The question on many business owners minds are, do group buying sites work? In theory, it sounds great; large number of subscribers who are looking for deals are sent directly to your store. Better yet, you hear of stories where tens of thousands of dollars are made in one day of a sale. But the question remains, is this good for your business?

There is no question that consumers love group buying sites. Consumers have access to goods and services at discounts greater than 50%. However, from the standpoint of a business owner, things are actually not as wonderful. Sites such as LivingSocial take a 50% cut off each voucher, which is already discounted, leaving you with very little left over. Depending the cost of the voucher, sites like LivingSocial may not be the most cost effective way to generate sales for your business.

Promoting your own 50% off sale or LivingSocial

Let’s take a second, and do some math. If you were to sell $50 worth of services for $25, and LivingSocial can sell 500 group coupons for you, that would equate to $12,500 worth of coupons sold. But this money doesn’t go to you, 50% of the money, or $6,250 is LivingSocials cut. Now think about using that same $6,250 to run online advertising, that money can go along way!

To compare the two a little more accurately, imagine the same 50% discount on your goods. Firstly, you need to think of two things; how much having an average customers contact information is worth to you, and what are the advertising costs to run one 50%-off sale. So using the example above, you are essentially paying LivingSocial $12.50 for each sale ($6,250/500 sales). So you need to think if you could attain one sale for $12.50 of well-targeted ads on Facebook or Google? If we assume that Facebook charges you $0.05 per click, that’s 250 chances you have to make a sale, leaving you with only needing to convert less than half a percent of leads.

Repeat Customers or Bust

Another important thing to think about is repeat business. Strengthening customer loyalty should be a top priority for every small business owner, but is especially important when using group buying sites to promote yourself. Once you have someone in the store using one of your coupons, it is now your responsibility to ensure that your new customer receives the best customer service so that they return.

Is your ideal repeat customer someone who would use LivingSocial? If so, great! But if not, then your chance of getting a repeat customer is low. To help you out, think about the four following types of buyers you will find when using LivingSocial:

• The Coupon Addict

The ‘Coupon Addicts’ are the buyers who see coupons as free money, so they buy all of them. They stockpile them, and use them when they need them. These buyers would actually adjust their shopping and living behaviors to just get a deal. You know them, they are the same type of people who go to five different grocery stores each week to redeem as many coupons as they can.

• The Experience Seeker

These are the buyers who look for new things in their city that they haven’t done yet. They look at LivingSocial as an opportunity to sample what the city has to offer. Although this sounds like a great opportunity for business owners, the ‘Experience Seeker’ rarely goes back, and instead, have the next lot of experiences/coupons lined up.

• The Economical Buyer

The ‘Economical Buyer’ is the one that waits for a restaurant or service they have been waiting to post a deal, and when that happens, they buy only then. The ‘Economical Buyer’ is unlikely to become a repeat customer because they are only looking for discounts.

• You Current Customer

This is the person who doesn’t care to try anything new. They like their local spots and that’s it! What this type of buyer does, is wait for the deal to appear on LivingSocial for their local spot, then they buy up as many coupons as they can. Than, for the next couple of weeks, use the coupon each time they come in.

LivingSocial for consumers is a big win, however, for businesses, it is just another piece of the marketing puzzle. That is the way business owners must think of it. Do your math, and make sure that it works for you, especially when compared to other channels.

What is your experience with group buying sites? Share your story here or with us on Twitter or Facebook.