Let me just say up front that this post is based on the experience of a single restaurant owner and should be taken in that context. However I was quite surprised, yesterday, to hear the individual’s experience with Groupon, after I brought up the group-buying phenomenon. I’ll paraphrase what I was told by the owner.
This particular restaurant, located in the middle of the country, had just opened and needed customers. It also had gone over its construction budget and was short of “marketing” dollars. So it turned to Groupon. Initial promotion suggestions from the restaurant were reportedly rejected by Groupon as being insufficiently aggressive. The final, accepted, promotion was very aggressive, such that the owners feared there might be no margin on these Groupon customers.
I was told that while businesses can specify a minimum threshold of customers, required to honor the offer, they cannot specify a maximum or cap the number of respondents. This created fear that there would be 1,000 takers of this particular deal. It turned out that there were just under 500, according to the restaurant owner.
One one level this is a great result: 500 new customers potentially to spread the word and become repeat business. This was the owner’s precise objective.
I asked if he had tracked these new customers and determined how many repeated. The owner said no. I also asked whether they “got the list,” the email addresses of those taking advantage of the offer. He told me that Groupon wouldn’t give him the list, which I found literally shocking.
The restaurant owner’s experience ultimately turned out fine and the promotion “worked” in terms of getting people in the door. But he also speculated and talked about the experience of smaller service businesses such as hair salons or dentists, which must service customers in a serial manner.
He said that his wife had, as a consumer, taken advantage of one of the Groupon offers in connection with a salon. She called and couldn’t get an appointment until many weeks later — the demand was so great. If there are 300 customers who take advantage and make appointments right away that may suck up an SMB’s time for weeks. Imagine weeks of work with very thin margins.
The restaurant owner complained that “there are things Groupon doesn’t tell you.” He said the restaurant’s website got hit with tons of traffic and their phone was ringing off the hook. “You basically have to become a call center,” he said, after the deal hits. “Most small businesses aren’t prepared for something like this.”
But he did appreciate that Groupon offered “pure performance marketing” as opposed to clicks and even calls, which were more speculative. He obviously didn’t like some of the Groupon policies (i.e., not divulging emails, lack of a cap) and the lack of education or information to prepare for the experience.
Assuming that this story is accurate it seems to me that the “group buying” model as presently constituted is unsustainable. Consumers love these deals but SMBs are going to become increasingly ambivalent about them. They “work” in that they get people in the door in a very direct way. But unless that initial foot traffic is smartly leveraged and there are repeat visitors or great word of mouth the value of that initial frenzy is minimal and debatable.
As more Groupon-like sites seek to gain consumer attention there will be an effort to get deeper and deeper discounts from businesses. As an initial matter that may work, but over time this may backfire and undermine the ability of these sites to get businesses to participate. It’s also largely a one-shot deal. The restaurant owner I spoke to probably wouldn’t go back to Groupon because of the limited margins.
Platforms like Perry Evans’ new Closely represent a similar model but enable the SMB to control the flow of promotions and set their terms.
March 26th, 2010 at 12:03 am
The margins on the offers I see in Minneapolis appear to be thin to none. In the case you describe, there’s nothing preventing the business from promoting their own email list, twitter account, facebook fan page, having a business card drop, etc., in order to build direct relationships with their first-time customers. Not doing that isn’t Groupon’s problem, and says more about the business’ marketing savvy.
March 26th, 2010 at 12:15 am
Groupon customers would likely be highly peeved if Groupon just handed over their email addresses to businesses to do with as they please. Spamming is not something people want in their lives, and companies handing over emails in that way often get lots of blowback from those who thought their email addresses were private.
Why would Groupon compromise the inboxes of those who buy from them?
March 26th, 2010 at 12:20 am
Understand what you’re saying re spam. But there’s got to be a compromise position where the local business can capture the email address. Many of these customers will want to be later contacted by these businesses.
Ultimately I suppose it’s up to the business to capture the addresses itself; however Groupon can facilitate that practice in one or more ways that involve consent.
