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Social Coupons: Good for Business?

Some companies do not make a profit from Groupon promotions.
October 25, 2010

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.

Daily deal: The Groupon website offers deep discounts for services and products at local businesses.

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).

Dholakia says many companies did not know how to get the most out of a Groupon. For example, many failed to sign new customers up to e-mail lists so that they could be encouraged to return to a store. “A vast majority of these businesses do not have a plan in place,” he says. “They just go with the flow.”

Julie Mossler, a spokesperson for Groupon, makes a similar point. “The merchants who have the best Groupon experience follow our suggestions in deal structure and use the tools we provide to adequately prepare their business and staff for their Groupon,” she says.

Peter Zubcsek, an assistant professor in the marketing department at the University of Florida, who researches social networks, says Groupon has shown that social media can spread the word about a deal very efficiently but adds: “For any marketer planning to promote their business with the help of Groupon, it is important to realize the limits to how much loss leader sales they can afford to remain profitable.”

Zubcsek says he wouldn’t be surprised if digital industries, like online games, turned out to be the best venue for social deals, since they’re already prepared for efficient scaling. However, Zubcsek questions whether such companies would need a third party like Groupon to facilitate such promotions.

Dholakia says radical changes may be needed to give businesses a better chance of doing well from social-media-driven promotions. He says that businesses could structure offers to entice customers to return, for example by offering $10 off on each of three visits to a restaurant. Or they could offer discounts for particular products, such as food only, while leaving drinks at full price. For social promotion sites to work in the long-term, Dholakia says, they need to go beyond taking advantage of the marketing value of new customers’ online relationships–they need to encourage those customers to form relationships with the businesses they try out.

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