Social media coupons are becoming big business. Groupon’s trend setting has led to the inevitable copy cats. Living Social, Yelp and Facebook Places are all trying to tap in to this revenue stream.

The question is – does it work?

According to a recent study from Rice University – “How Effective Are Groupon Promotions for Businesses?” – the answer is it depends.

There is no question social coupon sites work for the consumer. A 50% discount on goods or services will always attract a crowd. Everyone is a bargain shopper – especially in today’s economy. We are always looking for a deal. So, from a consumer standpoint these opportunities are a hit. But what about from a business perspective.

The study is based on a survey of 150 businesses between June 2009 and August 2010. One of the key findings was that fully two thirds of those businesses found Groupon promotions to be profitable (with 32% saying they were not profitable). The unprofitable percentage jumps to 42 when restaurants are isolated.

Those are concerning numbers.

What’s more, only 25% of Groupon users purchased products or services beyond the value of the coupons and less than 15% came back a second time to purchase the same products or services at full price. So much for generating brand loyalty.

In the end 42% of surveyed businesses said they would not do another Groupon promotion.

While social media coupons are still a relatively new opportunity it is clear there is much work to be done. As with the buzz around geo-social services like Foursquare and Gowalla the buzz is much greater than the production.

If the goal of any marketing is to attract – and convert – new customers the Groupon model is less than effective. True, 66% reported profitability but it appears even a percentage of the successful participants are choosing not to repeat the program.

The take away here is that you need to think before you act. A 50% (or more) off coupon is an attention getting number. The problem is you may be attracting quantity – not quality.

I know of a local limousine company that had tremendous response to their Groupon offer. Almost 500 people bought the coupons! Unfortunately, almost all of them wanted to redeem them in the same month. It almost drove him out of business.

If you are thinking about using Groupon (and the like) as a way to attract business keep in mind a few thoughts before you jump:

1. Discount what you can afford. Remember, even though they are paying 50% of face value Groupon takes a cut on top of that. If you can afford to sell a significant chunk of your goods or services for less than 50 cents on the dollar – proceed.

2. Can you handle the volume. As my limousine friend discovered, redemption rates can affect your regular business in the short-term. If your restaurant or salon is full of bargain shoppers – how does that affect your regular clientele?

3. Get your employees on board. This came out as a significant finding in the study. Businesses that rely on tips will be greatly affected by these offers. Customers will tip based on what they paid – not the full value of what they received. However, since traffic will increase it is a great opportunity for your employees to upsell and/or create new relationships.

4. Create loyalty. Loss leaders are great – if they create new customer loyalty. Think long and hard about this. If you cannot get these new customers into your database are they worth what you are spending to acquire them? As the study pointed out it may be better to offer deals that extend over multiple visits. That may cut down on initial purchases but could create better long term customers.

As with all things social marketing related, social couponing is an evolving platform. Jumping face first into the social media pool is not the best way to act. Just like you need to consider where Twitter and Facebook fit into your marketing plans – before you launch – make sure you know what you are hoping to accomplish before you partner with Groupon.

To read the entire study click here.

Your thoughts?