliates/CSE) when potential customers use search as a navigational aide after receiving a Groupon. As such, the real cost of acquisition using Groupon for a business is often more than what it appears to be at first glance. So, for example, a $50 Groupon good for $100 in merchandise, assuming margins of 20% costs the company $55 in acquisition cost. This is after we account for the fact that the customer might not have converted without the Groupon and using loss on COGS of $80 as the acquisition cost.

Is the high traffic and awareness that a Groupon generates for a business enough to warrant the high customer acquisition cost?

Let’s delve deeper using generalized Convertro client data. The general business case for running a Groupon campaign is to acquire new visitors and new customers; we see in the following chart depicting new vs. return visitors to the site (after being exposed to the brand by being offered a Groupon) that visitors tend to be predominantly new. On average, for the time period we considered, 93% of total visitors coming from Groupon links to our clients’ sites had not visited previously.

But, because you’re taking such a big hit on revenue on the first purchase, even under the most optimistic scenarios, the true value of Groupon lies in its ability to drive repeat purchases and/or order totals in excess of the Groupon value. Upon drilling into the data, we see that only about 33% of buyers that were exposed to Groupon before their purchase went on to make a repeat purchase, and most of the repeat buyers had only 2 purchases (disclaimer: for this exercise we only looked at a three month period from when the Groupon went live).

Normalizing this number to 100 buyers and using varying margins and a 33% rate of repeat purchases, we see that when margins are high, Groupon works very well, but not so much when they are low.

Although this is interesting in itself, this type of general marketing analysis should be done before running any marketing campaign. However, there is a deeper analysis that can and should be run in addition which is far more insightful, and tells you the true cost of Groupon.

Note:  The numbers cited so far are using Convertro’s multi-attribution solution. When you only take last click attribution into account, your analytics solution will report significantly lower sales attributable to Groupon although the number of Groupon coupons redeemed will be higher resulting in mismatch and misrepresentation of actual impact.

As we alluded to earlier, the real cost of Groupon is significantly higher since a Groupon run results in significant spike across all sources for visitors who use these for navigational purposes and results in the following additional costs:

  • PPC cost when potential customers use search engines as a navigational aide – which is an immediate cost irrespective of whether it results in a conversion or not.
  • CSE fees and commissions from customers who arrive at the site from from CSEs and/or affiliate sites after search
  • Unless the retailer is careful/prevents it, some of the customers can combine the Groupon with other offers on coupon websites and/or purchase the Groupon multiple times causing additional low- or no- margin sales for the merchant.

We can use Convertro’s multi-attribution data to effectively factor in all of these into channel analysis and evaluation.

The following chart illustrates the source position – specific position in the sequence of sources that the visitor saw before converting. As you can see Groupon is the only source in 15% of the cases.

In all other cases, there were marketing sources that assisted with the conversion, which leads us to the next question: with what other sources does Groupon most frequently overlap? From the following chart, we see that search engines, google affiliate network and email, all of which result in further costs/discounts, combined account for overlaps in over 60% of purchases.

 

Let’s consider the case of search engines with which Groupon has about 40% overlap. In the example we used earlier, of 100 visitors, only three converted, but about 40 visitors to the site used search as a navigational aide. Not all of these visitors resulted in PPC costs – some of them used organic search – but nonetheless they can result in another $1 of cost per acquisition (not all of this cost is wasteful as it has brand engagement and awareness lift that can result in subsequent conversion). In comparison to the deep discounts on Groupon, it might appear to be negligible, but it increases the cost of acquisition and combined with the other costs from affiliates/CSE’s, it could be a significant amount to warrant a thorough analysis. Especially, in the case of PPC, it is easy to run through monthly or quarterly budgets within days of running a Groupon, which means that valuable marketing opportunities are lost subsequently even on very targeted PPC matches. On the other hand in the case of Affiliates/CSE, double payments can result in further erosion/loss, that is difficult to compensate just by a minor increase in sales from increase in awareness.

We can start getting an accurate picture of the true cost of acquisition using Groupon only after you add in all of these costs and account for all future purchases from Groupon-browsers at the moment. Only at that point can you analyze if Groupon works for your business. If running a Groupon is causing additional expense/traffic spike from other channels, you have a few options:

  • Renegotiate payment options with Groupon to see if they can reduce their commission
  • Better manage Affiliate/CSE payouts using selective pixel firing to make sure that conversion pixels do not fire on Groupon sales
  • Put budget caps on PPC
  • Put frequency caps/pause display campaigns
  • Incorporate terms on the Groupon so they cannot be combined with other offers
  • Make sure that your visitor tracking is robust so you can prevent users from using the Groupon multiple times

Convertro gives you not only the ability to get better insight into your campaigns but also gives you a recommended course of action, and once you decide how you want to go about reducing your costs, enables you to enforce these decisions by providing you with Tag Container and Selective Pixel Firing features. The above analysis was done using generalized Convertro data, and makes use of only a tiny bit of the multi-attribution, user conversion tracking and other features that Convertro provides. For more information, visit Convertro.

If your current analytics solution doesn’t provide you with these capabilities, maybe it’s time to reconsider your options. request a demo

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