Part I: Three reasons in favor.


Social Coupons Story Image.jpgBy Reed Richardson.


During the past year, the business world has been significantly reshaped by a new discounting phenomenon, one that combines the ubiquity of traditional coupon clipping with the power of social networking. These new “social coupons,” offered through websites like Groupon, Eversave, Adility, LivingSocial, eWinWin and several others, promise participating businesses access to a plethora of new, local customers, while offering consumers steep discounts—anywhere from 50% to 90% off. With some variations, the basic social coupon mechanism works like this: The consumer purchases the coupon from the website, but the transaction is not completed until a certain minimum number of coupons have been sold; once that threshold is met, the revenue from the sale is split between the website and the business offering the coupon. On its face, this arrangement seems to be a win-win for both the consumer and the business owner. But as the popularity of social coupons has taken off, so too has the debate about their efficacy at the small business level. (For a basic primer on how social coupons work, try Eversave’s FAQ page here.)


So, is your company missing out on a golden opportunity if it hasn’t yet tried social coupons or is it dodging a red-ink-bleeding bullet? Perhaps not surprisingly, the answer depends upon a lot of factors, so we’ve decided to dig deeper into the devilish details to help you figure out if social coupons would be a good fit for your business. Let’s begin with the three key benefits:


1. Incredible exposure to lots of nearby customers

By their very group-focused nature, social coupons have the potential to radically re-orient a small business’s daily rhythm in terms of customers encountered. A quick look at testimonials by previous users of social coupons finds that hundreds, if not thousands, of copies of a company’s coupon can be typically sold in one day, funneling an enormous amount of new customers to a business looking to break out of a rut. (To read a few Groupon case studies of small business clients, each of which sold thousands of coupons in just 24 hours or less, you can visit this link.)


For an entrepreneur strapped for cash, social coupons have proven to be an incredibly powerful way to quickly generate extensive word-of-mouth buzz and new customer traffic. What’s more, because the breakage rate of social coupons is extremely low (breakage being defined as the number of coupons sold or issued that are never redeemed) business owners can feel confident that for every social coupon sold, there’s a very good chance that an actual customer will come through their door and try their products or services. And because sites like Groupon, Eversave, Adility, and others, sort and send out their coupon offers based on location, a business that utilizes their service is mostly gaining exposure to large numbers of consumers who live nearby and, therefore, the thinking goes, are more likely to return and become repeat customers.


2. Boosts business activity to cover slow periods and fill excess capacity

If you run a small business, particularly one with a fixed capacity, the traffic generated by a social coupon deal can be a great way to fill otherwise empty seats and avoid having to lay off staff or shut down production. This strategy can quickly turn an off day into a moneymaker. A Rice University study published in October, which surveyed a small sample of 150 small businesses that had used the social coupon site Groupon, found two-thirds of the Groupon business users it surveyed reported making a profit on their social coupon experience. But another key proviso to employing the power of social coupons wisely and profitably involves understanding just when and where those slow periods are and structuring your deal to fill those holes, all while building positive customer experiences and fostering repetitive consumer behavior.


“For example, instead of offering $60 worth of food for $30, a sushi restaurant could offer $20 worth of food for $10 on each of the consumer’s next three visits,” Rice study author Uptal Dholakia notes. Or, rather than offering one overall discount on a total bill, he notes that a business would be better off promoting a variety of specific items, to better cross sell all of its products or services. Finally, to insulate a business from cannibalizing full-price sales from existing customers, he adds, “A yoga studio might offer classes on a weekday afternoon, for example, but not on weekends, or an apparel store might promote middle- or end-of-season lines but not the newest arrivals.”


Adding these types of constraints will make a social coupon somewhat less attractive, Dholakia acknowledges. But it presents a better upside in the long run because of the types of customers it will weed out.


3. Guaranteed, measurable results – in advertising your business

As with any business expenditure, it pays to do your research ahead of time to figure out the true risks and rewards before execution. With social coupons, the first of these steps is to accept that they are, essentially, advertising. Very effective advertising, but advertising nonetheless. (One respondent in the Rice study enthused: “It’s the best advertising for small business!”) Because even though social coupons bring in dozens, hundreds, even thousands of paying customers, no sustainable business could survive selling its goods at such discounted prices, so social coupons can’t be honestly considered a long-term sales strategy.


Often, money that an entrepreneur spends on advertising or marketing can seem like it has disappeared into the ether, with its impact all but invisible to small companies that lack the resources to carefully track sales and marketing metrics. Social coupons, on the other hand, simplify the process and ensure a minimum payback on the money invested. Since a business owner knows exactly how many coupons exist based on the number purchased or by setting a numerical cap, it’s easy to track redemptions and then calculate coupon-to-customer conversion rates. (Some social coupon sites even offer complimentary tracking of sales for you in real time.) And because a business owner sees a share of the coupon sales upfront, he or she is guaranteed some return on investment.


Still, a business owner must factor in all their soft costs, a few other sales metrics, plus a healthy dose of skepticism in terms of repeat customer conversion before he or she can get a good handle on the potential long-term positives and negatives of a social coupon offer. “There are eight key calculations you need to consider to determine whether this is a better advertising vehicle than something else you may already be doing,” writes entrepreneur Jay Goltz on The New York Times’ You’re the Boss blog. Goltz’s post, which includes a very handy breakdown of a social coupon deal’s financial implications, can be found here.


The three benefits discussed above offer very tangible reasons you might want to consider utilizing social coupons as a means to grow your business. But does it all seem just a bit too rosy to be true? You may be right. Be sure to check out Part II of our social coupon series, which offers three reasons you might not want to use social coupons.