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Study: One Third of Businesses Don't Profit from Groupon Deal

A third of small businesses don't make money from promotions on group-buying site Groupon.
Andrew Mason, chief executive officer of Groupon Inc., arrives for morning sessions at the 28th annual Allen & Co. Media and Technology Conference in Sun Valley, Idaho.

A third of businesses don't make money from promotions on socially charged buying site Groupon, says a new study.

Consumers who use the deal-of-the-day web site don't make return visits to the businesses offering discounts, don't spend much and don't tip well, says the study from Rice University's Jesse H. Jones Graduate School of Business.

"I think these findings show that social promotion companies need to better balance consumer appeal with positive outcomes for the small businesses offering them," study author Utpal Dholakia, an associate professor of marketing at the business school, said in a statement. "Right now, these deals are tilted too far in consumers' favor."

Dholakia surveyed 150 businesses in 19 U.S. cities and 13 product categories that ran and completed Groupon promotions between June 2009 and August 2010. The barely three-year-old startup -- which has spawned loads of copycats -- is valued at more than $1 billion, and features about 330 deals in more than 230 markets worldwide.

Though some 40 percent of businesses said they wouldn't do a social promotion again, two thirds of the businesses did earn profits with Groupon. (Groupon founder Andrew Mason blogged in September that 97 percent of businesses want to be featured on the site again.)

"I think [Groupon is] brilliant," said one survey respondent. "Quick influx of cash. Great visibility for our business created amazing traffic to the site the day we were featured."

Other Rice survey findings: Happy employees are the single most important contributing factor to a profitable Groupon appearance.

"Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal," Dholakia said. "So employees need to be prepared for this type of customer and the sheer volume of customers that might come through."

In the service category, spas and salons fared the best, and restaurants fared the worst.

For the record, the percentage of discount offered and the number of Groupons sold were no prediction of a deal's ultimate profitability, Dholakia said.

Dholakia suggested businesses wanting to give Groupon a – or another – try use the website to build relationships instead of one-time transactions. Instead of offering $60 worth of food for $30, break it up to offer $20 worth of food for $10 over the customer's next three visits.

Another tip: Choose your deal carefully – use it to sell unpopular items or underused services.

Have you used Groupon or one of its competitors? What tips would you offer?

IMAGE: Getty
Last updated: Oct 1, 2010


Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.

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