The Dark Shadow of Groupon

Groupon: Friend or Foe?

I’ll give a mea culpa up front- I love being a Groupon consumer. It is an amazing way to ‘shop’ for deals on a vast array of services and products here in Toronto. At last count, the city had over 36 deal-of-the-day type sites, in all shapes and flavours. I can’t recall the last time my wife and I at a meal without using a ‘coupon’ from somewhere. (for those not familiar with the concept, this article provides a decent overview)

What it does for businesses, however, remains to be seen. So far, the majority of the support for using deal-of-the-day services has come from the site operators themselves. The Gap promo also fueled Groupon hype, but that is hardly the kind of case study that is relevant to smaller shops. They talk about repeat business and high satisfaction levels, but what matters most to small businesses is the bottom line – has the coupon successfully grown my business?

Last Fall, the owner of a small cafe in Portland, Oregon, Jessie Burke, wrote a blog post describing her disastrous experience running a Groupon promotion. For anyone thinking of signing on with one of the deal-of-the-day sites (LivingSocial, TeamBuy, TeamSave etc..), this is absolutely essential reading.

What is particularly interesting about the blog post are the comments. While the tone certainly varies, I was amazed at how many people expressed relief that someone finally spoke up and dispelled the myth of the invincible Groupon juggernaut.

On TechCrunch today, Rocky Agrawal provides a nice summary of Burke’s experience, based on his own interviews with her. His article contains several valuable lessons, and a look into the Groupon machinery that has helped create a $25 Billion dollar enterprise. While he does acknowledge that Burke’s story is a single case study of Groupon-gone-wrong, the illumination into the company’s business practices is frightening at times.

I’ve synthesized some of Agrawal’s take-aways into a short list, emphasizing those that matter most to small business, and presenting them more as ‘best practices’, rather than a list of ‘don’ts’.

1. Shop around. If you are in a major metropolitan area, there are bound to be competitors out. With deal aggregator sites popping up, consumers are certainly not loyal to only one deal-of-the-day operator. Groupon may be the largest, but it is not the only game in town, nor the only one with deep pockets. This is a recurring theme in the comments section of Burke’s blog post.
2. Ask for hard data from the coupon sales rep, including average value, uptake, redemption, and fraud rates. The Groupon rep told Burke that 98% of coupon buyers spend more than the face value, but what is important is how much over face value. The business gets 100% of that money, whereas the deal-a-day site has an incentive to boost the coupon value as high as possible. Ultimately, the face value should be in line with your average purchases. Burke’s average was just $5, yet the Groupon face value was for $13, which ultimately led to inventory problems.
3. Data should be particular for your industry (don’t settle for restaurant data when you are a pet store). Said Burke “Merchants are primarily reliant on the information and recommendations of the coupon sales reps, which can often conflict with the business’ best interest. …(N)obody knows the parameters unless you tell them. No one told me the parameters.”
4. Stand firm on negotiating the cut the deal-of-the-day company will take. In Burke’s case, the Groupon rep asked for 100% of the revenue, which would have left her essentially giving away $13,000 worth of gift cards. For a small café, the economics were crushing.
5. Have an efficient way to track the coupons. I’ve seen many retailers do it by hand, which inevitably leads to fraud.
6. Negotiate the start of a deal that works for you, not the deal-of-the-day site. If your traffic peaks in the summer, negotiate that the deal starts on September 1 or later. Days of the week are also important – Thursday deals can lead to a flood of customers the next weekend.
7. Get informed. Every deal-a-day operator should provide a detailed guide with commonly asked questions (how to handle expired coupons, for example). If you feel like you are on your own, you probably are.
8. Have a marketing strategy ready to capture those ‘new’ customers. Asking for emails, getting people to check in on Foursquare, or running another promotion for followers on Facebook are all options.
9. Don’t think you are alone. As Burke says in the interview, “What was the saddest part of it for me was that this had had happened to a lot of businesses but because no one had ever said anything we all just assumed (and myself included) we just assumed we were bad business people. That we just didn’t know what we were doing. If everyone loves Groupon so much, we must be wrong.”

Personally, I think we are going to see more and more of these types of stories. Burke lost $10,000 on the deal, and the harm to her reputation has been significantly higher. She indicates that other businesses have faired even worse. While other businesses may be reluctant to step forward right now, I think the wave is starting to crest. I’ve already had two coupons ‘expire’ because the business went bankrupt, and while I got my money back, I often wonder if the rush caused by a popular coupon just pushes struggling businesses further over the brink.

As markets like Toronto become supersaturated (can there really be room for 36 deal-a-day operators?), I think we’ll also start to see casualties on the other side. How many unique offers can there really be? When there are 4 hair salons offering similar coupons every week, it looks increasingly like the market is becoming commoditized.

It also starts to shift the power balance. Whereas 12 months ago, Groupon could have asked for 100% of the revenues from an offer, no one in their right mind would agree to that now. If you are considering using the deal-a-day model to promote your business, use your position of power to get the best terms possible. Use the list above to ensure you know exactly how the coupon will run, and what to expect. If the operator can’t provide that to you, move on, or spend your marketing dollars elsewhere.

I’ll finish this off with a story relayed in Agrawar’s piece. Apparently a Groupon rep called Jessie Burke recently. Her response: “ She suggested that he Google “Posies Cafe.” The rep responded a few hours later with, “A simple Google search showed that I’m an idiot. I’m really sorry.” ”

Tread carefully, my small business friends.