Posted October 4, 2010 6:46 am by with 24 comments

Tweet about this on TwitterShare on LinkedInShare on Google+Share on FacebookBuffer this page

Last month, we reported on a story of a Portland Cafe owner who claims she lost thousands of dollars doing business with popular deal site Groupon. Some people sided with her, others said she mishandled the situation and Groupon said her story wasn’t typical. But is it?

The folks at the Jesse H. Jones Graduate School of Business at Rice University wanted to find out, so they did a small study to see if merchants were generally happy with their Groupon experience. The study, which was reported on by The Wall Street Journal and other sources polled 150 merchants who had placed deals with Groupon.

66% of the respondents said that they did make a profit on the deal but 40% said they wouldn’t do it again. Groupon’s CEO says that number is a tad high. In a recent blog post, CEO Mason said that 97% merchants are interested in being featured again.

Sound like folks are just telling him what he wants to hear or he’s really not in touch with reality, let alone his client base. What the study found was that it was employee satisfaction, not customer satisfaction that shifted the tide from success to “never again.”

Poor tips, too many customers, angry customers (due to lack of product or wait time) are all potential side effects of a Groupon deal. The author of the study, Utpal Dholakia said it was almost a given:

“Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal.”

This led to the finding that restaurants had the hardest time with Groupon deals, where service business such as spas and salons fared better. The 32% that said they didn’t make a profit from the program reported that customers rarely bought more than the coupon deal and few returned to the business at a later date.

Despite dismal numbers on the merchant end, group deal sites keep popping up and businesses keep making deals. It smacks of a desperate attempt to jump on the trend-wagon and less of a well-thought out marketing move and that is the real crux of the problem.

What do you think of these numbers? Do you think Groupon’s satisfaction and return rate is closer to Mason’s 97% or 60% as the survey says?

  • Claudia

    A sample size of 150 doesn’t quite represent the whole, especially since Groupon is in dozens, if not hundreds, of cities.

    • Cynthia

      Exactly, which is why I feel like the number probably falls somewhere between the two. Thinking on it more – I also suspect that more people who were unhappy would be likely to answer the survey than those who were.

      However, I think the real takeaway here is that many people go in thinking this is going to be a huge boost to the business and find it was more of a nuisance because they were prepared for the results.

    • Not to get statistics nerdy on you but a sample of 150 merchants could reasonably represent the few thousands who have used the service assuming they selected appropriately. Just like 1,000 people polled can represent over a 100 million voters within a certain percentage of certainty.

      I would say it is definitely not 97% and 60% doesn’t seem outlandish for a new form of marketing.

    • Matt

      Claudia, you clearly need a lesson in statistics.

  • These numbers are astounding! With so many deal of day companies popping up and big players entering the biz like Whitepages, Groupon-like services are going to suffer if they do not modify their business model. It’s one thing to offer a deal – it’s a whole other thing to offer a deal to the detriment of the merchant. We’ve heard the same complaints from merchants when we were researching our acquisition of Local Ginger. These services have really failed to provide merchants with ROI. They need to target their advertisers better – by going after businesses that benefit from group buys like city tours or fitness club classes, they could boost the satisfaction levels of their advertisers, but by focusing so heavily on spa services and restaurants that rely on repeat business to make up for the discount they offered, they are just cannibalizing the market. For example, if you see 4 offers for spa services in 1 week, the call to action for the time limitation is gone and you can literally buy all 4 from 4 different places and have 4 discounted services. So what is the incentive to go back to any place you have already been to that will charge retail now when you can continue to buy discounted serves from their competitors?

  • Arik Keller

    The return rate is probably closer to 60%-70%. You’re right about the crux of the problem in that there is not a lot of thought going into running these deals. So the combination of the high margin paid on each sale and driving lots of customers who are unlikely to return is bringing merchants back to their own marketing tactics where they have more control.

    There’s an easy solution – more customer segmentation will help a merchant acquire customers who match their current customer profile. And a lower margin with inventory thresholds will make the experience for the merchant more in line with their existing customer acquisition programs.

  • One of the biggest determining factors in regards to profitability is revenue split. Groupon does a 50/50 split of the profit. ( ie: $30 in food for $15 means Groupon gets $7.50 and the restaurant gets $7.50 ). I think people just assume that this 50/50 split is and will always remain the norm. The networks will negotiate and we have seen splits ( not with Groupon ) in the 35/65 range. I believe as more and more competition enters the market you’ll see 20/80 splits or just flat out “pay to place” models. It’s just a new frontier and those blazing the path always get top dollar for the innovation.

  • I can definitely see what Utpal Dholakia is conveying about the Groupon trade-off of a business attracting deal-seekers when the business decides to use Groupon. However, I think in the long run it could pay off since hopefully those deal-seekers return next time to purchase/order whatever they bought at full price. I think a great benefit of Groupon is developing customer loyalty. Especially in today’s economy, some business increase is better than no business increase.

  • I think Groupon is a great concept and great company. That said, this type of marketing/promotion isn’t for everyone. Business owners need to be careful but so does Groupon. Many potential clients should probably be politely regected for poor fit….for everyones well being.

  • I work for Tippr the 3rd largest daily deal website in the nation. While do try to keep our revenue splits at a reasonable rate to cover our significant marketing costs (this benefits our partners because our ad’s feature the local business as opposed to the Tippr brand) , for the right offer (particularly Restaurants and Event/Adventures) we understand that a 70/30 revenue split is the only way to keep our partner merchants profitable. Please contact me at 206-707-8739 or via do discuss putting a profitable promotion together for you.