March 26th, 2010 at 2:37 am
[...] The Dark Side of Groupon Sites « Screenwerk [...]
March 26th, 2010 at 5:50 am
I am running a website where small business owners, particularly those in the restaurant industry can post promotional events on social media to attract customers. It’s similar to meetup, but the events are organized by business owners. For more information, check out http://travid.info/tour. It’s a good alternative to Groupon. And the service is free!
March 26th, 2010 at 3:06 pm
Some deals are structured such that the consumer provides contact info to the SMB during the process of consuming the deal itself. For example, the consumer may be provided a “coupon code” that they then have to redeem on the vendor’s website. Others require online scheduling of appointments.
I think some of the most interesting deals are in the form of special events held by a businesses (food festivals, wine tastings, parties, etc). These even encourage the SMB to market the deal to their existing base (it’s not cannibalizing their normal prices). These can also require registration on an event platform controlled by the SMB.
I see these as workable compromises, as long as transparency is provided to the user in advance of purchase.
March 26th, 2010 at 3:09 pm
Interesting…as a Groupon consumer I’ve always wondered how it affected SMB’s bottom line.
I agree with Brittney that in today’s world you need permission to keep everyone happy (and abide by email best practices).
Groupon could allow consumers to opt-in with a checkbox during the purchase process. But at the end of the day, I think this is a marketing issue for the small businesses.
SMBs can get savvy and collect emails when the Groupon consumers come in the door…run their own contest, win a free dinner, etc. If I have a good experience at the business, I’m almost always willing to join their email list.
March 26th, 2010 at 3:17 pm
I have two friends whose companies have used Groupon. They don’t look at a new Groupon customer for “margin” but view the money spent with Groupon as part of their marketing investment. If you are offering a 50% discount to a customer (plus paying Groupon some of the money you DO get) then obviously you don’t have margin for profit. What you are buying is new customers.
One friend thought to try and collect email addresses from all of the people who used the Groupon. He sent them a followup email thanking them for their patronage and sent them a followup 10% incentive to return. So far he says that about 40% of them have returned with the additional incentive (and he says he recognizes others who didn’t give meail addresses but have returned).
My other friend doesn’t collect email addresses. Oops.
As to becoming a call-center … well, let’s see … your friend used Groupon, they delivered customers at exactly the price point promised and your friend’s business rang off the hook and his website got lots more hits. Sounds to me like your friend got exactly the return he was looking for – he could almost be a case study for Groupon! But he complained? And you’ve labeled this the “dark side of Groupon”? Seriously?
March 26th, 2010 at 4:19 pm
Hi Greg,
Full disclosure, Groupon is a client of ours, but I think the conclusion that you’ve come to is based on too small of a sample size. Groupon did a similar poll of random businesses and found that 96% were satisfied with their Groupon experience, 97% would use Groupon again, and 96% recommend Groupon to other businesses (http://www.grouponworks.com/why-groupon). Doesn’t seem like these businesses are seeing the same side of Groupon as the SMBs you polled.
March 26th, 2010 at 4:33 pm
Thanks Bryson. Would love to explore your findings.
March 26th, 2010 at 9:24 pm
The size of Groupon’s customer base has become a liability for smaller businesses that can’t handle HUNDREDS of new customers. The non-Groupon deal sites – Living Social, SocialBuy, Townhog, what have you – usually take a smaller margin and attract some new customers without overwhelming a business (also I bet they’d let you set a cap). Small businesses should look beyond Groupon if numbers is an issue.
March 26th, 2010 at 9:32 pm
Geoff:
This kind of information isn’t readily available, however.
March 27th, 2010 at 11:02 pm
Kevin’s comment seems right on the money.
The only legitimate complaint that I see mentioned is the lack of a cap on the deal.
I can’t see how this can be seen as anything other than a marketing expense for the businesses that participate. If they are delivering an exceptional product or service then it seems wise to invest in the business with this type of marketing.
April 14th, 2010 at 1:25 pm
[...] and then selling them to local businesses for considerably more. I wrote a recent post, “The Dark Side of Grouponing,” based on an interview with a restaurant owner who said that the system “worked” [...]
