Are you a small business and considering doing a group buying promotion such as a Groupon or LivingSocial promotion? If so, there are a number of questions you first need to ask.

For instance, do you already advertise? TV, radio, print, online? If so, you need to understand that a coupon promotion is simply just another form of advertising.

Next, the purpose of advertising for your business must also be understood.  Do you advertise for direct response? This means, is your goal via advertising to generate an immediate transaction? Are you looking to generate brand awareness? Are you looking for repeat customers? Are you trying to augment seasonality in your business?

Can you measure the efforts of your advertising? Do you know how much business your last advertising campaign generated? Do you know what the average transaction value is for your business? What percent of your business is new each month versus repeat?

Lots of questions, right? Well, if you cannot answer these questions, don’t do a coupon. You won’t know if it worked.

Having said that, you’re going to encounter a lot of positive propaganda from the coupon companies touting how many they can sell for you, and that’s all fine and dandy. But, the real questions you need to ask are with regards to your own business. You need to understand how to price your coupon so that its value is less than your average sale, and ensuring that customers cannot just come in and purchase one item for the exact coupon amount. You generate business from a coupon in two major ways: up selling and repeat business at full price.

If your business is a commodity type of business, with little differentiation from competitors (think of a casual local salon or eatery), then there is little reason a customer might return other than positive customer experiences which can be difficult to replicate if your business is more transaction and less service oriented.

Most (yes, the majority) of coupon buyers are bargain shoppers. They are looking for the next haircut coupon or half off sandwich deal. They will buy the minimum from your business and then go to the next business with the next coupon.

This doesn’t mean a coupon is bad. Remember, you need to answer all those questions above first. Perhaps you are a new business and you need exposure. Perhaps you have a slow season coming up… etc…

A coupon might be right for you, but it might not be. Just like TV and radio are good for some businesses and not for others.

Also, not all coupons are the same. You’ll get more exposure with the big companies such as Groupon and LivingSocial, but you’ll also pay a large commission for that exposure. Whereas, the small local coupon companies may offer less exposure but a smaller commission.

Need more data? Check out this great research by Utpal M. Dholakia at Rice University. There are many great articles on this topic, so do your homework first!