Should Small Businesses Use Groupon?

NEW YORK (MainStreet) – Groupon has had incredible success in recent years, growing from a local coupon site for avid bargain hunters to a massive international operation with more than 40 million customers worldwide that is estimated to be worth billions. But despite this success, or perhaps because of it, the company continues to run up against criticism that it hurts many of the businesses it works with.

Groupon partners with small businesses, and occasionally some larger retailers, and promises these companies a certain minimum number of customers in order for a deal to be activated. Once that number is met, consumers who have signed up for the deal are charged up front, providing the businesses an immediate cash flow. For its part in the transaction, Groupon takes a 50% cut.

Ideally, this is supposed to give businesses new customers and extra cash up front, while providing consumers with an unbeatable deal and some nice revenue for Groupon. However, not every party always wins in this arrangement.

One recent study from Rice University’s Graduate School of Business found that of 150 business that had previously signed up for a Groupon deal campaign, 40% would never do it again. Moreover, a third of those businesses said they actually lost money by using Groupon, often due to the fact that there were more Groupon customers than expected and most simply purchased the heavily discounted products rather than buying anything else from the store.

Now, a new study from the Harvard Business School casts further doubt on small businesses’ decision to partner with discount voucher sites like Groupon.

According to the paper, cleverly titled To Groupon or Not to Groupon, these deal sites generally benefit businesses in one of two ways. First and foremost, they often serve as an excellent way to advertise a company, something which is particularly true of a site like Groupon, given its massive user base. Regardless of whether your company sells a single Groupon, by simply appearing on Groupon’s website and the daily e-mail sent out to customers, this promotion can create a significant amount of buzz around your brand.

Aside from this, partnering with Groupon also allows businesses to practice what the researchers refer to as price discrimination, meaning they can appeal to more cost-conscious consumers who might otherwise never set foot in their store by targeting them with lower prices on specific items.

However, for Groupon specifically, and perhaps several other popular deal sites like LivingSocial, this second benefit is true less and less as these sites become more well-known.

“As more consumers use vouchers, voucher-users necessarily come to resemble average consumers,” the Harvard researchers write in their conclusion. This means it’s much less likely that businesses today can appeal solely to a certain class of frugal consumers who happen to use Groupon because, the truth is, everyone and their mother uses Groupon. So rather than bring in a new group of customers to your business who could not afford to shop there otherwise, you may simply be giving discounts unnecessarily to people who don’t need it, or even worse, to customers who have already shopped at your store.

“Voucher discounts are worthwhile if they predominantly attract new customers who regularly return, paying full price for future visits,” the researchers note. “But if vouchers prompt many long-time customers to use discounts, offering vouchers could reduce profits.”

To reduce the odds of this happening, the paper suggests that companies prohibit existing customers from purchasing their Groupons, perhaps by checking their credit card numbers. But even with this policy, it’s still likely that businesses will be inundated with consumers who can afford to pay full price for services but simply opt not to.

According to the researchers, businesses debating whether or not to use Groupon should do so if they are looking for a good source of advertising and buzz, but not a tool to boost profits.

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