Why Groupon is Bad for Small Business

Groupon is like Super Bowl advertising.

It definitely creates awareness, but it does so at a price – one with consequences that should be carefully considered.

Much has been written about the direct costs of running a Groupon campaign. However, it’s the side effects that bother me.  And they extend long after that Groupon has expired.

You can easily examine them by putting on your traditional marketing hat – the one you used to build your business and sustain the customer base you enjoy today.

It Sends the Wrong Message

Large corporations are known for throwing advertising dollars around.  They entertain us with over the top super bowl ads that build brand awareness – and maybe a short term spike in revenue.

Small businesses invariably are built from personal relationships in local communities. People in communities talk, so its essential to treat them all fairly and equally.  This keeps your life simple and generates more referrals.

Let’s say you operate a lawn care business or one where your loyal clients are contracted or subscribed on an annual basis.  When you offer a deal to new prospects you devalue their loyalty.

While you may gain some new customers, one of the hidden costs is losing current customers that view your new marketing practices as unfair.  It’s a risk.

If you really do have the money to spend, why not invest in your current customers? You could offer them something like a recession discount at a time when they may need it most.

Trust me, they won’t forget it when their contract or subscription is up for renewal.

It Attracts the Wrong Customers

In addition to cannibalizing on profits from loyal customers, a Groupon campaign can attract new ones that are only there because of the deal.

During the 20 years I successfully operated my landscape architecture business I never once did Yellow Page advertising. OK, maybe once, when I was just getting started and didn’t realize that everyone that called was shopping my business against competitors advertising right next to me.

This is why when we received a call from someone we didn’t recognize we always asked why they were calling us.  Most were referred by a customer or had admired our work on a recent project.

We discovered those looking for the lowest price were open and honest about it.  We respected that and kept a list of phone numbers handy for companies that offered a low price and respectable quality.

That authenticity occasionally opened some minds that had previously not factored quality or service into their equation.

It Creates New Expectations

The cardinal rule of negotiation is that if you concede once, you will do it again.

This is why you need a very good reason for offering a steep discount via Groupon. Unfortunately, to my understanding there is no means for communicating this to your community.

Groupon did not earn a $6 billion offer from Google by customizing for every one of their customers.  They earned it by developing a repeatable formula that Google could readily monetize by expanding it even further.

Anyone that understands retail knows you pay full price to be the first with the latest fashions – or you can wait and get them at 50% later.  This is why I buy my suits at Nordstroms annual men’s sale.

However, if you are a small business, it’s unlikely your product or service is mass produced – one with a huge mark-up that you can give back if you wish.

You work just as hard for new customers and you do for those that have been with you for years.  You track all kinds of costs, including overhead and labor hours – and all of them tend to rise over time.  If everything goes well your net profit is probably around 10%.

So, where is the justification for offering a deal?

The only one I can think of is to make your existing customers happier.  So, instead of investing in Groupon, invest in them. Think of it as a gift.

Would you like to experience Groupon first-hand without investing a dime?  Then read why cafe owner Jessie Burke describes her experience with Groupon as The Single Worst Decision I Have Made as a Business Owner.

It’s a heartfelt account, and the comments from hundreds of fans share some insightful details as well.

To her credit, she didn’t write the post to rant, just to respond to one loyal client.

That’s what small business is all about.

If you want to learn more, you can read an additional perspective and watch a series of videos about Jessie’s experience here.

Invest in your clients.

It’s a no-risk play that is always good for your small business.

Leave a comment below or share this with your social community on Facebook or Twitter.  You may also wish to try the Google+1 button in the red bar at the bottom of your browser.

Until tomorrow,  Jeff

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Comments

  1. Thanks for sharing that story. I had not known about that side of Groupon. You really have to look at the value of a trending marketing method to see if it is for you. Your point in examining the type of customer is excellent. There does seem to be a trend to offer coupons or discounts, and in the past month, several potential clients asked for a reduction in my price. I say no, while explaining why I say no. I wonder if people do consider the flip side. I have been told that since I provide a service that I could provide it for free with no consequence. I ask them if they would work for their employer for free. They say no. Why not I reply, you are only providing a service as well, so there would be no consequence. Then it dawns on them that there would be consequences.

    • Jeff Korhan says:

      Frank – There are so many nuances involved with price.

      Why offer a discount? To get more business later. My experience has been it seldom happens. When you hold firm as you did, you earn the respect of your clients.

      I’d rather offer a gift than a discount. It sends the right message and you feel good about it too.

