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Join the Local Group Buying Game with Caution

Offering great group buying deals online is the hottest thing going for local business.  By posting their deals on sites such as Groupon and LivingSocial, legions of local businesses (and some national brands, too) are attracting new customers, boosting sales, and augmenting their email lists.  The front runners in this exploding marketplace – Groupon and LivingSocial – have been making big headlines.  Groupon, for example, recently thumbed its nose at Google’s offer to buy it for nearly $6 billion.  Meanwhile, LivingSocial made a national splash offering $20 gifts cards for $10, and moving 1.3 million of them within 24 hours. And Google may soon launch its own version called Google Offers.

But hype and headlines aside, are Groupon and Groupon-like promotions worth it? According to a new study from the Jones Graduate School of Business at Rice University, the answer is only “maybe.” According to the study, Groupon promotions were profitable for 66% of the local businesses surveyed — and unprofitable for 32 percent. And despite the sites’ own testimonials, more than 40% of respondents to the Rice study said they would not do it again.  (The study covered 150 businesses in 19 U.S. cities and 13 product or service categories.)

Daily deals offered online have been wildly popular with customers, and the roster of U.S. and Canadian cities, regions or metros covered by the two leaders – about 125 for LivingSocial and some 190 for Groupon – is growing rapidly.  But the Rice B-school study showed that the discount offered and the number of deals sold did NOT predict profitability; nor did the percentage of users who purchased something in addition to the deal offered, or purchased again at full price.

The key was this:  “Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal,” says Utpal Dholakia, author of the study and a professor of marketing at Rice. “Employees must be prepared for this type of customer and the sheer volume that might come through.

“The social promotion industry reminds me of the Internet boom’s heyday. We are in the midst of a dynamic and exuberant period, and once the dust has settled the industry will look vastly different than it does today, with consolidation and savvier small-business customers.”.

Here are four things you should know:

  1. Groupon promotions offer the most benefit for businesses in which the promotion does not cannibalize sales to existing customers.
  2. Among the service businesses (restaurants, educational services, tourism and salons), restaurants fared the worst and salons and spas were the most successful.
  3. Businesses with unprofitable promotions reported low rates of spending by Groupon users beyond the Groupon’s face value and low rates of return to the business again at full price.
  4. Respondents indicated they had largely negative perceptions of Groupon’s competitors.

So far, it looks like the Groupons of the world  need to put more emphasis on creating positive outcomes for local businesses, and stop tilting the equation so much toward consumers.

Still, two in three local businesses report a positive outcome, so it’s worth trying it out. A great way to get a feel for how it works, who’s participating (both buyers and sellers), and whether your small business should give it a go is to check out some of the sample offers (Groupon here; LivingSocial here), detailed case studies and other details on the LivingSocial and Groupon websites.  The Groupon video here on BizBest is also helpful.

Both sites offer a full range of local merchant services. At Groupon, most things are done by phone or online, while LivingSocial maintains small customer service teams in the cities it works in.  They’ll help you devise and structure a deal specifically for your business that delivers on your performance goals.

Since a minimum number of people must buy the deal for the offer to be valid, you are guaranteed paying customers.  There are no up-front costs (other than your time) to create and run a deal.  Groupon, LivingSocial and other copy-cat type sites make money by taking a small piece of each deal sold.

Biz owners who’ve had success don’t try to target customers looking for “the perfect deal.”  Rather the way the system works – offering consumers a handy way to make new local discoveries – you get customers looking for an excuse to try something new.  The deal you devise gets them in the door, and it’s up to you to keep them coming back.

From a demographic viewpoint, the Groupon audience tends to skew younger, toward people looking for great stuff or experiences they’ve never tried, or maybe never heard about, right in their own backyard.  But with thousands more people subscribing daily in the cities covered (and more cities being added all the time), the customer range is widening .

Ask for help with “redemption cycle planning,” so your business isn’t overwhelmed by a large response it can’t handle – especially in the first 30 days following the offer. Groupon offers checklists and hosts webinars to help with the planning.  As part of the deal creation and planning process, the services will also work with you to calculate the optimal number of customer’s you’ll want to generate by an online deal, relative to your existing customer base, and the capacity or staffing issues of your particular type of business.

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