in the last few months, we have seen a huge rise in popularity in crowdsourcing discount services such as groupon, livingsocial, townhog etc. through the power of mass group buying, customers can enjoy great discounts, while the businesses can pack the house. these platforms are doing a great job or maximizing their announcements through social media channels, (facebook connect, twitter) as well as their ever expanding email lists. groupon, being the largest of these has a national mailing list of $2m and just in SF, their daily promo updates reach 60k people. they started in chicago and grew to 30 more cities in 2009. they are predicting $100 million in gross merchandise sales in 2010 and became profitable 6 months after launch. businesses agree to list their products or services on these sites at huge discounts in exchange for a spike in sales. while this sounds line a no brainer for new and small businesses, there are some things that you need to consider before jumping on the bandwagon.

1. margin, margin, margin
these sites take a HUGE percentage of the sales price, groupon for instance, expects that 50% of each product sold goes to them. that means you have to consider discounting 50% to customers and giving up another 50% just to list it. so for example, a $60 meal can be discounted to $30 and then $15 will be paid to the discount service. in the end you are only taking home $15 minus the admin fees. yes don’t forget the 1.7% for credit card processing that will come out of your total. can all your costs be covered in the take home amount? that is a huge hit to your margin and in some cases, businesses are losing money on each groupon sold.

2. upsells and repeat business
why would anyone in their right mind sign up to lose money on each deal? well the hope is that each paying customer will buy above and beyond the product or service. in restaurants, it is customary to upsell cocktails, desserts and make a great impression for that repeat visit. of course, there are those folks that are just chasing the cheap deals and will not be interested in spending anymore cash or ever coming back. be honest with yourself, if you have products with limited upsell potential or offer the type of activity that people rarely repeat..say hot air ballooning, then be cautious about breaking even.

3. this is not real time baby, plan ahead
last time i spoke to the folks over at groupon, the average wait for a business to be featured on the homepage was about 60 days. this could be longer now, as their visibility continues to grow. don’t start planning your valentine’s promo on feb. 10th! the smaller places like livingsocial will likely have more flexibility, but less eyeballs, so do your research. think ahead and give yourself a lot of time to prepare and get in their calendar. start talking to them at least 3 months before you need the promo to be live.

4. capacity and opportunity costs
ask yourself, can you handle the volume that these services can deliver. many daily deals end up selling hundreds if not thousands or more of the product. are you already at 50% capacity, 75% capacity? do you have a shop where you take appointments or is it a walk in business you are at the mercy of? don’t get greedy and cap the amount you want to sell to a reasonable number you can service well. prepare to have the promo eat into your revenue for about 2 or 3 months after it launches. you don’t want to turn away your existing and loyal clients who pay in full and aren’t expecting a deal. please consider the opportunity costs of serving the new masses redeeming heavily discounted coupons.

5. expiration date
while you may sell a large number of deals, note that not everyone will redeem. the redemption rate will vary across industries, but most deals posted expire at 6 months. it would make sense that the shorter the expiration period, the lower the redemption rate. this can be great because it is money in your pocket, without any work, however you also lose that exposure to the customer you were hoping for. plan for a 3 month, 6 month or 1 year expiration according to your business objectives.

for any of you that have used these services for your business or for your personal consumption, please share your feedback with us!