Groupon Phenomenon Bludgeons Local Businesses

href=”http://www.groupon.com” target=”_blank”>Groupon, the popular, online coupon service that launched less than two years ago in Chicago, has become a hit with money conscious consumers. But as it continues to expand to more and more cities including right here in Phoenix, local business owners are discovering the service isn’t without its downsides.

A Local Story

Dana Mule, part owner of Hula’s Modern Tiki at 4700 N. Central Ave., recently participated in a Groupon deal offering $30 of food for $15. The resulting hoard of customers that descended upon Hula’s to take advantage of the 50 percent off deal created havoc for Mule’s restaurant.

“Initially, it was disaster,” said Mule. “Far more people showed than we could accommodate, which made for long wait times … and angry people (which counteracts any benefit you’re supposed to get from this kind of marketing).”

How Groupon Works

The way Groupon works for consumers is relatively simple. Every day, a new local deal is featured on the Groupon homepage, sent to subscribers in a daily email and updated daily on the Groupon iPhone app. If the pre-determined minimum number of people purchases the Groupon within the established time frame, then the deal is active. If the minimum isn’t reached, then the deal is cancelled.

Mule initially decided to take part in Groupon to get additional exposure for his business and to expand his customer base, which are two of the key selling points Groupon uses to attract businesses. But as some experts have pointed out, there can ultimately be a backlash if the discount price ends up taxing a business’s ability to serve its customers, thus eroding their brand.

“The race to the bottom is never the way to get to the top,” said Ellen Malloy in a recent Reuters article regarding the Groupon phenomenon. Malloy promotes high-end restaurants in Chicago and blogs about the topic of discounting for Restaurant Intelligence Agency.

Groupon Threatens Customer Experience

According to Malloy businesses risk a cheapening effect on their brand and that the customer experience can be threatened if an oversubscribed offer ends up producing a short-term spike in demand.

Mule’s own experience with Groupon was uncomfortably akin to Malloy’s cautionary advice.

Groupon provides the business no tools to help manage the number of coupons sold – they up sell you to drive the value of the coupon up (making them more money),” said Mule. “They are not responsive with concerns – the amount of the sell given to the restaurant doesn’t even cover food/liquor cost – and they will not let you put a limit on the total number of Groupons you’d like to sell (we had to beg them to stop it at 1,000).”

After his initial experience with Groupon, Mule said he wouldn’t participate in the service again. He also advised businesses that require appointments, such as salons, to avoid Groupon altogether.

“We’ve talked to other businesses where they had sold so many Groupons that those were to only appointments they could accommodate for months, allowing them to take no additional new clients who would more likely become repeat customers,” he said.

So what do you think?

7 Comments

  1. This sounds like a success-disaster situation, where advertising was too effective and the business can’t handle the flux of customers. Some of the deals say that you have to schedule in advance (which might not be relevant for a small walk-in restaurant). The market is bound to evolve with groupon-like offerings allowing stores to put a limit on the number of coupons sold, or even with insurance for overselling.
    If the business instead offered free drinks to the people standing outside in line, it would have generated a huge positive goodwill and had more repeat customers…

    1. Eran,

      Thanks for the feedback. I agree and think that in addition to the evolution of Groupon and other similar services, businesses will eventually become savvier with the way they use them. Given that Groupon and the like are still relatively young, I think we’re bound to see a lot of change and improvement not only in the services themselves, but how businesses and consumers use them.

      -Eric

  2. Although I can see where Groupon’s hesitation to put a limit on the number sold can be problematic for the advertiser, at the end of the day the advertiser needs to decide whether or not it’s going to be a beneficial medium through which they should market their particular product or service. I believe there are “conditions” of each coupon displayed when a deal is viewed; maybe businesses could take better advantage of the conditions option and list specifications (i.e. must make a reservation).

    I’ve personally had a good experience with Groupon; a $25 for a $50 gift certificate to a spa in Austin. However, I have had booking and payment issues with another third party “deal” site, so I have experienced the frustration in purchasing from a service that intends to save money but ends up costing time.

    I agree that these services are relatively new, and expect the kinks to be worked out as the concept evolves!

    1. Thanks Brianne. Only time will tell how these types of services will play out. Certainly much to to on the experience end with regard to customer satisfaction as well as the advertisers ROI.

  3. I’ve watched the Groupon phenom for a while now wondering how the businesses have handled the high demand. I imagined that they were running into problems such as this as well as taking a huge financial hit. To consider their cost as part of their marketing budget is one thing, but I’m curious to know if any of these Groupon customers become repeat customers; paying full price when they return. That would be an interesting study.

    We have a client launching one of these sites next week. They are also offering special deals that have a low maximum number of deals available. It’ll be interesting to see how that works out. Great article!

    1. Jen, thanks for your comment. This was definitely something keeping us up at night – we were curious about the high demand and advertisers advantage when 50-60% off services just didn’t make sense. I can see this working better for product type business but seems the service industry is really being poached. Feel free to share with us the new site, we’d love to check it out.

  4. “If the business instead offered free drinks to the people standing outside in line, it would have generated a huge positive goodwill and had more repeat customers…”

    I say BINGO to Eran’s post. I am new to the Groupon trend in that I am not a big coupon user. I was interacting with a potential client, a high end Chic restaurant, and warned them about many things “discount” related. One thing that I told them over and over again is that it makes more sense to me to use these types of promotions to extend your SERVICE…to build LOYALTY and yes GOODWILL!!! VIP treatment can apply at any level…but needs to apply for upscale businesses that want to maintain an upscale brand. There are ways to offer “discounts” that do NOT attract unprofitable clients and that extend client loyalty. Fact is that most small businesses rely on their most loyal fans for MOST of their success…why not focus on serving them better?

    Eran…BRILLIANT!!!!

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