April 28th, 2010 at 7:53 pm
Interesting point of this model would be retention. Seems like the group discount phenomenon is based upon reaching out to young hipsters who probably facebook, twitter, blog, etc. That demographic probably also Yelps for every single restaurant or experience they have (and it can be in hundreds if not thousands). What I’m getting at is they may be less brand loyal because the excitement of a new deal (and there’s lots of them) is more enticing than visiting a past experience. Also, they appear to be price-sensitive, so much so that they aren’t revisiting that same business again until they see another offer of some sort. Every day, as it pertains to dining, they could be going out to a new restaurant since they could literally be loaded up with coupons at a deep discount.
I guess that’s my fear with signing up my group of restaurant businesses.
April 28th, 2010 at 8:18 pm
Jim:
This whole phenomenon is definitely not yet mainstream. As it evolves and more consumers become aware of these sites we’ll have to see what the demographics are. Could be a lot of “mom’s” that wind up participating as well.
April 29th, 2010 at 2:00 pm
[...] walked O’Shaughnessy through my “Dark Side” post and we discussed the various issues raised. In particular he said that LivingSocial does allow [...]
April 29th, 2010 at 4:11 pm
Side note, Greg: I’ve been monitoring Groupon offers in D.C., Northern Virginia and the Norfolk area for the past several months. In at least some cases, Groupon does appear to be capping offers.
Very occasionally, a note “limited amount remaining” will appear on an offer; even less occasionally, the words “sold out!” will pop up.
Totally concur, however, that SMBs must carefully think through the offer they’re making and the long-term customer value and short-term buzz they’re getting.
It harkens back to a rule of thumb in the print-coupon business: You want the offer to be good enough that if you get 10 responses, you’ve happy – and if you get 100, you’re ecstatic. Too often, deals are structured so that if you get 10, you’re happy … but if you get 100, you’re out of business.
April 29th, 2010 at 5:08 pm
Tom: interesting, thanks
May 17th, 2010 at 7:38 pm
I started a “Groupoff” Facebook page after a recent Groupon totally destroyed my favorite sushi place.
May 22nd, 2010 at 1:36 pm
We give the restaurant $1 for $1 in advertising for every one of our 50% off Dining Perks they take in – we help them stay in business – we give them – tv – radio – web – email and twitter marketing and rather than them paying us in cash – they pay in food – thus saving 2/3 and we sell the food trade at 50% off on http://www.diningperks.com —- 20 years in Atlanta -
We have the highest restaurant success rate in the State of Ga — very few of our restaurants fail. I bet groupon has some issues with restaurant owners just like Rewards Network did –
May 26th, 2010 at 12:09 pm
[...] the remaining empty tables of its restaurant partners instead of targeting venues looking for one time influxes of thousands of coupon-wielding [...]
June 10th, 2010 at 5:58 pm
[...] effect if a threshold of purchases is met, so you want your friends to buy, too. (Although as some have explained, there can be a dark side to the Groupon [...]
July 5th, 2010 at 8:01 pm
Groupon is SUCH a bad IDEA for small businesses. I own a skin center, like a spa, and have thoroughly researched and talked with multiple other business that are similar to mine like chiropractic, spa’s, holistic centers, etc… What I found out was the discounts are crushing with a 50% discount and splitting the other half with Groupon means you are discounting services 75%. Though that is a huge chunk what is really the big issue is the TYPE of people you get. For the same reason you dont get involved in Coupon Books because of the TYPE of clientele. Absolutely ZERO loyalty to your business and its people just looking for the next best deal. Let me say that I dont have a problem with that but for a small business like mine who truly makes money on building relationships and loyalty Groupon is terrible. I talked with almost a dozen similar businesses and they all said the same thing, less than 10% and most of the time 5% returns which is TERRIBLE. When you are practically GIVING away your services and to have that type of return on your investment go elsewhere.
Groupon is good for restaurants but not for mine.
