Groupon madness, estimate your short and long-term profit or loss

It seems that you can't avoid Groupon in the news lately. Consumers are mad about using Groupon since they can find great deals at often unheard of discounts. Even for customers, there is a often a down-side with reports of customers mobbing unprepared businesses and leaving frustrated or unhappy with the experience.

My review of multiple profit estimates shows that without a high rate of repeat business, your Groupon gains will likely end up as a big loss! However, if you can handle the volume of business and are considering offering Groupon at your business, you should download my spreadsheet to estimate the short and long term profitability of your participation.

1) The example used in the spreadsheet is based on a local restaurant. Their standard entree cost is $32.55 with the Groupon deal offered at $14.79. The fee to Groupon is half of the $14.79, leaving the business with $7.40 to cover $8.90 in marginal food and staff costs.

2) It is estimated that about 28% of people would have eaten at this restaurant in the next few weeks without Groupon, so there is additional lost revenue from their full-priced visit not occurring.   The loss per existing customer who uses this Groupon offer is $26.66.

3) Additional spend of $12.50 per new customer (for instance, a dessert or drink beyond Groupon) yields a net  profit per new customer using Groupon $6.54.

4) The restaurant estimates that 4,600 Groupons will be sold, yielding an immediate net loss of $12,679 and a cost per new customer of $3.83, because 3,312 new customers are exposed to the business.

5) The restaurant estimates that 33% of new customers will return an average of 1.5 times in the next year. Their estimated spend on their post-Groupon visits will be $42. This brings the one year net profit into positive territory at $37,350.

Notice that the immediate cost is $12,679 but the long-term profit is $37,350. This is a one year ROI of around 295%. When using this spreadsheet, you should estimate best and worst case scenarios for future visit rates and spend amounts, this would give you an idea of how much risk is involved in Groupon for your business.

6) I added a section with my own estimates of Groupon's gross profit. This is for entertainment purposes. My estimate is that Groupon makes a gross profit of $20,219. However, unlike the restaurant, their profit is much more of a sure thing!

Download the Groupon madness spreadsheet here! Orange cells in the spreadsheet should be changed to reflect your business conditions and best estimates for how Groupon customers will behave in your business.

UPDATE, I added another fun feature to the spreadsheet, a calculation of cost per ad impression for all of those who saw your Groupon but didn't purchase it. Suppose 100,000 received and viewed the offer but only 4,600 buy the Groupon for your business. You have received this additional advertising at a cost of $0.13 per person. I use the immediate profit/loss for this estimated cost per impression.

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