Note: this article was originally published in ClickZ.

It’s easy to see why group-buying promotions like Groupon are popular among consumers. Massive discounts (50 percent-plus) are coupled with urgency (one-day deals) and a built-in social component – the coupon only goes into effect after a predetermined number are sold, encouraging buyers to share the deal with their networks to ensure the deal will tip.

Thus, group-buying sites are booming, Groupon in particular. The site reached profitability in seven months, and is reportedly in acquisition talks with Google – estimates claim the search engine may buy Groupon for upwards of $3 billion.

But the promotions on these sites are not profitable for retailers in and of themselves. The 50/50 sales split with Groupon means that, in many cases, retailers take in less than 25 percent of list prices on these sales. The retailer does not get the e-mail addresses of customers who purchased their deal – only Groupon has access to those. Groupon reports that 95 percent of businesses would self-reportedly try Groupon again; another study puts this number closer to 68 percent.

Profit Outside the Deal – Great Experiences and Word of Mouth

Retailers are betting on the side effects of these promotions to provide the real ROI. Specifically, one big draw of group-buying deals for businesses is the word of mouth generated both pre- and post-redemption. Businesses offering the deals hope that users who buy the coupon will share it, spreading the word about their brand. They also hope that, after trying their business, customers will tell their friends about it, driving even more visitors to try it. This requires visitors to have a great – not just good – first experience; great enough that they remember it and later tell their friends about it.

Retailers are also counting on repeat business. They hope that after trying their business, visitors will become repeat customers and return to pay at full price. Groupon estimates that 22 percent of its customers return to pay full price. Good word of mouth is necessary to drive more customers to try the business, generating more repeat customers.

So, exceptional customer experiences and positive word of mouth are key to retailer success in group-buying deals. If a business determines a group-buying deal is right for them, they should definitely take the hit on labor costs and staff up (with their best employees) during the special. In addition, they should take extra steps to help bring customers back and get them to share their insights.

Open the Lines of Communication With These New Customers

Basic marketing dictates that, in exchange for the great deal, the company should ask for contact information – just an e-mail address will work – from each new customer. This not only fuels your marketing database (one way to suck up the costs of your promotion), but it also gives you a way to ask them to provide valuable feedback.

Right at the point of purchase, ask customers to provide feedback. Include a link to your website (if you can take feedback in this venue) or to Yelp and ask them to take a moment to share their experiences. This gives new customers a great first impression, letting them know you think they’ll have a kudos-worthy experience. And it even reminds return visitors – who love you already – to take a minute to give you feedback.

Additionally, they can leave feedback via tweets, Foursquare, or Facebook Places check-ins, and more, depending on which social activities your business is engaged in. Prioritize your efforts based on ongoing value to your business.

Use in-store signage to encourage social media mentions – prompt them to check in on Foursquare or Facebook Places, or encourage them to tweet questions or comments while they shop to your store’s Twitter handle. Direct them to a URL where they can read and submit customer reviews. Include this URL on receipts, bag inserts, bags themselves – everywhere you can to encourage customers to submit feedback.

After they leave, take time to e-mail everyone who came in from the special promotion to invite them back and get their feedback. You can even couple this request with a second, less drastic offer as a reward: “We want to hear what you think! Review your experience and get 10 percent off your next purchase.” Not only will you gather lasting word of mouth and insights that can help you improve your business, but you’ll encourage a second visit – one step closer to a repeat customer.

The increasing popularity of Groupon and other group-buying sites makes these sites tempting for business owners. While it’s important to understand that the promotion won’t likely be profitable, businesses can take steps to reap the benefits of the conversations these deals create and gain insights that keep new customers coming back.

One Response to “Great word of mouth: the only way to profit from group-buying sites”

  1. As a big time Groupon user, I can tell you that the reasons you listed are the reasons we keep coming back! Great savings and very user friendly…

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