Does Groupon hurt small business?

 The Groupon corporate logo. The subtext reads “Collective Buying Power.”

Big for consumers, big for big business – and perhaps not so big for small business. (Photo Credit: CC BY-ND/Liam Darmody/We Love D.C.)

Groupon, the deep discount coupon website with more than 60 million subscribers, has been a boon to shoppers who go wherever Groupon’s 50 to 90 percent off coupons lead them. High-margin businesses have also benefited handsomely from the increased patronage. However, Karen Klein of Bloomberg Businessweek suggests that small business may actually be taking a loss when it comes to discount sites like Groupon, LivingSocial and BuyWithMe.

Collegiate study calls Groupon a mixed bag

Dr. Utpal Dholakia, a Professor of Management at Rice University in Houston, Texas, conducted a survey of small businesses that participated in Groupon promotions from June 2009 to August 2010. Dholakia found that two-thirds of the participants derived profit from the venture and the remainder lost money – and 40 percent of businesses indicated no plans to use Groupon again.

Groupon fires back

Groupon responded almost immediately via its corporate blog. Company spokeswoman Julie Anne Mossler wrote:

“(Groupon) runs 900 deals a day, and we’ve repeatedly polled 30,000 merchants, which is everyone we’ve worked with to date. When we ask, ‘Would you want to be featured again or recommend us to another merchant?’ 95 to 96 percent say ‘yes’.”

Mossler suggested that the Rice study was undertaken before the small businesses had a chance to calculate total ROI for their deals. Also, the fact that the study used a small sample was problematic in Mossler’s estimation.

If you can’t take the heat, stay out of the kitchen

Many of the problems small businesses have with Groupon appear to relate to employees being unable to handle the rush of one-time customers. Such was the case for Big Ass Sandwiches in Portland, Ore., last spring, writes Klein. The food cart reportedly lost $16,000 when it budgeted for 400 half-off coupons but sold 2,000 in 48 hours.

“There were a couple days where we had 100 sandwiches go out the window and we grossed $150. I still have a nervous twitch from it,” said Big Ass Sandwiches co-owner Lisa Wood.

Weird Fish in the San Francisco Mission District had a problem with the level of publicity one Groupon-like service brought its way. Restaurant owner Timothy Holt told Bloomberg that a simple miscommunication with an employee left the restaurant unable to honor a Scoutmob coupon. This led to a string of one-star reviews on Yelp, a highly influential consumer review website.

“It was a little brutal,” Holt told Bloomberg.

A small business Groupon checklist

According to retail consultant Bob Phibbs (aka the “Retail Doctor”), small businesses must adjust to the viral phenomenon of deep discount coupon sites like Groupon, as the potential to attract new customers is tremendous. However, such coupon services should be approached with a plan in mind. Here are some things Phibbs suggested small businesses should consider before diving into Groupon and its competitors:

  • Is it right for your business?
  • Discount non-sale items only
  • Make sure you’re well-staffed
  • Negotiate for the best coupon deal
  • Track redemption and ROI

Sources

Bloomberg Businessweek

Groupon corporate blog

Real Time Marketer

Rice University study

Low margin companies should use Groupon cautiously

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