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Sep 22

Is Groupon Good For Business?

Photo Credit: Matt McGee (Flickr.com) Used Under Creative Commons License.

I’ll admit now that the older I get, the more of a sucker I am for coupons. I used to think that they were sort of “low rent” and uncool, but now, I see them as being almost a form of currency — a way to lower my expenses and to give me more money for the things I actually want.

So, I signed up for Groupon a few weeks back, thinking that it, too, might provide me with some value. (Groupon, for those who don’t know, is a web-based service that emails you a new discount every day depending upon where you live.) At first, the idea seemed pretty cool — Groupon was offering deep discounts of 50% or more on all sorts of stuff. But the Groupon coupons came with a pretty big catch: you had to purchase them in advance in order to use them. So, for example, when Groupon offered me a discount coupon for a major clothing retailer, I had to spend $25 to save $50 on merchandise. That’s not so bad if I plan to use the coupon right away, but it’s not too appealing to me if I have to spend the money up front and then go out of my way to get my value back.

As it turns out, some of the retailers who have bought in to Groupon’s sales pitch aren’t wild about the service, either. For example, Jessie Burke, the owner of Posie’s Cafe in Portland, OR, posted up this Facebook note (which I found out about via Redfin via Fark) which explains her experience. Burke’s campaign offered $13 worth of items for $6. She’d expected Groupon to take a percentage of the sales (maybe 5 or 10%), but was surprised to find out that they expected to take 100% of the coupon sales. She talked them into a 50/50 split, so that she made $3 for every coupon sold, and Groupon took $3. Around 1,000 coupons were sold, which meant that each party made around $3,000 to start.

But then, the customers started coming in, and Burke found herself losing $10 on every Groupon transaction. What Burke had forgotten was that her margins went to cover expenses like staff and overhead — not just the raw cost of the materials. Some of the new customers coming in were genuinely happy to discover the place. But others were rude, trying to use multiple Groupon coupons for orders (despite not being allowed), undertipping and behaving in a manner that suggested that they were just looking for a deep discount and wouldn’t be back. Burke said that she had to take $8,000 out of savings to cover the cost of the promotion. She also immediately began to refuse the Groupon coupons once the expiration date began.

Burke says in her note that she feels Groupon is probably better for pure service businesses than retail businesses, because the only expenditure the services businesses will make is in time. But she definitely feels she made a huge mistake with the promotion, and also feels that Groupon can harm small business.

I would have to agree with her assessment, but for different reasons than she notes. Burke demonstrates in her piece that she thinks like a typical small business owner — she’s trying to maximize traffic into a single location, but she’s not considering the implications of her strategy. The best strategy for a small business like a cafe is to target specific groups of customers who are likely to be good sources of word-of-mouth referral and to give them incentives to bring new customers in. Cafes don’t need a lot of foot traffic; they need a strong cluster of core customers and a steady stream of newcomers trying them out.

Coupons aren’t going to help bring in that kind of business. In fact, coupons are probably one of the worst tools a marketer can use to build brand loyalty because they reward disloyalty. The theory behind coupons is that they can persuade some customers to try something new in exchange for a discount on the item. But the reality of coupons is that many people who use them aren’t as interested in trying out new products as they are in getting discounts on the types of products they already use. Some coupon users are so skilled that they even hold out for deals and use coupons to get items very cheaply or for free. This is not brand loyalty; it’s a system that can be gamed by people who aren’t interested in repaying companies for the discount by becoming regular customers.

And that’s the problem with Groupon as well — you’re essentially paying a company that is not an advertising firm to promote your products by offering a deep discount as a means of attracting attention. The problem with offering deep discounts is that you immediately create an expectation on the part of your customers that your product does not have value and that they’re suckers to pay full price. Consumers aren’t grateful for small businesses owners giving them a taste of what they have to offer; they’re sullen that if they want to come back, they have to pay a lot more for the experience. Blame the large product companies and the discount stores; they’ve taught consumers to hold out for the deals and to maximize their coupon use. It’s a monstrous system that continues to get worse as coupon users get more savvy.

So, what would I suggest for the owners of Posie’s Cafe? Burke notes in her Facebook piece that small businesses always need to advertise. That’s actually an incorrect statement. Small businesses do need to constantly find ways to promote themselves, I’ll agree. But do they need to advertise? Only if they’re in a rotten location. Otherwise, a place like Posie’s needs to focus on the basics: care for your customers, invite them to come back, and ask them to tell their friends. If business needs to be stimulated further, target specific groups (teachers, nearby office workers, college students) with special promotions, and engage in guerilla marketing activities to make their name known. In the meantime, focus on making their service and their servicescape as appealing as possible, paying close attention to customer feedback and constantly looking for new and better ways to do things.

That sort of strategy isn’t going to make a small business owner rich, but it’s certainly not going to cost them $8,000 to implement. What’s more, it’s a sustainable strategy that can be used to grow a business naturally and healthily — and not in a pseudo-”get rich quick” scheme like Groupon seems to be offering.

What are your thoughts? Share them below!

1 comment

  1. Michael

    Great quality article !!. Thank you for all your time and work. ;)

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