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The Groupon website offers coupons for nearly 200 promotions a day in the United States and Canada. These coupons provide big discounts at local businesses, but with a simple catch: a certain number of people have to sign up within an allotted time limit for the deal to work.

Groupon users are encouraged to spread the word about an offer to their friends, often through social networking services like Twitter and Facebook. And companies are attracted by the promise of getting a large influx of new customers, and having those customers do their marketing for them. But a recent study questions how profitable such promotions really are for the businesses that get involved.

“If things continue the way they are, I would be very surprised if it’s sustainable,” says Utpal Dholakia, an associate professor of management at Rice University, who led the study. He surveyed 150 businesses that had run promotions through Groupon between summer 2009 and summer 2010. Although the majority of Groupon’s business customers said they were satisfied with their promotion, Dholakia found that about a third hadn’t turned a profit as a result of offering a deal, and just under half said they would not repeat the experiment. He argues that the problems experienced by these firms mean that changes need to be made if such social promotions are going to survive in the long term.

Dholakia and colleagues surveyed how many Groupons were distributed through a business’s promotion, how many new customers the promotion attracted, and how many of them became returning customers. The researchers also looked at whether businesses turned a profit as a result, and how satisfied the business’s owners and employees were with the experience.

Dholakia found that businesses that sold more than 1,000 Groupons were less likely to have profitable promotions. This suggests that, at a certain point, a promotion can overwhelm a business and block existing customers who are paying full price. With unprofitable promotions involving restaurants, he found that employees were often unhappy that deal-chasers had not tipped enough. Dholakia speculates that some businesses simply did not prepare well for the sudden influx of new customers.

Businesses that had unprofitable experiences reported that only about 25 percent of Groupon users spent money beyond the value of the Groupon, and only about 15 percent came back for a second visit. Certain types of businesses seem more vulnerable to such problems. Spas tended to have successful promotions (82 percent were profitable through a promotion), but the restaurants surveyed fared less well (about 58 percent were profitable through a promotion).

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Credit: Groupon

Tagged: Business, Facebook, Twitter, social networking, online advertising, marketing, Groupon, social marketing

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