An Enigma In My Toast

http://videos.webpronews.com/2011/02/is-groupon-helping-or-hurting-businesses/

Groupon has made headlines in recent weeks as it prepared for it’s IPO, raising about $700 million.

With power like that, the company should be on every “watch this company” and “buy now” list in existence.

What is rarely talked about, and easily forgotten, are the tens of thousands of businesses across the country Groupon and, similar online couponing services, negatively impacts each year.

The point was hit home again in metro Detroit a few weeks ago when I chatted with a business co-owner I know. Knowing how I felt about the use of Groupon, he called to relay his tale.

It seems his business partner recently made the decision to run a promotion through the online discounter.

The good news was that the promotion was tremendously successful. The bad news was that the promotion was tremendously successful.

The phone hasn’t stopped ringing off the hook and the business can’t keep up.

The cost of the promotion is overwhelming and actually strangling the company’s operations.

If we look at the anatomy of such a promotion, we can estimate it’s true cost and impact on a business.

Take for example that you own a sun tanning salon and sell five visits at a rate of $10. As owner, your rudimentary cost to provide services is $5. Groupon is estimated to take about 52 percent of the original promotion. In our example, that’s $5.20.

So after you subtract the online coupon company’s $5.20′ he remaining $4.80 doesn’t cover costs, leaving the owner $.40 in the hole for every item sold. It also prevents existing customers from using slots booked by deal-seeking Grouponers. And don’t forget the cost of the added time and manpower needed to handle calls and book these appointments, which can easily reach thousands.

This is a very low cost example and business owners often suffer a much greater loss.

It doesn’t take much work online to find stories from small business owners who have been taken advantage of by Groupon. The following was excerpted from http://articles.businessinsider.com/2011-03-14/strategy/30079937_1_groupon-s-ceo-andrew-mason-groupon-offer-business-owners :

“Jessie Burke, the owner of Posies Café in Portland, said her experience with Groupon proved to be too much to handle. Not only did she underestimate the number of shoppers her Groupon promotion might attract, the discount offer itself was too generous.

Groupon’s CEO Andrew Mason called the ordeal, which Burke detailed on a post to Posies’ blog that went viral, “painful.” Groupon seeks to be a win-win for business owners and consumers alike, he says. Although he acknowledges that the serviceisn’tperfect,hesaysGroupon iswilling to considernew ideas. “It means a lot to us to make these promotions successful,”hesays.

Meantime, business owners like Burke can pay a steep price for marketing experiments. While Posies’ foot trafficshot up by about a third after the promotion, the majority of her new customers did not spend above the valueof theGroupon offer. Many of them used multiple Groupons at a time. They also neglected to tip staff members, attempted to use expired coupons and subsequently became irate with staff members when they were refused.

‘I consider it the single worst decision I’ve ever made as a business owner,’ says Burke. “I could have done a lot more advertising for $10,000 with a lot less frustration.’”

During my research, I even found a Facebook page dedicated to this “cause” ( http://www.facebook.com/pages/Groupon-Hurts-Small-Businesses/182054251815316?sk=wall). The number of fans is ” one,” as many business owners mourn their losses in silence.

While Groupon and other companies like it are in the business to make money (totally fair), they need to be held accountable for devising promotions with their clients that work for both parties.– otherwise they both end up with egg on their face.

Using our tanning example, that would mean we could reasonably expect the discount coupon sales rep to put into perspective for the business owner the cap on the coupon. If the owner sells 1,000 certificates, that actually translates into 5,000 visits! If his five tanning booths work 8 hours a day, a visit (say) lasts a half hour, and all certificates need to be redeemed within three-months, can the owner fit in enough regular paying customers to sustain himself? PS- He’s closed on Sundays.

Flashbacks of elementary school story problems? I thought so.

He’ll be able to do it, but that’s as long as he books every available slot and always is open 6 days a week for those three months. He’ll have to say goodbye to regular customers who didn’t purchase a coupon. He just can’t fit them in. And he’ll need to pay his employees, who will still need to come to work and be paid while he’s running the coupon redemption period. Oh, yeah. Don’t forget the money he has to pay the coupon.

What about all the “new” customers he found through Groupon, you ask? Won’t they be there to support the tanning salon in the future?

No. Informal surveys on small business owners who have used Groupon often indicate that businesses see a giant uptick in business traffic from the promotion and then never see those people again. They come in to redeem their coupon and that’s it. They are bargain hunters and business loyalty often takes a backseat to the deal of the day. They are always waiting for the next great deal in their inbox.

That’s not to say a promotion like this is NEVER right for a business. You may want to draw a crowd to attract the attention of shoppers in nearby businesses. When he see all the people walking out of your store and through the mall with your logo emblazoned bags, you might catch their attention: “What is this place? I’ ve never heard of it, but I keep seeing people walking by with their bags. I should check this place out!”

There are probably other reasons, too.

But all require a large financial investment on the part of the business owner. Many times this investment is more than a small business owner can handle and he’s not made aware of the risks through the online discounter.

In an age where we’re working to support small business and ” shop local,” it’s a travesty that organizations like Groupon are allowed to operate as they do.