Why Groupon Sucks for Small Businesses

Groupon, the three year old coupon company, has been all the hype across business and tech sites lately. The company is the largest of its competitors and claims it distributes online coupons from merchants in 500 markets and 44 countries. Facebook and Google, in an attempt to get a piece of the action, have recently rolled out similar services.

As Groupon gears up for its much-anticipated IPO, there’s a lot of noise about social coupon services, and less concrete advice about how to use them. It’s a good time to outline some of the potentially harmful effects that Groupon and other daily-deal services can have on your business.

1. You’ll lose money. Horror stories–like this one from a café owner in Portland who lost $8000 using Groupon–are all over the Web. For some companies, especially those with a high fixed cost but low marginal costs–such as a yoga studio, for example–the numbers can pan out. But even if it does make financial sense, there are other reasons to be wary of the Groupon craze.

2. The split is actually more than half. The Groupon split with businesses is currently advertised at around 50 percent. Although some businesses have reported getting much better splits with Groupon, businesses should still be wary of the fine print: Groupon does not share your credit-card burdens.

3. It dilutes your brand. You set the price for your products or services for a reason. Whether you’re a café or gelato spot, your company offers real value. It also has a reputation, which for many small and medium sized businesses (SMBs) has taken years to built. By offering your products or services at such steep discounts, you are implicitly saying that your company is willing to be flexible–very flexible–with the value you place on your products or services.

4. Poor user experience. Your staff knows Groupon users are bringing the company less money compared to a full-paying customer, and might treat the Groupon-wielding-patron with ambivalence or disregard. In my research I’ve come across dozens of articles from customers who used Groupon (or other mass-coupon services) only to be disrespected and come away with negative impressions of the businesses visited. These peoples’ vents on their blogs or review sites like Yelp.com (not to mention real world exchanges) are incredible harmful to your business.

5. You’ll upset the wrong customers. Loyal customers are hard to come by, but once found can be the lifeboat for any SMB. Make sure they remain happy. A sure way to perturb them is to offer the same meal, yoga class or latte they’ve been buying for years to a newbie for half the price. How would you feel?

6. You lose brand control. Groupon’s e-mail deals come with quirky text describing the deal and your business. Although these descriptions–often accompanied by a tangential story–are clever and entertaining, the business has absolutely no control over what ends up being written. Now, of course Groupon has an incentive to make your business sound appealing for their deal-seekers, but their style could clash with the brand you’re trying to build.

7. These aren’t your customers anyway. Groupon users come to your business primarily because they can purchase what you’re offering at an incredible discount. Are those the customers you want? Are those the customers that will be support your business through thick and thin, that will spread the good word to all their friends? True, some deal-seekers get hooked and may return, but if they didn’t need the product or service before the deal, may not live in the neighborhood, and are used to getting new deals every day from Groupon, what are the chances they’ll end up returning-and paying full price?

What can an SMB do to control these issues? First, understand your numbers. Some businesses simply can’t afford Groupon-like services. Don’t get caught up in the hype. There are other ways to get the word out about your business. And if you do jump on the bandwagon, understand the kinds of costumers such services attract. Tell your staff to treat them well, and treat the regulars even better.