      Jeff

    • Do your Groupon customers never return and pay full price for your services? Find Our how a Rookie Personal trainer used Groupon to create a 6 figure business in 2.5 months: http://goo.gl/z5MEe

  2. Hey Jeff

    Good points there. I myself posted an article on Groupon just today (and than found yours).

    http://www.social-brand-value.com/2011/06/15/groupon-destroyes-your-business/

    • Jeff Korhan says:

      Good article Daniel – It’s rare that someone posts a link that actually leads to valuable content!

      I especially like your insights of using Groupon to dump overstocked inventory or product that may be soon out of date – precisely why Nordstroms sells me suits at half off months after they are first introduced.

      Jeff

  3. Thanks for sharing this, Jeff. I agree with you.

    There’s a golden business rule which covers Groupon and all such “promotional” activities.

    Never treat an existing customer worse than a new customer.

    If Posies had followed that rule, she wouldn’t have done the Groupon offer.

    Groupon is a way for Groupon to make money. Not the businesses. Unless you need to buy eyeballs for a brand new, very heavily financed business in a very early stage, I can’t see any value in it at all.

    Groupon is a great way to devalue your product, to offend your existing loyal clientele and to attract cheapskates to your business.

    The bad clients (in a service business) cost a fortune and damage team morale. The people Groupon brings are exactly the ones you want to avoid.

    Human beings (business owners this time) sometimes are not too bright. It could be worse: we could be lemmings.

    • Jeff Korhan says:

      Sorry for the slow response Alec – this slipped though the cracks.

      I have seen a few businesses that claim Groupon has brought in new and sustainable business – a restaurant, but my experience has been that discounting and promotions send the wrong message.

      An outright gift to a loyal customer sends the right message.

      When I was a younger business owner I indeed used the lemming approach you mention from time to time – and learned from it.

      We are the ones that know what’s best for our businesses. :)

      Jeff

  4. I should have read this before I advertised my business on groupon… BIGGEST MISTAKE OF MY LIFE!

  5. Jeff. Thanks for the well thought through article.
    One thing I would like to add is that Groupon and the ilk are sucking money out of local economies. The small businesses and the customers are effectively donating $$$ to big business.
    An interesting take on this subject is here:
    http://www.thedailydross.com/html/vancouver-riots-1304.html

    • Fantastic article Jeff and trying to get customers based on price is a bad idea most of the time. They are not as loyal. However, Groupon can be effective with the right business, product or service and proper planning and execution.

      Trying to get customers based on price can be lethal to many small business owners. If a small business thinks they just can pick a product or service and be successful, they are setting themselves up for failure.

      Businesses with high profit margins on a product or service are best for this kind of promotion. If you want to be successful, it takes a lot of planning and work even before your groupon marketing campaign starts.

      You need to pick the right product or service and know which days to run it. In addition, the limits you need to set for your vouchers. Also, you must have a creative plan to get the contact info from the groupon customers and how to use that information wisely. The employees need to be trained on how to handle this promotion and don’t forget about your loyal customers. What are you going to do for them?

      Marketing on groupon can bring a lot of cash to a small business without having to pay upfront. However, Groupon marketing is not a long-term marketing strategy. Just like yellow pages, some small business owners will continue to advertise there, even if there are better long-term options.

  6. I completely agree with you. Companies should focus their efforts and money on referral marketing. When you advertise a low price, you’ll find that those people always complain and want more. If you get new referrals, they are usually willing to pay full price with fewer complaints since they know the quality of your work.

    • Jeff Korhan says:

      Jennifer – Indeed, it is often true in business that those wanting the best price still expect the best service too.

      My experience with good customers is they expect to be treated fairly – but are willing to pay a reasonable price for excellent service.

      They view the partnership as a win-win relationship.

    • I’m trying to decide if I want to use Groupon or not. I have had experiences with coupon clipping fools, & I’m not in the market to be aggravated with these kind of deal seekers. I take pride in my work, and do not like to devalue it, by offering a “cheap” deal. BUT… on the other hand if I obtain ONE full price-paying client, for future appointments it would be worth it.

      • Jeff Korhan says:

        Cheryl – It sounds like it may be worth it for you. However, you’ll probably give some money to regular clients who will take advantage of the offer.

        So, it may be one step backwards and two forward.

  7. I really do believe that if small business owners are careful enough, there is a way to profit without losing your loyal clientele! I believe that marketing actions should be combined! I mean, do a groupon but don’t ridicule your product by offering 95% reduction. do a groupon, but a month before, do a loyalty marketing move! loyal customers are the ones small businesses should invest to. this is the success metric. on the other hand, I have a question: does groupon in the US, accept a maximum number of coupons sold per groupon??

    • Jeff Korhan says:

      Prosfores – Yes, the Groupon can indeed be capped. I participated in one that offered $10 of merchandise at Whole Foods (grocery store) if you spent $20.