July 15th, 2010 at 3:30 pm
Everyone is skirting the issue… the business owners are discounting their services but you have to look at the lifetime value of a client. If you are a business owner and you do not know the lifetime value of a customer then you are not running your business for the long term. This particular time you are not going to make your standard margin but if you create an atmosphere that is likable people will want to return to your business. This is your job as a business owner. Think about it this way, if a customer pays full price and has complaints they are going to street their friends away a lot more than if they experienced your business on a deal. With these sites they promote you getting your friends to buy as well… if only one has a complaint then its going to get over shadowed by the friends opinion.
If your business does a promotion on groupon et al, why the heck are you not collecting information from them or even give them a business discount towards the next visit. It doesn’t have to be 75%, but if they had a good experience why as a business would you not want to give them reason to come back?
It is about making money but are you in it for short term or the long haul?
July 15th, 2010 at 3:37 pm
Yes, lifetime value is the key factor to think about for most businesses using groupon or similar sites.
July 15th, 2010 at 4:17 pm
On the last posts I think you are missing the point of my previous post in saying that Groupon client = a loyal client if you just gather their information and offer them future discounts. Just talk with owners and see that a substantial majority of Groupon clients regardless of the service you provide or future discount does not equate to long term clients, period. Just like a nightclub keeps having to reinvent itself every year because clients are fickle and loyalties blow in the wind I see the same with Groupon clients, they are waiting for the next best deal and wont come back until you offer them a HUGE discount to do so. Thats not the type of client that anyone wants who is trying to build long term relationships thats a bargain shopper.
July 15th, 2010 at 4:24 pm
I think it’s an “empirical question”: whether the Groupon consumer (call them the “Groupoñeros”) will not return unless it’s via a huge discount. I have some anecdotal evidence to the contrary but it’s an unresolved question at this point.
February 10th, 2011 at 6:59 pm
It seems like they are complaining about something this start-up restaurant knows nothing about. It would definitely be illegal for groupon to share their emails with any business.
February 11th, 2011 at 3:17 pm
I had a great experience with a smaller Groupon knockoff in November. And I chose to venture into Groupon a few weeks ago. I ran a deal, discounted 50% as requested by Groupon, with a cap…and two days before the promotion ran, I emailed my sales contact telling her I had a really bad feeling. She told me it was too late to do anything about it, and that “we would be fine”.
Day of the deal – the deal forum was flooded with emails, I was flooded with emails and phone calls – many of the contacts were pushy and rude. The deal sold out, and we were getting ready to get it all together – this was a one day deal.
Two days before the execution of the deal was to happen, a blizzard hit, rendering the city closed. Needless to say, we were unable to fulfill our orders, which turned a possible marketing hit into a nightmare lasting now two weeks. I have had death threats, legal threats, bodily harm threats from Groupon clients who I emailed that I could not fulfill their order. I have had my email address compromised by a disgruntled Groupon person and had my inbox flooded with junk/porn – I have had horrible things posted on Yelp, facebook, anywhere that can take a posting.
And, don’t think I didn’t make offers to extend the Groupon with a higher value if possible when the blizzard started. I did, relentlessly.
This was the very worst business decision I could have ever made, and has nearly destroyed 7 years of hard work…in one single blow. It wasn’t worth it -
July 5th, 2011 at 1:40 pm
Yes, you have some points but one thing you and groupon had, its a win win situation. The gain maybe smaller to the part of the restaurant owner…why? because food had smaller mark-up compare to some items like owners can increase the item/s to 200%-300% where they can give 80% discount and can give the groupon company a 30%-50%.
August 15th, 2011 at 9:01 pm
My friend owns a hair salon in a busy UK university town. As a new business she had to Groupon, to compete with the other Groupon deals in local salons. Groupon strong armed her to sell haircuts for £16. Groupon took £10, which left the hairsalon with 700 £6 haircuts to honour. This has literally bankrupt the salon and it’s going into closure because customers now refuse to pay the proper price for anything – instead of repeat business – they chase the next Groupon deal. For this reason, I’m dead against it, and the concept that we should get something for next to nothing. Let’s support business and pay the right price for our goods and services.