11/4/2011 5:45 PM ET|
Will Groupon spoil your dinner?
Welcome to long lines, businesses unprepared for the onslaught of (unprofitable) customers and resentful regulars. Some businesses aren't all that happy either.
What could be better than getting turned on to a new restaurant or hair salon for half the price?
Finding a place on your own with fair prices.
At least that's what an increasing number of Groupon users are deciding, as they deal with cafes, day spas and other retail businesses that are overbooked, understaffed and understocked.
The economic pressure of satisfying hordes of Groupon users paying a fraction of regular prices has crushed some coffee shops, restaurants and massage businesses. For others, it's just been a flop, turning away other customers, at least temporarily.
Indeed, while Groupon's website says that businesses that use Groupon "always come out ahead," that isn't so, say business owners, researchers and marketing experts.
"The risks are much more varied than people understand," says Bob Phibbs, a retail consultant and the author of "Groupon: You Can't Afford It -- Why Deep Discounts Are Bad for Business and What to Do Instead." Many entrepreneurs, he says, lack the knowledge to evaluate these deals and the potential impact to their business.
"I think it's a bad idea. I don't buy the loyalty. I don't buy the 'give (people) a deal so they will come back and spend more money,'" says Phibbs. " I think all of it is just built on hope, and that's really dangerous for business."
Groupon, whose stock went public Nov. 4, is the largest of dozens of online coupon sites, including LivingSocial, Gilt City and BuyWithMe, offering daily deals for cities around the country, typically at discounts of 50% to 80%. Groupon's email subscribers purchase these vouchers online, share them with their friends and family on Facebook and Twitter, and have a certain amount of time to redeem them.
It was conceived as a way for small businesses to get exposure and lure in new customers who, they hope, will become regulars.
Only that's not how it's working out for many businesses, marketing experts say.
"You get a disproportionate number of deal chasers that aren't very likely to come back," says Utpal Dholakia, a professor of management at Rice University's Jones Graduate School of Business who has run studies on the marketing effectiveness of these deal sites. And in many cases, you alienate your existing customers.
That's what happened in Diane Benney's boot-camp class in Rancho Cucamonga, Calif.
After her instructor, Cathy, did a couple of promotions on online deal sites, the class Benney had been religiously attending for more than a year doubled in size. The dynamic of the class changed, too.
"Before, the people that were there worked their butts off," says Benney, a stay-at-home mom. "Everybody was there for a reason."
The new crowd, however, seemed to be fitness dabblers who "weren't really into it." It made the class less enjoyable for her, and she counted the days until the Groupon deal expired. Almost none of the newcomers returned, she says, making the promotion a flop for everyone involved.
True, there are many business owners for whom these promotions are a success. But even they concede they can be a burden for their customers.
"I only do it in summer when business drops off," says Amy Peddycord, the owner of Invoke Studio in Indianapolis, which offers Pilates and yoga classes.
Peddycord says despite grumbling by some regulars, Groupon has been an unmitigated success for her business. Her three Groupon promotions have expanded her customer base by as much as 20%.
'We converted a high number of those people into (full-price) packages," Peddycord says, which has meant more pay for her instructors and improvements to her studio.
Groupon says that between 94% and 97% of businesses that did one of their promotions would do it again or recommend it to a colleague.
Is it really that much of a sure thing?
However, just 55% of the 324 businesses Rice University studied using Groupon between August 2009 and March 2011 reported making any money from the deal. An additional 26.6% lost money and 17.9% broke even in the study.
And while almost 80% of the users visiting these businesses were new customers, only about 20% of them returned to pay full price for goods and services.
And just 35.9% of them wound up spending more than the voucher's face value.
Peddycord, the Pilates studio owner, who also does some marketing consulting on the side, says that was the case with a few restaurants she worked with that did a Groupon promotion.
"There are only so many people for whom this works out," she says, noting that many of these restaurants' servers suffered as Groupon users failed to tip on the original amount.
To be sure, restaurants and spas didn't fare as well in the Rice study, compared with fitness studios, personal trainers, concerts and events, or medical providers such as dentists.
"A dentist has a much higher margin," Dholakia says. "They can afford to give away some services and make less money from it."
Groupon does not track the profitability of its promotions for businesses, says Julie Ann Mossler, a company spokeswoman. But the company insists that its promotions work across all types of businesses.
"It just depends on how you structure the deal," Mossler says.
To be sure, even thriving businesses can suffer if they don't get their deal right.
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