Stephen Joyce wrote a great post on how Groupon advertising works. He offers insight into Groupon’s impact on sales and profitability from a local small business’s perspective. The bottom line is: you’re gonna lose!

Groupon is the 2-year-old group buying service that has received a great amount of attention (and a billion $ in venture capital) because of its huge growth. Groupon partners with local businesses, agrees on a heavy discount on the local business’s service, and sends a daily coupon by email to the local members.

It is geographically targeted risk-free advertising: the local business pays only if a certain amount of the discount coupons are bought, i.e. there are interested customers. There’s no upfront cost.

The customer pays Groupon for the coupon and Groupon splits the revenue with the local business. Let’s say there’s a 50% discount: a €100 product would be sold for €50 of which the local business gets half, i.e. €25. Now, a 75% discount sounds like a no-go even with healthy profit margins, don’t you think?

Groupon has inspired hundreds of clones. In Finland the most prominent is CityDeal that is currently running an overwhelming advertising campaign on Adsense and other ad networks. Today, for example, CityDeal.fi is offering a Spa treatment in Helsinki at a 53% discount. Groupon bought CityDeal last May and will rebrand it and maybe then we’ll have Groupon.fi…

Another interesting clone in these parts of the world is the Estonian Cherry.ee. They made a deal with Estonian Air to sell travel vouchers at a 40% discount last December. Their coupons were sold at such a pace that Estonian Air had to stop the deal! The travel voucher’s face value was 1000EEK and they sold 6500 of them at 600EEK. If Estonian Air gets 50% of the proceeds, that adds up to 50% x 600EEK x 6500 = 1.950.000EEK, i.e. 4.550.000EEK less revenue than at the retail price. Four and a half a million EEK is about €290.000… Quite a marketing stunt for a small airline.