Cut-rate deals offered by group buying startups such as Groupon are great for consumers: Half off lattes and airbrush tanning sessions? Count me in. But a new study claims that the group buying phenomenon is not quite the panacea for participating businesses.
Nearly a third (32%) of the 150 businesses surveyed for a study (pdf) by Rice University said that the Groupon campaigns they ran were unprofitable.
Those with unprofitable campaigns also said their Groupon customers didn’t spend much beyond the offered deal, and very few were converted into regular customers when compared to the other two thirds (66%) who ran profitable Groupon offers.
We recently reported the story of a small cafe owner in Portland, Ore., who claimed she lost $8,000 on a Groupon campaign.
Surprisingly, despite the group buying scheme’s consumer focus, the success or failure of a Groupon campaign hinged on the satisfaction of a participating business’s employees.
“This was completely unexpected. Customer satisfaction is often driven by employee satisfaction. When you have satisfied employees the customers are more satisfied, and there’s a greater chance that they will come back, which is the whole point of a campaign like this,” said Utpal M. Dholakia, the study’s author and associate professor of marketing at Rice.
The study polled businesses in 19 U.S. cities and 13 different product categories that had run Groupon campaigns. Among service businesses, restaurants had the toughest time turning a profit, while salons and spas were the most successful.
When running a group buying campaign, participants and their employees need to be prepared not only for a large influx of customers, but also for customers who are motivated by price. That generally means cheapskates and bad tippers.
“Businesses need to consider that this class of consumers are [sic] bargain hunters. By nature they are frugal. An assumption that the Groupon consumer is going to fit certain predictions in behavior would be a mistake,” wrote one respondent.
Groupon was unavailable for comment, but company founder Andrew Mason has previously stated that businesses need to be prepared for a large influx of customers when running a campaign. Groupon also provides campaign preparation materials to merchants.
While the survey’s respondents were mixed about their Groupon experiences, the feelings about Groupon’s competitors were almost unanimously negative. While it was not part of the study, many respondents volunteered their opinions about other group buying services, using phrases such as “rip off”, “imitators”, and “ineffective.”
“I worked with another company shortly after my Groupon promotion and have to say that Groupon was 75% more effective in coupon sales, bringing in new customers and with their organization of coupons sold,” wrote another respondent.
To run a good Groupon campaign, Dholakia suggested using the promotions as a way to build customer relationships over time rather than just a one shot deal. For example, offer $20 worth of food for $10 over the customer’s next three visits, rather than $60 for $30 worth of food all at once. He also suggested targeting specific products or services with the offers, particularly ones that are unpopular or are being undersold.