Monday, November 28, 2011

Groupon education of its merchants

While using the Washington Post Social Reader in Facebook, I just read another Groupon problem story entitled "Groupon horror: Bakery must make 102,000 cupcakes." According to the story, Need a Cake Bakery in Woodley (UK) offered a 75% discount on its cupcakes, but didn't cap the maximum number of items available at this price. To meet the demand, Need a Cake Bakery had to hire temporary help at nearly US$20,000 - a move which wiped out the bakery's annual profits.

When stories are offered via the Washington Post Social Reader, you can use your Facebook account to comment on the story. As I read through the comments, one of the biggest topics of discussion was what Groupon should (or should not) have done to educate Need a Cake Bakery before offering its deal. So I got curious - what type of education does Groupon provide for its participating merchants?

I went to Groupon's merchant site at This is different from the main Groupon site - it even has a different micrologo. The merchant services site is definitely targeted toward merchants:

Merchants come first at Groupon.

The people who are searching for Groupon deals may feel differently - but I digress. The page describes Groupon's merchant education; here are some excerpts:

We collaborate with you to structure a deal that delivers on perfomance goals, expectations and service limitations....

We work with you to calculate the optimal number of Groupon customers relative to regular traffic; calculators are customized to address specific dynamics of key industries (eg, restaurant table turn rate, therapists on staff, etc.)...

We offer advice on ways to convert Groupon customers to your own -- from collecting email addresses on-site to ongoing communications to build strong relationships....

We'll monitor your campaign success and do everything we can to deliver satisfaction and recommend deal structure modifications, if necessary, for subsequent features. Over the long-term we intend to develop a partnership that constantly addresses your ever-changing merchant needs.

From the sound of things, Groupon offers merchants the opportunity to educate themselves on how to structure the deal - but once the deal is set, it's set. This is understandable, since anyone who sees a guaranteed deal for a 75% discount on cupcakes would be very displeased if the deal were suddenly withdrawn.

But even with education, does the model work? Amy Lee at the Huffington Post surveyed various sources back in June. According to Ronan Percival (as quoted by Dylan Collins, the beauty salon appointment segment requires a 10% conversion of Groupon buyers into regular clients - however, it appears that the actual conversion rate is only 1%. Back in 2010, the Wall Street Journal referenced a Rice University study, which showed varying performance between merchants:

The Rice study found that 66% of the 150 merchants responding found the program profitable, while 32% said they were unprofitable. Forty percent of the respondents said they would not run such a promotion again.

There was another interesting ramification from the Rice study:

“Satisfied employees” is the most important factor for the Groupon promotion to work successfully for a business, according to the study. If employees remain satisfied through the promotion, the likelihood of its profitability is significantly higher. The percentage of discount offered and the number of Groupons sold did not predict the deal’s profitability, nor did the percentage of Groupon users who purchased beyond the Groupon’s value or purchased again at full price.

“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,” said Utpal Dholakia, author of the study and associate professor of marketing at the Jones School. “So employees need to be prepared for this type of customer and the sheer volume of customers that might come through.”

Interesting observation, because if the employees are dissatisfied - especially in a small company - then the business owner is going to have a big problem. Take a look at this post:

The food lived up to its excellent reputation, but the only way to get our server’s attention was to flail my arms about like some over-eager 2nd grader dying to be called on by the teacher. If anything, service at a four-star restaurant should border on hovering. This felt more as if we were being quarantined for some highly contagious virus .... We couldn’t help but think that our early admission of using the Groupon had an overall negative impact on service.


The servers I’ve spoken with all complain that users frequently tip on the discounted amount, and not on the actual amount of the food. For expensive restaurants like the one we went to, that could mean the difference of $100 – $200.

Of course, this is not just limited to Groupon. Businesses need to evaluate every advertising method they use - their websites, their banner advertising, their telephone directory listings (remember telephone directories?) - to determine not only the business return on investment, but also the types of customers that will be attracted by the advertising medium.

And of course there is a responsibility for the customer also. The Southern California restaurant chain Don Jose offers a Fiesta Club that provides coupons once a month - sometimes more frequently. The usual coupon entitles the bearer to one free dinner entree with purchase of a second one at equal or higher value (offer good Sunday through Thursday only). My wife and I use these coupons frequently - but when we do, we calculate the tip based upon the pre-discount amount, not the post-discount amount.

Of course, I'm sure the the number of patrons from the Fiesta Club is much lower than the number of patrons who would suddenly show up if a Groupon promotion were run.
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