Get Your Groupon?

Group-buying sites are hotter than ever, and it’s no wonder: Offering deep discounts at businesses in hundreds of local markets, Groupon and its competitors are a bargain shopper’s dream come true. But the reality can be a nightmare for retailers who offer steep discounts without sufficient preparation.

Marketing experts urge merchants to use common sense when signing up for a social promotion. The extraordinary bargains—at least 50 percent off—usually mean the retailer will lose money, especially since many deal sites require stores to split the sales of the coupon 50/50. That means a retailer who offers $40 worth of merchandise for $20 is actually receiving $10 for $40 worth of merchandise—not even enough to cover the cost of goods.

“You really do lose money on it,” confirms Allison Montague, owner of Snapdragon Boutique in Grand Rapids, MI. Montague sold 895 coupons for $30 worth of children’s apparel for $15. Despite the financial loss, she’s happy she used the service. “It’s been a good marketing tool,” she explains, for attracting a “significant number” of new customers. “And for our existing customers, it’s been a good reminder to come back, too. From that perspective it’s been worthwhile.”

“We always position Groupon as a marketing spend,” explains Groupon spokesperson Kelsey O’Neill. “This is something that you’re going to do instead of buying ad space, because you’re going to reach thousands of consumers you’ve never reached before.” Since the social-promotion concept is relatively new, the verdict is still out on whether the long-term benefits of luring lots of new customers outweigh its short-term costs, but an increasing number of retailers think the risk is worth the gamble. Interested in getting your Groupon? Or LivingSocial? Or being a Daily Dealster? Be sure to follow these top tips.

Know Your Goal

“I don’t think every single business benefits from a promotion like this,” says Utpal M. Dholakia, an associate professor of management at Rice University, who surveyed 150 businesses that used social promotions, like Groupon, between June 2009 and August 2010. “They work better for businesses that are new, that don’t have established customer bases, are struggling or have had a change in management,” he explains.

That’s why Lauren Gogolak used BuyWithMe to promote her Arlington, MA-based children’s boutique, Wild Child. “When we ran our deal, we had moved to a new location and we ran it to promote the new location.” For other retailers, social promotions can be a handy way to whittle down old merchandise. “We did it in December when we were trying to get rid of all of our fall stuff. I didn’t have to discount my merchandise as much to get rid of it,” says Carolyn Goldman, co-owner of Uptown Kids in Oklahoma City, who says she decided to use the promotion in lieu of markdowns. “Since we’re a new company, we’ve tried not to do a lot of sales because I don’t want to be known as the sales store.”

Social promotions can also be a good way to reach customers who might consider boutique prices beyond their budget, says Scott Kominers, a Ph.D. candidate in business economics at Harvard, who co-authored a study on social-promotion sites. Services like Groupon give retailers the chance to make the case to budget-minded buyers that their wares are worth the price. “You might get people who are low-valuation consumers but become high-valuation consumers when they discover they really like the product,” he explains. But Dholakia warns that price-sensitive shoppers are less likely to come back the second time and pay full price. “When the deal goes away, they’re not going to come back. They’re going to go to the next deal.”

One way to cut down on one-time bargain hunters is to list deals on family-friendly or mom-targeted deal sites, says Artie Wu, CEO of Mamapedia, an online community for moms that offers a “Sweet Deals” daily e-mail featuring discounts on family-friendly products and services in 12 cities across the U.S. “What you don’t have on Mamapedia are the professional deal seekers. Our audience is moms, and the beauty of a mom is she doesn’t have a lot of time. Once she knows that you’re family-friendly, she is a fiercely loyal consumer because she needs solutions in her local area she can rely on.”

Upsell, Upsell, Upsell

One way to keep a social promotion from bleeding into your bottom line is upselling beyond the face value of the coupon, Dholakia suggests. In his survey, 66 percent of respondents said they turned a profit using Groupon and other social promotions, but the businesses with unprofitable promotions reported significantly lower rates of spending by Groupon users beyond face value of the deal. “I would say at least half have definitely come in and spent what they needed to use their Groupon, but I’ve been pleasantly surprised by the amount [of people] that have gone over,” says Montague. She estimates that she’s been able to upsell to around 20 percent of Groupon users.

Goldman suggests retailers structure the price of their deal so that customers are likely to spend more than their promotion amount. At Uptown Kids, 467 people purchased Goldman’s Groupon offer for $60 worth of merchandise for $30, but since most items in her store are $40 and over, many Groupon users spent exactly $60. Next time she says she will offer $40 worth of merchandise for $20—making it more likely that customers will spend more than their coupon amount.

Keep ’em Coming Back

Experts and retailers agree: The key to making any social promotion successful is to turn deal addicts into lifetime customers. “You need to figure out another way to get them back again to buy something at a regular price,” says Lisa Starbuck, co-owner of Psychobaby boutique in Chicago. “We offered them a coupon for 20 percent off their next visit.”

