More than likely, you’re one of the millions of people who receive a daily Groupon email full of smokin’ hot deals and discounts. You’ve probably also felt tempted enough by at least one of the offers to jump in and join the party. From a consumer point of view, the 50-70 percent discounts are often a no-brainer.

But from an advertising perspective – are social buying sites like Groupon or Living Social really worth it?

For those of you who are not familiar with model, here’s how it works:

1. Groupon, or other similar services, partners with a local business on special deals on products and services.
2. It then blasts the deal ("groupon”) to the millions of people on its email list.
3. If enough customers purchase the groupon – the deal is on.

While Groupon itself has been a tremendous success – it turned down an offer by Google for a reported $6 billion earlier this year and just recently started down the road to its IPO riches – some of its small business advertisers have recognized that there are some clear downsides to running a Groupon promotion:

The disadvantages of Groupon

It all boils down to simple math.

Let’s say, for example, that one of your products is a fire-torch (yes, please!) that usually sells for $100. You will have to give at least a 50 percent discount for your offer to get noticed. Of that $50, Groupon will get a cut, which is typically 25 percent, or in this case $12.50. That means you will end up with $37.50 of your retail value.

Although you may eventually recover that in numbers, you must remember that you are also multiplying your production effort and your production cost. In other words, as your sales go up, so does your capital. And despite this, you are not earning as much.

On top of that, many small businesses are often so overwhelmed with the sudden increase in demand that they are not able to keep up.

So before you jump on the Groupon bandwagon, you need to ask yourself, can you get away with "losing” 75 percent of your earnings?

The advantages of Groupon

The advantages of Groupon lie in its vast reach. According to their website, Groupon has more than 50 million subscribers. Although not all of those 50 million will be in your city’s mailing, there are still a huge number of people who will come across your offer and your brand through Groupon.

In other words – it’s an advertising tool. It serves as a way to increase awareness about your brand and show your customer that you know money may be tight and that you’re doing what you can to make things easier for them.

So….what should you do?

Offering massive discounts to people month after month isn’t the way to do business. By doing so you’re essentially training people to never pay the full price. Fortunately there’s a solution this predicament.

1. If you decide to move forward with a Groupon promo, only offer it to first time customers. This will ensure you are using it as a lead generator.
2. Add new customers to your newsletter. This will help generate loyalty and more future sales.
3. When someone redeems a Groupon, treat them like royalty. Thank them for their business and provide them with a bounce back offer that ensures they will come back.

Suffice it to say that Groupon has its pluses and minuses. As with any other marketing platform it pays to do your homework to determine if this is truly the right approach for you.

- Inga Rundquist

Inga Rundquist

Inga Rundquist is a Public Relations Arsonist and Co-Owner at MindFire. When she’s not dreaming up ideas that will generate publicity, you can find her knee deep in the social media world, also known as the next PR frontier.