      Since I shop there anyway it was a no brainer. I tried to get my wife to sign-up too but within hours it maxed out at one million offers.

      So, they gave away $15million dollars in exchange for $20 million in revenue. $10 mil to consumers, many of whom are regular customers, and $5 mil to Groupon (actually I think the company in this case was LivingSocial).

      Worth it?

      • I have a small travel agency and have thought about groupon or living social but I have been trying to research pros and cons. I like your article a lot but wonder your thoughts on if its possible to use groupon for bringing in clients rather then devalue your product. For example if I was to offer any client of mine $25 on board credit when they book a cruise though me. Do a coupon deal for $25 OBC and receive $50 OBC when a cruise is booked through me. They would still have to buy the farm but get a little in what clients see as bonus but I would only be offering what I normally do to my regulars… make sense? Would this devalue my brand or offend clients or could it actually work and be worth it?

        • Jeff Korhan says:

          Shaunette – I cannot imagine a credit of $25 or even $50 is sufficient incentive to get the attention of most buyers when it comes to a significant purchase such as a cruise. And do you really need Groupon for that?

          Do something nice for your best clients – that’s more memorable.

          Jeff

  8. Jeff, Thanks for your article. Too many Groupons sad stories…

    I own a local restaurant and a gift shop in Larchmont, NY. As a small business owner, operating on a tight profit margin, it’s a challenge to successfully market my business in a cost effective way. I am a shopper as well, and sometimes, my budget requires me to look for sales or discounts, specially today in difficult economic times.

    While issuing deals/discounts is a great marketing tool to attract repeat and new customers, it has to be done carefully. Restaurants do you have excess capacity on certain days or certain times and retailers do have excess inventory that is just collecting dust on the shelves. That’s when offering a deal/discount is a good idea – as long as we don’t take a loss. I experimented with a popular deal site and it definitely did not work for me – I felt like “selling my Soul and my Brand to the devil”. Oh, and the idea of having my money in “their pocket” is not was best for my business.

    However there is an alternative solution. It’s called JCadin.com – A self service marketplace Deal site specifically designed by a Local Merchant FOR Local Merchants. Unlike Groupons deal sites, WE can create & sell our own deals, on our own terms and keep the revenue of the sold vouchers – Definitely a win-win formula for consumers & local store owners like myself.

  9. Hi Jeff,

    Renee Powell is the owner/founder of JCadin.com so this is not a review from a user but a promotional blurb from the owner.

    Making the web work for you, Alec

  10. Kane Christin says:

    Hi there. The hour is late and the brain tired!

    I run a very successful photography studio in the UK. Groupon was brought to my attention six months ago after seeing a rival studio advertising – and selling loads of portrait sessions. We immediately contacted them an the only deal on the table was they kept all the money (£14) and we supply th ehour photo session and framed picture. What could we say.. it had to be a yes or we would not be listed.
    So we were featured and sold 70 portrait experiences – well I was over the moon! Thought this is it we have made it. Then the groupon people started arriving. We upsold to 80% of these customer which was very encouraging, however we started noticing what we call voucher junkies – people out for freebies from every business they can gain benefit from. So dur I hear you say well we did expect this but they are very frustrating when we invest an hour shoot, two hours editing photos and an hour viewing for them to walk away with a frame that cost the business good money to buy..
    So then the next month another of our rivals is featured who go onto sell sixty odd experiences and our studio phone does not ring with any bookings which has never happend.. We try and get refeatured with groupon who say wait your turn or go away. So the next month another rival gets featured and they go on to sell sixty odd experiences (witha worse deal on offer than ours so groupon you are not offering customers the best local deal are you!) Again our booking line doesnt ring. The next mont we get featured, sell sixty odd and this time convert 70% upsells and %30 voucher junkies.
    So a pattern is forming right.
    Groupon have stolen seven years of hard graft promoting my studio to the top of the pile and swept the world from under my feet just like that. People flock to the next bargain like locus feasting on vegitaion and then onto the next deal. Why should they invest in that small business if they know they can try a similar business next month.
    The world of small businesses are doomed my friends :0( we photography studios any way. The only winner are groupon and the last man standing.
    Thank you and goodnight. K

    • That’s great story from the field K.

      And that about sums up the situation. A friend of mine had a restaurant which he promoted in a similar way. After a year of building up turnover via discount site offers, he’s finally realised that there is very little loyalty and no margins in these ongoing discount offers.

      A year effectively tilting at windmills.

      The only way I can see a Groupon offer working is if it is for a tiny part of your services which involves very little incremental work, with a wide ranging offer behind. To give an example, painters who will paint your mailbox or your veranda railing for free.

