Successful Groupon Promotion Almost Wipes Out a Small Cafe

The Groupon deal-a-day model — “no money upfront, but we’ll take up to 50 percent of the coupon value” — has been met with high satisfaction. Groupon’s internal data show that 97 percent of participating SMBs want to do it again.

But the model has been taking real heat this week from some SMBs on the blogosphere. The complaints largely center on their poor judgment. Specifically, they hadn’t established a ceiling on the number of Groupons that can be sold. This can pose a real problem for SMBs, which are typically willing to take a loss on every coupon to build their business but can be drained if too many money-losing Groupons are sold.

Other allegations are circulating about unscrupulous businesses that manage to get onto Groupon. Specifically, a photographer in Atlanta offered a deal that was too good to be true, and uneconomical. While it isn’t clear what advantage this business got — other than some upfront cash for a portion of the deal — it does suggest that Groupon’s promise to carefully vet every business that it works with may have gotten stretched too thin by its rapid growth.

The recent hubbub started with a post by Posies Cafe in Portland, Oregon, which agreed to offer $13 of food for $6. It did so after a Groupon rep advised the owner that Groupons do better when they are discounted more than 50 percent. But Posies was unprepared for the avalanche of Groupons sold to Portland consumers, who bought 1,000 Groupons and overran the little upscale cafe for several months. Ultimately, Posies’ owner said she suffered such extreme losses that she had trouble paying her rent and her staff.

“It has been the single worst decision I have ever made as a business owner thus far,” she wrote on the Posies blog this month, saying she was down $8,000 in total — apparently after subtracting food and service costs, and the costs of Groupon redemption.

The math here is kind of interesting. While Posies would normally lose $7 of the face value of a $13 Groupon, and Groupon would then also eat $3 of the $6 Groupon — the loss was even higher. Apparently, Groupon keeps all the revenues for Groupons priced under $10.

Objectively, it still isn’t clear why a promotion costing $10,000 would have such a catastrophic effect on the cafe. In many cases, consumers typically spend well in excess of the coupon value. Moreover, the cafe would theoretically be able to cut back on advertising during this period.

Still, the troubles at Posies Cafe struck a nerve. At the very least, it suggests that certain finite service providers are not ideal users of Groupons.

Still, we believe that deal a day is a touchstone for local online commerce that is going to have a major effect on SMB marketing as it continues to evolve. We especially like what Groupon investor and former AOL EVP Ted Leonsis said on his blog in a post titled “Victims.”

“In the last ten years, two new methods have emerged to help small businesses become successful: Targeted search marketing from people like Google where you bid and pay for targeted search words and clicks and now social shopping sites a la Groupon. Both methodologies are accountable; are focused on geo-served audiences; can be used creatively; and can drive traffic into stores or make the phones ring. And best of all small businesses only pay when the programs work.

“And more and more these programs really do work. Your neighbors want to support you. They want to sample your wares. They want to come in and buy from you. Group couponing is a powerful tool and a positive breakthrough for small businesses.”

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