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Deals Du Jour 

Lauren LaBorde on Groupon, Living Social and the other daily-deal sites: Good or bad for business?

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On a Monday night at the Warehouse District eatery Feast, groups shared plates of blood sausage, warm pork fat on toast and the restaurant's other rustic European fare. It was a typical Monday night for a New Orleans restaurant — quiet, with only two or three tables filled at one time — except for one aspect: when diners paid for their meal, many handed the waiter a large sheet of white printer paper.

Diners were redeeming the coupons they had purchased on the daily deal site LivingSocial before those vouchers expired the following Saturday. The deal, which ran in February, was a good one: Buy the coupon for $20 and get $40 worth of food at a buzzed-about restaurant where a plate of stewy pork cheeks or offal can go for more than $20.

Millions of people subscribe to daily deal sites like LivingSocial, its precursor Groupon and myriad copycats. The sites send subscribers email blasts with often-snarky write-ups offering deals for anything from food at restaurants to Botox sessions, for at least 50 percent off regular prices. Capitalizing on the post-recession, discount-seeking consumer landscape, these sites have become immensely popular. Groupon, the site that spearheaded the daily deal trend, recently filed for a $750 million initial public stock offering, and the site may be worth even more once it goes public.

While users of these sites benefit from discounts at places that usually don't run deals or give away coupons (Dick & Jenny's, the tony Tchoupitoulas Street restaurant, did a LivingSocial deal in November 2010), the Internet is filled with horror stories from small businesses whose experience with Groupon and its ilk was not what they expected. Many complain the deals attracted the wrong kind of customers, the rabid deal-seekers of the Extreme Couponing variety who may be rude and don't tip properly. Others say they lost money in the process; although it costs nothing to appear on the daily deal sites, the sites do take a cut of the voucher sales. If customers don't spend much — or anything — beyond the deal amount, the cash from the business' cut might not make much of a dent in what it costs the business to provide the products or services. Jessie Burke, owner of Posies Bakery & Cafe in Portland, one has become a poster child for bad experiences with Groupon. An open letter published on her cafe's website went viral; in it she speaks of bad tippers and a customer who asked for the Groupon discount but hadn't actually purchased a voucher. Worse than the undesirable clientele, Burke says, her cafe lost nearly $8,000 because of the Groupon campaign, forcing the owners to pull from their personal savings to keep the place afloat.

What draws businesses in despite the risks is the potential for new customers. In using a daily deal site, especially the big ones like Groupon or LivingSocial, these small businesses get exposure via the millions of inboxes that receive the email blasts. But is that potential influx of customers worth the risk? Some businesses in New Orleans say it depends.

Rachael Jaffe, co-owner of the Uptown Creole restaurant Cafe Atchafalaya, wanted a new stove for the restaurant's kitchen. Instead of taking out a loan, she decided to do a LivingSocial deal, anticipating a small cash boost from the restaurant's cut of the deal sales. In her case, the motivation for using the site was mostly financial, but many business owners say they participated in the sites as an alternative to traditional advertising.

"Advertising is very expensive, especially for a small business," says Duke Morgan, owner of the eponymous Duke Morgan the Spa. "I would do quarter-page ads, and they might run me $800 to $900 for the week, and I couldn't bear that anymore."

As of press time, Morgan's spa has been featured on LivingSocial four times with deals on services ranging from manicures to couples massages. So many deals sold the first time he was on the site, Morgan says, LivingSocial promoted the spa to an elite status on its site, allowing him more control over which days his deals run.

"I'm actually thinking about what (deal) I'm going to be doing next," he says.

Chris Reams, a co-owner of the Oak Street clothing and accessories store Skip N' Whistle, used Groupon as a way to promote the store's Saints-related items during peak holiday shopping time.

"We knew we'd reach out to a whole lot of people who were on Groupon's mailing list who may not otherwise have heard about our store, or had heard about it and hadn't come in yet," he says. "It's an incentive to get them in the store and see what else you have. That worked really well — a lot of people came into the store."

Still, as Internet stories attest, sometimes using a daily deal site can result in headaches. Juliet Pritchett, manager at Fat Hen Grill in Harahan, used both Groupon and LivingSocial to fill tables during the restaurant's slow times, and says she encountered some difficult customers.

"I had a customer calling on the day the LivingSocial coupon was expiring and asked if we would extend it and if we didn't, they would write negative reviews about us online," she says. "So you know what I did? I sent her a gift certificate. Whatever you can do to keep (customers) from getting angry. Now that I think about it, why did I even do that?"

Pritchett says the restaurant ended up losing money from the deals — but she expected that would happen.