      Anyone who needs them probably has a whole house in need of work.

      In your place, I wouldn’t give them the frame next time, just the portrait and a single set of passport photos (they probably need more and copies are rarely acceptable).

      • Jeff Korhan says:

        Alec – Tilting the windmills – love that! Indeed, if the offer is small the risk is too. That is where Groupon may have a place for businesses.

        For those of us who are already offering substantial value for our pricing … Groupon deals probably not such a great deal. :)

    • Hi Kane,

      Maybe the only way to fend off the vulture like tendencies of Groupon (which will eventually create “the last man standing” scenario) is to agree an (unofficial, of course) cartel-like pricing agreement with your competitors. It seems that when one business goes down the Groupon route then all their competitors feel the need to join in – with Groupon being the beneficiaries and all the small businesses (collectively) losing out.

      • Jeff Korhan says:

        Clive – Indeed, once fear starts running through an industry or community, it begins to feed on itself.

        The consensus in the comments thus far is that Groupon is not without its merits, but the business has to carefully consider the impact on both current customers and have a plan for translating Groupon leads into new customers.

    • I am a small business and ran a feature with groupon, BIG MISTAKE! I am a health professional and offered a dental exam, cleaning and whitening.
      Well, it worked but it didn’t work. I had people coming and who had not had a cleaning in YEARS! and they thought that it should ALL be FREE! Look back at what I featured, clenaing and we specified 45 minutes. These people would come in and DEMAND AND EXPECT FREE. After 4 years you can not possibly be complete in 1 appointment – and this was explaioned to them, they were evern told upfront “Go and get a REFUND now, before any work gets started”. No many insisted that just “do what it is that you can do as I am here now”. Anyway, we were not aware of their easy refund policyies. People would get part of the work done (part of a cleaning) and then demand a refund and GET IT!
      Groupon stated that they have a “loop hole” where they do not have to contact the merchant simply issue the refund. Most of the complaints UNFOUNDED – but hey, free is free and they got free cleanings. Incomplete but still free.
      GROUPON SUCKS!

  11. I totally agree with the author. Especially here in Greece where the businesses are small to medium, they only put offers on sites like groupon just for the cash flow.

    • Jeff Korhan says:

      When I was a contractor looking for new work, we used to call this practice “chasing future work for current dollars.” Time has a way of catching up with all of us, and that is when you really pay for these deals.

  12. Groupon is much like of a bee, too much sweet but stings. Overdelivering and underservice are one of the weaknesses of this model.

    • Jeff Korhan says:

      John – There definitely some sting there.

      I suppose the quality of the delivery is up to the establishment.

  13. “The only one I can think of is to make your existing customers happier. So, instead of investing in Groupon, invest in them. Think of it as a GIFT.”

    … Wish I would have seen this article earlier. You hit us on the head.

    Great article and so many points to comment on, too many to list here.

    Thx for the article!

    • Jeff Korhan says:

      Joel – I hope I didn’t hit too hard!

      Thanks for your comment – and have a great weekend. :)

      • Dirk Digler says:

        Groupon can work if the business owner uses it to their advantage. Set a cap of how many you will sell. Once you sell out on Groupon, your business is still on the Groupon website that goes out to millions of people. Far better than any local marketting can offer. People will call your business directly and then you can either sell them a full priced service or sell them the Groupon rate and keep the discounted payment 100%.

  14. I didn’t use Groupons or any similar services. I am just wondering why the business owners don’t spend money for advertisement instead of paying a half of income to Groupons? Well, you don’t pay for ads, they pay for it, but they don’t care about your clients, they care only about the profits. I agree with Jeff: Groupons is not good for service business especially for hypnosis practice because they
    care only about money, which is a wrong way anyway.

  15. Why Groupon is Bad for Small Business??

  16. I was so happy to find your article!! I work for a small business and the owners have been doing groupon since opening for two years now to “generate new business”. I have tried explaining many different ways how this harms our existing AND future business while ripping off the employees but they don’t want to hear it. Maybe when I show them this article written by a professional they will be more receptive. They refuse to put any money into advertising any other way! I always say, the thing about common sense is its not that common! ;) Thanks!

    • Hi Melissa – Thanks for your comment. Happy to know this was useful for you.

      Be sure to help the owners understand that they are paying dearly simply to rent Groupon’s list. Recommend they get started building their own list.

      That’s the smart play these days. It’s not only the best way to gain control of your marketing, but that list becomes a bankable business asset that will increase the value of their business when the go to sell it.

      They may think that day is a long way off, but I can tell you the twenty years I owned my brick and mortar business went fast, and when I sold – everyone was primarily interested in one thing – my list.

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