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There’s a lot of buzz about Groupon in the small, local business community as some have heard that it’s great and others have heard that it was terrible for small business.

Let’s start with the way that it works.   If you decide to run a Groupon, you’ll work with a sales rep to determine your offer and they generally recommend offering at least a 50% discount to entice the potential customers to buy your Groupon.   Groupon keeps half of the revenues and you get the other half.   So, you get about 25% of your usual fees for whatever you offered.  This begs the following question…

When can a small (or large for that matter) business live with just 25% of their regular fees?

I think there are a few instances when this makes sense:

1) Your incremental cost of selling one more item is less than 25% of your regular fees. (You can consider a higher end item that might help make this true for your offer).

2) You have plenty of excess capacity (your starting up a service business for example) and want access to a bigger list and  (1) is also true for the opportunity cost of your time.  In other words, if you weren’t providing services for Groupon customers you’d be doing something else that would bring in less than 25% of your typical revenue for that service.

3) You’re willing to pay to build your list to market directly to these customers in the future. (This assumes that you’re going to ensure that you collect contact information as people redeem their Groupons with you.)

On the other hand, if you’re a well-established business with relatively low excess capacity or inventory, then a Groupon campaign probably doesn’t make sense for you.   You might even lose money if you take on a campaign.