  • Camille

    As someone who has purchased many Groupon deals and tried out many businesses for the first time, I would comment that I would only return to about 50% of them. I think the restaurants are assuming that you are going to love their food, deal or no deal, and I found that not to be the case with many of them. As far as tipping goes, just make adding a proper tip on to the deal as a requirement for those who are too cheap to figure it out (and I’m sure there are many of those). The other deals I tried were things I would not otherwise have purchased, and most of those I didn’t love either. As a regular Groupon customer, all I can say to these merchants is, nothing ventured, nothing gained. I’ve found some great businesses this way that I will use regularly.

  • This is a great thread, the bottom line is Groupon is far from perfect and most certainly not for everyone. Like anything else, if the biz and client base are a good fit it could probably payoff quite nicely, but outside of that I think you have a recipe for a time/budget soaker where nobody really wins…

  • I’d be awfully careful as business before going the Groupon route. I can see it working for restaurants where it’s unlikely that a customer would be eating alone as the food and beverages from the other people in the party would offset the discount. For businesses that are hoping for repeat business as a result of the discount I think they are going to be disappointed in the return. A good rule of thumb would be to craft the deal such that you are at least breaking even with the discounted transactions then any repeat business or add-on sales are gravy.

    • Cynthia

      Something we’ve discussed before is the concept of looking at the Groupon split as a marketing expense. For example, if you have a 5,000 marketing budget and you give Groupon $2,000 off the top from a deal, then that money comes out of the $5,000.

      I think many businesses go in looking at it like Groupon is taking half my profit and that’s not the right view. If you can’t afford to spend that amount in advertising, then you probably shouldn’t put up the deal hoping you’ll make it back in trade. Does that make sense?

      • Sheila Keenan

        Makes sense to me!

  • Group deals can be a great way to bring new customers in to your business, but just like any other form of advertising it’s no silver bullet. The bottom line is that a group deal needs to be well thought out just like any other type of marketing. Groupon has probably not done a good enough job educating their clients on how to put together an offer that will benefit them – and this is a big failure because this is type of marketing that many businesses have never done before. LivingSocial is another group buying company that has wisely released a merchant bill of rights ( in the wake of negative publicity that Groupon has brought on the group buying category. Group buying will probably continue to be a very popular form of marketing for businesses especially as more businesses learn how to do it the right way.

  • Not to mention businesses being under-prepared for the surge of business that groupon/living social brings their way. Recently I bought a livingsocial coupon for a “Dessert Showcase” event in New England. Thanks to the viral nature of the coupon ( 50% off on a Dessert eating event priced at $35 pre discount), the event was oversubscribed. The organizers didnt anticipate the number of people who bought the coupon. It seemed thousands showed up, the lines were three blocks long. Finally many coupon purchasers had to be turned away. I am promised a refund , which still hasnt shown up. But you would think that vendors who sign up with these sites also have a way of keeping track of how many coupons they sell.

  • I have advised clients in the use of Groupon, and similar bargain hunter sites, and my advice is to carefully craft your advertisement in a manner which will prevent all of the participants from taking advantage of the deal all within a narrow window of time, attempt to pursuede your future customers to use the coupons on the slowest business day so that they will not interfere with your regular customers, and of course give the future customers a deal, but not one that creates a loss for you, and don’t rely on the expectation that you will recover your costs with other purchases. Always assume that the customers will only redeem the coupon and not spend an extra dime. I have seen restaurants who include text on the coupon to remind the patron to tip the servers based on the full menu price, that is not a bad idea.

  • Any business owner who does not understand the concept of a “loss leader”, or where the business doesn’t fit the loss leader model opportunity should stay away from Groupon and all the new wanna-be Groupons out there.

    Any business owner who thinks a lot of the Groupon takers aren’t cheapskates should avoid it.

    Any business owner who has extremely low margins should avoid it.

    Any business owner who thinks they see a gold mine at the end of the Groupon tunnel should avoid it.

    Groupon should be much more proactive in picking and choosing who can participate.

    Groupon should go much further in helping merchants understand the ramifications, and provide a comprehensive guide to making it successful.

  • Beth

    It’s been my experience using these deals that the business owners who aren’t happy after the fact…are those who weren’t properly prepared. Of course I won’t come back or spend more money if you:

    1. Act like I’m a bad customer because I’m using a coupon….
    2. Don’t have proper staffing levels following a huge deal… leaving me waiting and dealing with angry employees.

    Those who take care of the customer regardless of a coupon and those who have staff ready and educated about the deal will most likely have a good experience… even if they don’t make a ton of money. The whole point is to get the consumer off their penny-pinching butts and into your store. Right?

    Remind them what they’re missing!

    • That’s actually a really valid point… Your staff if unresponsive or worse can really monkey-wrench the entire process…

      • Cynthia

        This is why employee satisfaction played a huge roll in the poll results. When an owner – particularly one who doesn’t spend anytime interacting with customers – puts a huge discount deal into place then leaves it for their staff to deal with, that’s a disaster waiting to happen.

        I’m a coupon user and I’ve been places where the coupons was expected and welcomed and places where I felt like a bad person for using it. Guess which one gets more of my business.

  • Percy Pomoroy

    Vendors entering into a Groupon offer should ready themselves as one would entering into a self-marketing campaign or other promotional period where they hope to increase the foot traffic into their store with new blood. Doing so by readying themselves for the tidal wave of money leaving the store, with hopes to convert the Groupon opportunists into regular customers. Continuing with the water metaphors, I see how a company without much liquidity could quickly find themselves deserted by their resources. Take inventory of your assets and manpower to see if you can sustain a successful period of chaotic ebb and flow. If so, there is the potential you’ll be swimming in a sea newly converted customer cash flow…. Or, drowning in debt. Man, isn’t being a business owner swell?

  • is a new site dedicated to serving merchants who have done a Groupon promotion and allowing them to gain strength by sharing knowledge and ideas in order to increase their profits, not Groupon’s