Is Groupon Bad for Business?

Groupon is touted by many as a win-win situation for both merchants and consumers. Consumers win by getting some really great deals on services and merchandise and businesses win because they increase traffic for their stores. It should be the perfect formula for success, but in reality the Groupon model has been less than kind to many merchants.

Let’s be clear, Groupon cannot be made to shoulder the entire blame for the problems that some merchants have encountered. In some cases businesses themselves have simply not been prepared for the results or for dealing with other issues that have come about due to the sudden (though usually temporary) influx of customers.

But the overwhelming flood of coupon holders is not the only problem that many businesses face. Despite the increase in sales brought about by the promotions, some merchants have found themselves on the losing end, financially… even to the extent of needing to borrow money to meet other expenses. Probably the most noted case in this instance is Posies Café, a coffee shop located in Portland Oregon, which according to the owner, ultimately ended up losing $8,000 due to their Groupon experience.

After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month. It was sickening, especially after our sales had been rising.

The café owner wanted to make it clear that she was not blaming Groupon or the customers for the bad experience but she also stated that the decision to run a Groupon campaign was one she regretted and called it the single worst decision she has ever made as a business owner thus far.

According to a recent study by Rice University, social promotions such as those offered by Groupon give too much value to consumers and not enough to the small businesses that run them. This definitely rings true when you consider that Groupon takes half of the total coupon sales. So while customers may be getting a great deal at 50 percent off, merchants are actually losing 75 percent of what they’d normally make on the sale. Running a promotional campaign at this cost may be easily absorbed by larger stores such as the Gap, but for small local merchants the cost can be overwhelming.

So were Groupon promotions profitable for our respondents? Yes, they were, for about two thirds (or 66%) of our respondents. However, a significant number in our study, 48 (or 32%) reported their Groupon promotion was not profitable. For these businesses, only about 25% of redeemer purchased products or services beyond the Groupon’s value and less than 15% came back a second time to purchase products at full price.

The idea behind offering daily deals is not to make a profit directly from the deal but to increase foot traffic and hopefully gain repeat customers which will then increase business profitability. Merchants are told to look at it as an advertising expense. But in many (if not most) cases, coupon users are only interested in the current deal. The businesses offering the deals are not necessarily places the purchaser would normally visit or will likely visit again. Merchants and employees describe many Groupon holders as poor tippers, rude, often angry due to shortages of product or a long wait time. They rarely bought over the exact amount of the coupon and would even put items back if they went over.

So is Groupon bad for business? For some the answer may be yes, but many local merchants have nothing but good things to say about the daily deals giant. Sometimes businesses just make bad decisions and unfortunately working with Groupon may be one of them. It’s not a one size fits all solution for growing a business and each merchant needs to make an informed decision as to what will work in their particular circumstance.