In my last blog post, I showed how Groupon can destroy a business, if misused. After that blog post, I had one recurring question: why, if Groupon is so harmful, is it so popular? After examining different cases, I’ve concluded that the success of your Groupon depends on what you are selling.

Posie’s Café sold items with very clear costs and inflexible profit margins. Selling a tangible good can be very lucrative, but rarely does it yield a high profit margin. So, the key to a profitable Groupon is to sell a mostly intangible good – a service is ideal – with a high profit margin with low variable costs. 

Take this example of a spa that made $33,000 using Groupon. The spa offered a half-price deal and made a profit. The only costs were labour and relatively cheap supplies. A spa has few variable costs, and it largely uses already existing materials. The spa could almost be considered a service. (Note that the example below the spa is a material good distributor and that it might experience a loss.)

A message to business owners: before you consider a Groupon, it’s imperative to know whether you can afford it. If you’re selling a tangible good, there are probably better ways.