Groupon Toronto – Why It’s Bad For Your Local Business

Typical OffersThe typical customer (business offering a discount) of group buying sites are local service businesses. There have been a few big splashes by major corporations, but those are few and far between. These small businesses are always looking for ways to get more customers in the door; they live and die by their customers.

There are all sorts of local restaurants, outdoor activities, salons, spas, photography, cooking lessons, the list is endless. Up to this point, there haven’t been enough studies to determine if these group buys are having a positive or negative affect (there is rarely such thing as no effect). Consumers think it’s great; they’re getting great deals and trying out places they wouldn’t normally if they had to pay full price. Then you have local businesses; they think it’s great, they’re getting more exposure and more people through the door (more on that in a minute).

It all seems so positive from the surface, a win-win, you say? Not so fast. A recent study by Utpal M. Dholakia (Associate Professor of marketing at the Jones Graduate School of Business, Rice University) outlines some major concerns about the sustainability of group buys and why they’re not necessarily a win-win situation.

This survey-based study of 150 businesses that ran and completed Groupon promotions was taken between June 2009 and August 2010. Again on the surface, the study would suggest they are great. These promotions were profitable 66% of the time and unprofitable 32% of the time. Looks good. Dig a little deeper, and the shine starts to wear off.

When compared to businesses with profitable Groupon promotions, those with unprofitable promotions reported significantly lower rates of both spending by Groupon users beyond its face value (25% vs.50%) and returned rates to purchase from the business again at full prices (13% vs. 31%).In the report, there is an appendix of positive quotes from satisfied customers.

The problem with most of them is they all say the same thing. It brought in lots of new customers, increased our brand awareness. That’s wonderful; I could do the same thing by offering my sh1t for free. None of these positives gets into more specifics about how it has increased their bottom line, how they have a whole new wave of (what they want) repeat loyal customers.

It’s all ‘fluffy’ stuff they were sold by the group buying sales agent to get them to sign up and give away their services for 5% of what they normally charge. Most of these group buying sites take 50% of the deal coupon price (not the coupon value).

A recent study of over 100 recently completed deals from 5 different coupon companies within Toronto shows the average local business gives up 81% of their revenue to run the ‘coupon.’ Compound on to that, the number of people who only use the coupon value and don’t spend anymore, nor do a lot of them come back, and you now have an unfavourable deal (if it was unfavourable already). Offering these types of discounts is not sustainable for a local business.

It directly affects the profitability of the business negatively (remember, they’re earning 20% of what they normally would be getting). Thus their service levels will drop, they have to. With decreasing service levels, customers will become less pleased, and now you’ve not only lost the coupon user (who was likely not to come back anyway), you’ve lost your loyal clients too. Not to mention they’ve (business owners) now cannibalized full-price sales to their existing customer base.

A loyal client will be displeased and question the value of what they’re paying when they see how much it can be discounted for several hundred to thousands of other people. When was the last time you saw a business offering an 81% off sale? Most if ever do, and when you see that it’s usually a liquidation; going out of the business sale.

It’s not sustainable nor good business if that’s all you’re relying on, that and good service, you need more than that, like a real system in place to increase client retention and repeat customers! Hoping they like your service and come back is not a system/strategy/formula for marketing in any way, shape, or form. So while looking at the positives that certain business owners had to say, what about the list of negatives, each of them in the report was very pinpointed and specific, unlike the fluffy positives of ‘more people in the door, brand awareness.’ Many reporting all they got were deal seekers.

They buy the maximum deals allowed, use them up and move on. (discounting 95% to get those kinds of none returning people, what was the point?), here are a few others:*consumers were cheap not a good fit with our core customer waters were frustrated didn’t use it for more than the coupon value the group clients try to swindle you out of more savings, most of them are cheap-skates.the only downsides to Groupon are you never see of the guests return because they are bargain shoppers.

It can create a wait that negatively influences full-paying guests. They were rude and complained to be difficult; I could tell. I could go on, but each one of these comments showing pinpointed behaviours of the average group buying coupon user when visiting a new business. Giving up 81% of your profits to attract people like that? I’m lost as to why anyone would think that’s a positive outcome. Don’t take my word for, do a search and the countless pieces of information that are starting to surface about them being the ‘worst business decision I ever made.’ These are from unbiased sources, real business owners who got burned, and some burned badly.

A simple Google search will show you hundreds of stories of local businesses and the failures of the coupon, some businesses going out of business, some refusing to honour the coupon. The list goes on if you happen to stumble upon a local business that now has hundreds, maybe even thousands of BAD comments because of what happened with the Groupon? That’s starting to become more and more common, and that’s something you can’t just erase!

The Merchant AgreementThe fine print in these coupons is ALL in favour of the company doing the coupon, they’re protected, and you’re not the risk is huge. It may be cash up front, but it’s not essentially a loan given out by Groupon, and they collect by handing you clients with coupons in their hands for the next 6-12 months.

The economics of it often, when properly calculated, will rob your business. Read this Groupon Merchant agreement, it’s entirely in favour of Groupon and leaves the local business owner in a high-risk situation (they’re all similar, so don’t think that Groupon is bad and the rest aren’t).

Read this write up in tech crunch about the why Groupon is poised to fail; it simply can’t keep doing this to local business owners, it’s starting to catch up. Toronto DealsIn Toronto alone, over 150 previous deals have been analyzed, and the average cost per person that local businesses PAY in lost revenue is $144/person. Can you afford to pay $144 of lost business to get someone to walk in the door? What about fraud?

The companies and the whole system don’t provide any real measure to make sure people aren’t using false coupons, and the legal responsibility falls DIRECTLY on the local business. It’s a sure way to alienate your current customers who already frequent your business. Ever sit on an aeroplane and find out the person next to you in the same seat paid half the price you did? How did that make you feel? How do you think it will make your current regular paying customers when they find out

you’re offering the same service at 50+% off. Not only are they going not to want to pay, but you’ve also insulted them.

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