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.
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.
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.
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.
The easiest way to do this is to request an email address at the time of the transaction (note, though, that it is illegal to require an email address), or to put an email 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.
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.