Groupon: good or bad for small businesses?

Rachel Brown was recently the victim of her own success when a cupcake promotion she offered proved a little too popular.

Her firm Need a Cake advertised a deal on the group buying site Groupon, which allows people to buy coupons that give substantial discounts on restaurant, beauty treatments and other treats.

Mrs Brown offered Groupon subscribers a 75 per cent discount on a dozen cakes – selling them for £6.50 instead of the usual £26.

Swamped by orders, Mrs Brown, who normally makes 100 cupcakes a month, found herself having to bake 102,000 cakes.

After spending an extra £12,500 on staff and distribution, she stopped accepting orders when they reached the 8,500 mark. She went on to make a loss of £2.50 per order.

It is not the first time a Groupon promotion has created too much demand for a business to handle.

What is Groupon?
Groupon is a group buying or daily deals site, though the Chicago based company prefers to call it “collective buying power”. It promises businesses a minimum number of customers, in return for discounts for customers that subscribes to a deal. Each day, Groupon features deals on things to do, see, eat, and buy.

Customers can search for deals in their local area, buy a coupon which they redeem for a promotion, for example a Spa treatment or five-course meal. Customers then share the deal with their friends and receive a payment for each friend they refer.

Groupon’s success has spawned a collection of imitators. They range from direct competitors like LivingSocial and Qype Deals to smaller, more niche group buying companies.

Earlier this year the owner of a cafe in Portland, Oregon blogged about losing money after offering a 50 per cent discount.

But some businesses have found that Groupon and similar sites are good for business.

With the greatest respect… it is probably the worst thing you could sell on Groupon. Paul Croxford

Paul Croxford, co-owner of Picture, a high street photography studio in Newport, Wales, said the Groupon deal his firm entered brought in a lot of business.

“We went into it with open eyes,” he said. “We were aware of how many we could handle. We could not have handled any more.”

“We were fortunate to have got the right amount of customers.”

Mr Croxford said it is down to the business to upsell their product but revealed that his business has had repeat customers following the deal on its portrait service which was offered two months ago.

In fact, Mr Croxford’s experience is not unusual. Data from US based deal aggregator Yipit showed that 44 per cent of Groupon daily deals run in May 2011 were run by businesses who had already run a daily deal.

“If they really had a bad experience, why would so many merchants be doing it again?” asked the Yipit blog.

Shane Hayes founder of daily deal aggregator Siftie.co.uk, said the advantage to a business of a service like Groupon is that it costs nothing up front because Groupon covers all the publicity.

After that the success of the promotion is down to the business.

“It’s your job to convert these into repeat customers,” he said.

Mr Hayes said that Groupon works best when a business can use a deal to persuade customers to buy more than they normally would.

He added that they work well when the extra demand would not significantly increase your overheads.

Mr Hayes said businesses could get round the problems faced by Mrs Brown by putting a cap on a deal, but added that Groupon is often reluctant to add a cap, unlike rival sites.

But he said that in this case, it was probably just the wrong type of product for this particular marketing tool: “With the greatest respect to the lady, it is probably the worst thing you could sell on Groupon.”