Groupon's smashing success leaves small businesses with some bruises

The online group-buying model pioneered by Groupon has become big business, so much so that it's creating growing pains for both the Chicago company and the small businesses it's supposed to help.

Greg Gibbs, owner of Chicago Bagel Authority, felt this pain firsthand when he signed on with Groupon for a deal-of-the-day in January.

His promotion, which cost $3 for an $8 voucher good for any menu item, sold nearly 10,000 Groupons, 10 times more than the top end of Gibbs' expectations.

"This will end up being the year of the Groupon for us, and that's not a good thing," Gibbs said. "We'll count it as a loss. "

After splitting 50 percent of the revenue with Groupon, a standard deal for most businesses, the shop netted about $15,000 for $80,000 worth of food.

Gibbs said the promotion hasn't yet translated into additional revenue.

"We just don't get the kind of customer that we want to come back," said Gibbs, who saw patrons put items back if their total exceeded $8. "It's a lot of people that come once for the discount, nobody tips, and they're all trying to squeeze it into the exact dollar amount."

"Let the seller beware," a twist on the old maxim, has become the mantra for a growing list of local merchants overwhelmed by the response to Groupon's popular model. The site offers new deals every day at a deep discount if a minimum threshold of buyers participate.

Groupon has more than 500,000 subscribers in the Chicago area, and an onslaught of rivals has emerged with nearly identical business models. It said it's counted more than 500 copycats worldwide.

"The challenge [for local businesses] is that the way Groupon is constructed today, it's going to go throughout the Chicago area," said Mark Goodman, workshop chairman at Score Chicago, a nonprofit association that counsels small businesses.

"It runs the risk of giving you distribution beyond what's logical for your business. That's why sitting back and saying, 'What is my business and marketing plan?' is really important."

Groupon spokeswoman Julie Mossler said the company has strategies to manage its increasing scale without alienating small businesses or consumers.

"We certainly believe in learning from past experiences," Mossler said, noting the company has added staff to its merchant-service team.

"We've had [sales] representatives go through even more detailed training in terms of different recommendations they can make."

Personalized deals

Groupon started testing personalized deals in Chicago and five other cities last month, asking subscribers for their gender and ZIP code.

Mossler said the program eventually will offer deals to consumers based on their Groupon-buying history.

This feature transforms Groupon from a daily deal site to a service that offers multiple promotions per day.

Mossler said the segmentation will allow a business that can accommodate only several hundred new customers to participate comfortably.

The Groupon wave can unsettle even a merchant with large capacity. Blo, a 3-year-old beauty salon in Chicago, netted 4,000 new clients in one day in an April promotion, said owner Elizabeth Floersheimer.

The phones were tied up for 10 days after the deal, which cost $40 for $110 in services, and the salon is booked through September.

Unable to get through, Groupon holders groused about the experience on the online review site Yelp, damaging the salon's reputation among the same tech-savvy constituency it sought to reach.

Hoping to soothe core customers, the salon posted a message on its website instructing regulars to send inquiries via e-mail.

Groupon has increased its outreach to merchants, hoping to get more feedback from local businesses and better prepare them for promotions.

A checklist sent to business owners advises them to add an additional phone line for every 100,000 Groupon subscribers in their city.

They also are reminded to increase staff, stock additional merchandise and make sure their website servers can handle a fivefold increase in average daily traffic.

Pattern of redemption

In an effort to help merchants plan ahead, the site notes that 20 percent of vouchers sold typically get redeemed in the first month, and 15 percent will be used in the promotion's expiring month.

The dilemma of getting more subscribers while remaining an effective marketing tool for merchants is one that Groupon's competitors will face as they grow.

Tim O'Shaughnessy, CEO and co-founder of LivingSocial, a major Groupon rival, said his company will be introducing new features that address the problem.

Possibilities include offering an exclusive deal to a small subset of loyal users or targeting deals to a specific neighborhood within a city.

These kinds of strategies will ensure that even the smallest of small businesses still can run a group-buying promotion.

"If we truly are viewing ourselves as a city explorer and a service to help you find cool and new things to do in your city, some of those things will be 10-table restaurants," O'Shaughnessy said.