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Groupon Nightmares (and How to Avoid Them)

The Groupon coupon service is hot right now--not only with customers who love getting deep discounts, but also with businesses looking to appeal to the site's vast database of potential clients.

Groupon and other social-coupon sites (such as BuyWithMe, LivingSocial, SocialBuy, and Tippr) offer deals with a catch: For a deal to become valid, a certain number of people must first purchase it. That way, Groupon makes a certain amount of money, businesses are guaranteed a certain number of customers, and customers get deep discounts. Supposedly it's a win-win-win situation.

Social coupon sites
But small-business owners should be careful not to get swept up in the frenzy of social coupons. As some small businesses have learned the hard way, running a deeply discounted deal can give you so much traffic, and so many customers, that it will cost you money--a lot.

Portland, Oregon-based coffee shop Posies Café is one of those businesses. Owner Jessie Burke penned a revealing blog post about her café's losing more than $8000 from its Groupon promotion. Posies Café faced rude customers and overwhelming traffic--all at a price that barely covered the base cost of the food being sold.

Posies Café is not alone. A recent study by Rice University surveyed 150 small to midsize businesses that had used Groupon, asking about their social-coupon experience and whether they would use the service again. While 66 percent of the 150 respondents said that their Groupon deal was profitable, a significant 32 percent found it unprofitable. And 40 percent of the respondents said they would not use Groupon again--notable, considering Groupon claims that at least 95 percent of its sellers request to be featured again.

Before you jump on the social-coupon bandwagon, make sure your business can handle it. Here are five Groupon nightmares that could happen to you--and how to avoid them.

Nightmare 1: One-Time Customers

A one-time customer who buys nothing extra is the worst situation for a small-business owner, because you're basically giving your products or services away for free.

Be prepared: Many Groupon customers are in it for the deal--with no intent to come back or to purchase more than the coupon is worth--so you should set up your store or business accordingly. Prep your salespeople to bring their A game and to sell extra products to customers aggressively; if you aren't selling more than what the coupon is worth, you are losing money. Service-oriented businesses might consider offering an incentive for customers to sign up for another appointment on the spot.

Collect e-mail addresses: Because of Groupon's privacy policy, Groupon cannot give businesses the e-mail addresses of the users who purchase Groupons. E-mail marketing is a valuable way of keeping in touch with your customers, however, so now is the time to implement an e-mail list. The easiest way to do this is to request an e-mail address at the time of the transaction (note, though, that it is illegal to require an e-mail address), or to put an e-mail sign-up list near the register.

Nightmare 2: Bad Branding

Offering deep discounts on your products and services can be a bad thing for your company.

Before you lure customers to your door with a coupon, do the math.
Before you lure customers to your door with a coupon, do the math.
Consider your size: What type of business do you have, and how many people can you reasonably serve? If you're a small salon with five chairs, for example, do you really need to open up your business to 500,000 potential customers? Consider Blo, a small salon and day spa in Chicago. Its Groupon promotion ($40 for $110 worth of services) sold 3915 Groupons in April. Unfortunately, that was way more traffic than the salon could reasonably handle, and its Yelp reputation consequently suffered.

Consider your product: Offering a deep discount on a high-end service or product can hurt your business. Bargain hunters are unlikely to come back and purchase your products at full price (especially if you offer a great deal), and you're devaluing your product in the eyes of your regular customers. A small, exclusive boutique won't benefit from 600 new customers who now think of the store as a discount brand.

Next page: How to prevent bullying by customers

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