The Good And Bad Of Groupon And Small Businesses

by Jason Falls |

The only time my wife and mother-in-law have ever been excited about the Internet is when they get a quarterly email from Louisville Originals telling them when the next restaurant coupon fire sale will begin online. The coalition of locally owned and operated dining spots started the time-sensitive coupon deals in 2006 and area diners went nuts. Word of mouth about the 30 percent or more discounts to a really nice assortment of dining hot spots spread so fast, people without computers would rush to sign up and click. Little did Louisville Originals know it was preceding a now national trend in online deals and couponing that has quickly become a hot, yet not altogether perfect, marketing opportunity for businesses.

Groupon, the largest daily deal site and, according to Forbes, the fastest growing company ever, turned down $6 billion from Google. For consumers, you sign up for daily email notices, get invited to a 40- or 50-percent off deal at a business, often but not always a local one, and you buy the deal. A typical offer is something like $16 worth of Mediterranean Fare at Burning Bush Grille for just $8 (the Louisville Groupon deal last Tuesday). You have a limited amount of time to act and the businesses that offer the deals have the option to apply some rules (limit one per person, not valid with other offers, etc.).

Groupon logo.
Image via Wikipedia

But Groupon has its issues. Not only do they almost insist that a business’s deal be at least 50% off or better, they take 50 percent of all revenue generated from the deal as commission. They also stick the business with the credit card fees and (to my knowledge and according to businesses who have used it) won’t allow a cap on how many Groupons are sold. (**Note** This original report was a factual error. Groupon does and always had allowed caps. My apologies for not appropriately checking the fact before hand.)

So, if you’re a small business and think giving away 200 or so 50 percent off coupons will help drive people to your store, you’ll want to proceed with caution. Your one-day Groupon feature might lead to not 200, but 2,000 or more sold, leaving you with no margins or even a loss.

Posie’s Cafe owner Jessie Burke called doing a deal with Groupon, “the single worst decision I have ever made as a business owner thus far,” in a blog post explaining her experience on Sept. 11, 2010. Her Portland, Ore., coffee shop sold over 1,000 Groupons this summer, but because of the service’s aforementioned costs, Burke was left holding an $8,000 monthly shortfall.

The lesson learned in Burke’s story seems to be that you can’t trust a Groupon sales rep and need to account for their commission and your overhead when devising your deal. Sure, a coupon of 50 percent or more sells a lot better than one for 25 percent. But when the sales go to the coupon store, not yours, the bag left held is in your hand, not theirs.

And Posie’s isn’t the only example. There are more out there. And there are even some frustrations from the customer perspective when Groupon and the retailer aren’t in sync.

Todd Earwood, CEO of MemberMinded, the company behind Groupon competitor (and a personal friend of mine) says the negative examples are anomalies. He told me as such for a profile of his daily deal effort I wrote for

“The reality is there’s such a small percentage of businesses that a Groupon deal has done harm to that they’re not really worth talking about. The media and bloggers can’t find a weak link in the armor, so they find an anomaly and make a big deal out of it.”

Touche’ might be in order. A quick scan of the online conversation around Groupon shows a 4:1 positive to negative ratio, but with negatives growing, according to NetBase’s ConsumerBase, a market research partner of SME’s. That could be the result of competitors like TryItLocal bringing better commission rates and more customizable deals to the table. Overall, however, the negative experiences are generally from the few … the businesses … not the many, the benefiting customers. For any of these online coupon networks to thrive in the long term, however, they’ll need to serve both audiences well.

Some media members have been quick to say the problem with customers like Burke is they don’t use Groupon wisely. But when those customers are counseled and cajoled into their deals by anxious Groupon sales people … representatives of the company that gets all profit and no overhead out of the deal, I’d lean towards pointing the finger in more than one direction.

Still, Groupon has its small business successes, particularly with events. Alison Margello with HyperDrive Interactive in Loveland, Ohio, told me her firm helped Krohn Conservatory in Cincinnati with a event ticket deal through Groupon. They sold over 2,000 tickets to their annual butterfly show at half price in just minutes. Ultimately, they only collected about 25 percent of what they would have normally, but drove far more numbers in attendance than expected and kick-started word-of-mouth about the event. “Our goal was attendance, not revenue, so it worked for us,” she said.

Another event-related Groupon success story found its way to me from Carol Ely from the Historic Locust Grove site and museum here in Louisville. They used Groupon to compete with Halloween publicity for their 18th Century Market Fair and sold over 500 tickets, or about 25 percent of the event’s attendance. She reported they made up the difference in ticket sales lost from Groupon’s cut through food or vendor purchases at the event.

Other retail examples of Groupon success aren’t hard to find. The service drives people to your store and is a no-up-front-cost advertising solution. It is perceived as a couponing service, which can cheapen your business’s image, but all the daily deal services like it are measurable mechanisms to drive people to your business. So long as you account for a bit of overhead and do things to entice those newcomers and coupon hounds to get to know you, want to come back or even upsell them while they shop, it’s a potential profit center.

As for alternatives to Groupon, there are a few.

LivingSocial doesn’t have nearly the network or user base, but has a 40 percent commission rate and pays you after 30 days. (Groupon pays in installments up to 90 days after your deal goes live.) They seem to have a stronger local focus, but not to the TryItLocal extent. And apparently you’re not allowed to have concurrent deals running with competitors (also a Groupon requirement). Most other competitors are nearly identical.

TryItLocal, a Louisville-based company, is a different model and seems to have filled the gaps the others have yet to. TryItLocal is built for area Chambers of Commerce and returns 70 percent of revenues to the business in question, helping companies avoid the overhead problem. More than 70 percent of the profits benefit the local economy, too since a commission is routed to the Chamber. The business model for TryItLocal is substantially more stable than its competitors because it offers a higher profit margin for the business, allows more flexibility to businesses for the deals (including maximum capping) and is offered to companies through a trusted partner: their own Chamber of Commerce. Who has a faster path to local businesses? (Psst! Google! Look at these guys, wouldya?)

They also offer aggregated demographic data back to business clients they’ve never seen before. You think your target audience is 45-55-year-old females, but after running a TryItLocal deal, you get to see what demographics were actually interested enough to buy a deal from your store. Surprisingly, the two demos are sometimes different, according to Earwood.

(And yeah, I’m biased. Earwood and I co-founded Social Media Club Louisville in 2008. I worked with him on the now defunct, but forever web archived The Daily Idea. Not to mention we’re good friends. But TryItLocal is a Louisville business and it’s my blog. Sue me.)

Daily deal sites have been around a long time. was probably the first one. It’s been operating since 2004. Groupon added a geographic and general retail layer to the puzzle and exploded. Competitors are finding needs left unfulfilled and hoping to catch a wave as well. That’s a good thing for businesses, large and small.

But if you are thinking about using one of the services to drive traffic or business for your company, be sure you know what you’re offering, how much it’s costing you and how much you will actually get back.

Are you using a daily deal site to drive business? Tell us about your experiences in the comments.

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About the Author

Jason Falls

Jason Falls is a leading thinker, speaker and strategist in the world of digital marketing and is co-author of two books, No Bullshit Social Media: The All-Business, No-Hype Guide To Social Media Marketing and The Rebel's Guide To Email Marketing. By day, he leads digital strategy for Elasticity, one of the world's most innovative digital marketing and public relations firms. Follow him on Twitter (@JasonFalls).