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The Groupon Phenomenon

I’ve recently become a Groupon user. For those of you that aren’t aware of this craze, the Chicago-based company is essentially a “deal of the day” website that is customized to the city you live in (currently offered in almost 150 cities around the world). The daily deal could consist of things to do, see, buy, or eat. To sign up, you simply go to the site to confirm your city, enter your email, and BAM! – you are all set. It’s that easy. After you are signed up, you get an email each day with an extremely discounted product or service that is within close proximity of the city you live in.

As a “deal-oriented” consumer, this is the best case scenario. If something of interest comes along, I snag it. Otherwise, there is no harm in ignoring them for days or weeks at a time. However, what about the businesses utilizing Groupon to sell their products and services? Is this really a good idea? What kind of revenue does it generate?

Many of you may have heard about Groupon’s $11 million day thanks to the daily deal that was produced for the Gap. It was a great – you got a $25 discount if you spent over $50 at the store. It was a no-brainer to buy it. So, was this really worth it for the Gap? Or, due to the overwhelming response, did they ultimately lose with the deep discount?

Contrary to popular belief, I say “no” to the fact that the Gap made a mistake. True, they didn’t expect to sell over 400,000 Groupons that day. Also true, they only received 50% of the revenue they could have had on the purchases that were made (not counting the cut that Groupon takes). This assumes, however, that everyone who purchased the Groupon that day was going to make a purchase at the Gap anyhow. Of course, there is no way this was the case and I’m certain the data would show that nearly all redemptions were well over the $50 amount for that sale. The publicity also came at a time when sales have been somewhat lackluster over the past two years.

So, all publicity and marketing aside, the real benefit that Gap created for themselves is an opportunity to not only gain new business and customers with a one-time transaction, but also to build greater loyalty for the existing customers who may not have purchased recently. So, the verdict is still out on whether or not this was a good strategy for the Gap or not – we’ll see in the long-term if sales grow and are sustained beyond the “pre-Groupon” day. Due to their size, this investment is likely one they would have made in some fashion anyhow. This type of reaction could have been devastating to a small business, however.

Have you had any positive or negative experiences with Groupon?

Katie Kiernan
Vice President, Consulting Services

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