“Whenever customers come in our store, my staff is supposed to ask them to fill out an information sheet with their name, address and e-mail,” Goldman says, noting that she’s used the information to stay in touch with her Groupon customers about new merchandise and sales. She also uses Facebook and Twitter to communicate with her clientele and used the sites to promote the sale of the Groupon—something that pleased her loyal followers on Facebook.

Dholakia recommends structuring social promotions in ways that force customers to come back again and again—for example, instead of offering one large discount, offer three smaller coupons that must be used on separate purchases. “The whole idea is to try and make the customer a relational customer. And getting them in the door just once probably isn’t going to cut it. If you can force them to come back a few times, you will have a better chance of converting them into loyal customers.” But Kominers warns that it’s unlikely to be profitable if you allow customers to repeatedly receive the discounted price. “If the new customers attracted by the voucher promotion use vouchers every time they visit, then they will never become positive-margin customers,” he warns.

Limit Your Merchandise

“I put no limitations and no restrictions. When someone came in and went to the sales rack, I just dug myself a hole,” says Candace Khashman, owner of Peek-a-Boo Couture in Charlotte, N.C. Gogolak avoided this pitfall by stipulating that the deal could not be combined with other sales and promotions, but she notes that it “was hard and frustrating” to reinforce the policy. “Some people were a little put off by it, which is crazy in my mind because you can’t discount an item by 100 percent.”

Dholakia also suggests this strategy: “Try to sell items that are less popular, running out, lower quality or late season,” he advises. Several retailers reported running Groupon promotions at the end of the season to clear out older inventory. Instead of emphasizing end-of-season items, Starbuck saved money by steering customers to Psychobaby’s in-house brand of customized tees and personal items. “Our margins on that [line] are significantly higher than the margins we can get on any other product. We focused on that when people were coming in to redeem so it wasn’t quite as painful.”

Select the Site Carefully

In a marketplace overpopulated with Groupon knock-offs both beneficial and ineffective, the big question for many merchants is which social-promotion site to choose. “In my sample, Groupon was the outperformer and everyone else was significantly worse,” Dholakia says, although he notes his sample was relatively small. “Groupon is much higher on the learning curve,” he explains. “Many of these other sites are very new shoestring operations. They don’t know how to help small businesses do promotions like this."

“Overall the experience behind-the-scenes with Groupon was really wonderful,” Starbuck confirms. “They were helpful when setting our deal and they provided tons of background information.” Starbuck adds that Groupon has an iPhone app for merchants “that makes the redemption process so simple and so easy I couldn’t imagine doing it any other way.”

However, Groupon’s competitors have several major advantages. First, many other sites offer a better share of the profit to the retailer. For example, LivingSocial typically takes 30 to 50 percent from the deal, says company spokesperson Maire Griffin, as opposed to Groupon’s 50 percent split. Second, many sites—like BuyWithMe and Mamapedia—run their deals online for up to seven days, wheareas Groupon’s flash sales come and go in 24 hours. Wu says that’s part of the reason why Mamapedia has proven so successful with moms. “What they don’t like about other sites is they get back to their computers at the end of the day and the sale is already over.”

Keep Your Staff Smiling

Somewhat surprisingly, the single most important factor in a successful social promotion is employee satisfaction, according to the results of Dholakia’s survey. “For the majority of the businesses that didn’t succeed, it was because they went into it without much thought. They didn’t have plans in place for their employees on how to deal with the customers,” he explains.

Successful retailers made special preparations to handle the influx of customers. Montague prepared for her Groupon customers by beefing up her staffing during the deal’s first month, while Starbuck spruced up her inventory. Goldman made sure to watch Groupon’s tutorial and trained her staff at Uptown Kids on how to ring in a Groupon sale on her computer system, as well coached them on how to explain that the tax is not included. All of these retailers made sure to train their employees to gather contact information, like addresses and e-mail.

Dholakia agrees that this type of preparation is key. “What the business owner or manager is trying to do is bring in new customers and convert them to loyal customers. When customers come in and are confronted with disgruntled and dissatisfied employees, and are treated with poor service, the inclination to come back is washed away.” Retail strategist Bob “The Retail Doctor” Phipps warns that dissatisfied Groupon customers can lead to loads of bad publicity and a precipitous drop in a store’s online ratings on sites like Yelp. His blog includes a 10-part series describing the dangers of social-buying sites. “The very thing that makes Groupon and its online clones powerful is that they’re all socially driven. So if [Groupon users] try and get an exception to your policy and you don’t give it to them, they’re going to rail all over their social network, and that’s potentially going out to thousands of people.” Of course, glowing reviews have the potential to reach thousands of customers as well, and that’s the ultimate goal for many of the businesses who choose to use Groupon and its ilk—to generate buzz that brings an increasing number of shoppers coming back again and again. For many retailers in a tough marketplace, it’s a gamble that may just be worth taking. —Audrey Goodson