As co-owner of Savvy Cellar Wine Bar & Wine Shop, I get to experiment with promotional services that are designed to help local businesses. Over the course of several years we’ve tried (in no particular order): Google Adwords, Yahoo! Local, MerchantCircle, local newspapers, local magazines, email, Twitter, Facebook, FourSquare, Peninsula Shops, Movie Theater Advertising, Rumbafish and now Groupon.
An online coupon site, Groupon is organized by major metro markets in the U.S. Each day, the company features unique offers in the local market (restaurants, spas, entertainment, etc.) at a special “group” price. There is a minimum level set for each offer – meaning that a certain number of people have to sign up for the daily groupon in order for everyone to get it. This drives sharing among friends on social networks. If enough people opt to take the offer, then the offer is “on”. At the end of the day, everyone who took the offer is charged. Then Groupon takes its cut of 40-60 percent and pays the merchant the balance.
I’ll let you know how it goes. For a small merchant this is an interesting option. The pain is the cost of promotion – in Savvy Cellar’s case it was a 58 percent discount on wine flights, basically eating up the margin. In addition, we will lose another 40-60 percent of what’s left in the form of Groupon’s take. So if we get 100 takers of the groupon for wine flights, we will see approximately $4 each or $400 total from the promotion.
If an average wine flight is $16, then 100 flights at full retail would be $1,600. So one way to look at this is the promo cost us $1,200 in gross margin, which is a money loser.
So why bother with Groupon? Well, the flip side of the analysis is we received branded exposure on their full mailing list (the size of the San Jose list was not disclosed), reaching people we typically would not be able to. When people come to the shop they are likely to enjoy more than just a single discounted wine flight – possibly another wine flight, a glass of wine, food and retail bottles on the way out the door. Plus, if we provide good service and a positive experience, some will return, some will take classes and some might become wine club members.
Additionally there is the “breakage” aspect of coupons – some customers who pay for the groupon won’t actually redeem the service.
Time will tell whether Groupon is worth a small, local merchant’s while. As a business, however, Groupon is a great idea with phenomenal momentum – growing rapidly, profitable and well funded, having just received $30M.