What are the must have shoes right now? How about the must have technological gadget? At any given time there are a host of must haves and in the business community it isn't any different. The fad in the world of business is social media. You don't have to look too hard to find a seemingly unlimited amount of articles about how to use social media to grow your business regardless of its size. (For more suggestions on how to improve your business, check out 10 Breakout Ideas For Small Businesses.)

TUTORIAL: Business Plan

One of those must-haves in the world of business growth is Groupon. For those who don't know how Groupon works, consumers receive daily e-mails from informing them of local businesses who have partnered with Groupon to present a deal that many consumers can't refuse. It's not uncommon to receive offers of 50% off or more. The only catch is that a certain amount of people have to purchase the Groupon before it can be used but statistics show that only 2% of the daily offers fail to gain enough interest to become redeemable.

Good for Business?
You would think so but some business owners say no. Groupon drives a large amount of foot traffic through the doors but as any business owner knows, traffic doesn't necessarily mean profit. First, Groupon takes a significant cut of the deal when consumers purchase it from the Groupon site. In fact, according to Julie Mossler, marketing manager from Groupon, their cut has been about 50%.

Second, a business can be overwhelmed with traffic. Bloomberg reports that a certain coffee shop who offered half price $20 gift cards expected an increase of 200 patrons. Instead they received 2,000. They ran out of gift cards and didn't have the resources to handle the massive uptick in visitors. Another business, a nail salon, offered a groupon for manicures. It was so successful that 4,000 were sold. The problem was that they only had two stations to give the manicures they sold.

Businesses argue that if the goal of using Groupon is to get customers in to their store, when they are overwhelmed they can't offer the extraordinary service that they want customers to experience in order to drive them back in to the store. (For ways to improve your small business, see Keeping A Small Business Afloat.)

Do Businesses Make Money?
One Oregon café owner lost $8,000 using Groupon and that story is not as rare as one would think. Often businesses give up profit in order to gain new customers. The problem is that it rarely turns out that way. Only slightly more than 1 out of every 5 Groupon customers will return to the business after they redeem their Groupon. For some businesses this can represent a sizable increase in their customer base but often, it's a losing proposition.

For those who have a favorite restaurant but only eat there rarely because of the long wait, that represents another problem encountered by small business owners using Groupon. The most important customers to any business are the repeat customers and because Groupons sometimes take up to a year to redeem, a business can experience higher than usual volume for a long period of time possibly driving existing, loyal customers away.

Is Groupon good for Groupon?
Groupon has faced headwinds as it nears the day it is listed as a publicly traded company. The average user now purchases only 0.6 Groupons versus 1.3 in 2009 and the net revenue per Groupon sold is down to $9.50 from $12.48. Next, although the standard 50% revenue required from each business is dropping due to the amount of businesses crying foul at such a steep cut of the revenue. As a result, their cut is down to 42%. This margin compression is especially problematic given the large increase in advertising dollars spent. As a result, Groupon has lost nearly $550 million in the last year.

The Bottom Line
While Groupon may face growing pains, the market has a way of molding a company in to an organization that serves its customers in the way that they require. As Groupon grows, it will either evolve as customer needs change or follow down the path of companies like Blockbuster. (To learn more about Groupon, read 3 Things You Need To Know About Groupon.)

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