"You still have to pay for the cost of food that's sold, so you're not making money off of it at all," she says. "You want customers to come and redeem (the vouchers), but it's not about making money up front. Optimally, they come and spend a little more, enjoy the restaurant, have a great experience and come back."

It seems the key to not getting burned by these daily deal sites is being prepared for worst-case scenarios. Businesses should have enough product in stock to satisfy a sudden influx of customers, and remember that while LivingSocial gives its clients their share of voucher sales up front, Groupon doles out the cut over a series of three payments.

"The worst that can happen is that everyone comes in at once with Groupons," Reams says. "Are you prepared? Do you have enough inventory to give that away in one day and not get paid by Groupon in 30 days? And that's only the first third of what's due to you. You better be prepared to give it all away and finance yourself for three months. ... Just plan accordingly."

Morgan, who says many of the LivingSocial customers have become regulars, agrees that's all part of the risk of using these sites.

"That's the gamble," he says. "You think, 'Yeah, I'm going to give something away or reduce it, but with the hope that I will gain more in the long run.'"

Christian Galvin, website project manager for the Louisiana Small Business Development Center, which provides free and low-cost consulting services to entrepreneurs, says the daily deal sites can present a great opportunity for small businesses. They just have to be smart about it.

"(Deal sites) allow a small business to market their product without any money out of their pocket initially," he says. "That's thrilling for a small business who [doesn't] have $4,000 to spend on an advertisement or radio campaign and then they're not sure what type of hits they're going to get. ... Here, they can really track and see results."

Galvin says businesses using these sites should think about ways to engage and capture consumers and might consider having other deals ready for customers who come in using coupons. For someone redeeming the Botox deal, for example, a business might offer them another cosmetic service at a discount during their visit.

"(Using daily deal sites) has to be looked at as a way to kick off a new campaign to get new customers, build the sales and generate long-term revenue, not just this one-time thing," Galvin says. "So that's where the business needs to think beyond, and it has to be a marketing tool and not just a one-off."

Cafe Atchafalaya's Jaffe says creating buzz for a business is more important than profit when it comes to daily deals.

"Of course you get the people who don't normally eat with us and just spend the coupon's value," she says. "But that doesn't mean they're not going to go home and say 'I loved my lunch' and tell their friend, and maybe their friend will come in."

With inboxes increasingly cluttered with offers from Groupon, LivingSocial and others, and with Google and Facebook readying their own daily deal services, the market for these sites has reached the point of saturation. But Chris Reade believes his New Orleans daily deals site Fetch Puppy — which works very much like Groupon, LivingSocial, etc. — stands out in a competitive market, partly because of an interesting twist: 10 percent of all deal sales benefit a local charity. Past beneficiaries include Second Harvest Food Bank, Friends of City Park and the Green Project.

Reade, an entrepreneur who is a partner at Carrollton Technology Partners and whose voice you may know from WWNO's daily GNO Info Minute, also says Fetch Puppy differs in the level of control businesses and deal-seekers have on the site. Users can vote for deals and charities they'd like to see on FetchPuppy, and businesses have a lot of flexibility in how many deals are sold on the site. For example, a deal featuring tickets for the Shakespeare Festival at Tulane University was only a 33 percent off discount, and the site would only sell a maximum of 50 vouchers.

"I believe very strongly that the future of this whole market lies in the self-service model, where businesses themselves have complete control over it," Reade says. "I think one monolithic organization ... dictating to businesses what terms they're going to offer in marketing and so forth is really not a long-term play. I really don't think that's sustainable in the business side, and I don't think it's sustainable on the consumer side, too, because ... you get a few of these (deals) every day. After a while you're kind of numb to it."

Although entrepreneurs like Reade see the daily deal site as an opportunity, the popularity of these sites — and couponing culture, in general — might be a bad deal for businesses. Galvin cautions businesses about the danger of feeding deal-seekers.

"I know a lot of businesses get really addicted to (running deals), but you don't want to erode your customer base and have people always be looking for that Groupon ... and then they don't value what you have in the business," he says. "Discounting devalues your brand."

Others see these sites as predatory, especially with the small businesses that populate the deal sites. In an article called "Why Groupon is Poised for Collapse," TechCrunch's Rocky Agrawal says what these sites are doing is akin to loan sharking. "They (the businesses) get the cash up front but pay for it with deep discounts over time," he says.

Many business owners say the big daily deal sites — and not the businesses — are the ones that win in the end.

"They're still making a killing off me," Jaffe says. "What do they do? They post something to a website; there's no effort on their end. If (Groupon) were an open company, I would suggest investing in their stock."

With Groupon on the precipice of becoming public, she soon may have that opportunity.

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