Posies Café owner Jessie Burke wrote a blog post about losing $8,000 on a Groupon campaign, after the Portland, OR-based eatery offered $13 worth of food for $6 on March 9, 2010.

“It has been the single worst decision I have ever made as a business owner thus far,” she wrote in her blog.

Here are some of the takeaways from her blog post:

• Over the six months that the Groupon coupon was valid, Jessie met many, many wonderful new customers;
• Jessie also met many terrible Groupon customers that didn’t follow the Groupon rules: they used multiple Groupons for a single transaction, and argued with her about it with disgusted looks on their faces;
• Some Groupon coupon customers tipped based on what they owed – 10% of $0 is zero dollars, so tossing in a dime was them being generous;
• The interactions with the few bad Groupon customers jaded her staff; and
• Jessie believes that service industry businesses, such as hairdressers and beauty clinics, do quite well with Groupon coupons because it is just the cost of time – they are not paying for a product for resale.

I think Jessie’s blog post offers some valuable lessons for all small businesses who are considering a Groupon-like promotion.

These lessons include:

• Groupon-like promotions can deliver a rush of new customers;
• Some coupon-buying consumers will try to take advantage of the rules and use multiple coupons for a single transaction;
• Coupon-buying consumers may not tip as well as regular customers;
• You must inform your employees of what to expect from coupon-customers: If your employees have a better expectation of what to expect from coupon-customers (such as less tips), then your promotion is more likely to be a success; and
• Seriously consider whether a Groupon-like campaign is right for your business? Would the flood of bargain-hunting coupon-consumers use up resources which would otherwise be used to service your regular customers?

Has Jessie’s story made you reconsider whether you should run a Groupon-like promotion?

Full story at the Posies Cafe blog »

According to a study by Rice University’s Jesse H. Jones Graduate School of Business, Groupon promotions were unprofitable for 32 percent surveyed for the study, but they were profitable for 66 percent of the businesses.

More than 40 percent of the respondents indicated they would not run such a promotion again.

Utpal Dholakia, author of the study and associate professor of marketing at the Jones School, conducted surveys with 150 businesses spanning 19 U.S. cities and 13 product categories that ran and completed Groupon promotions between June 2009 and August 2010.

Other findings include:

• The study provides evidence that “satisfied employees” is the most important factor for the Groupon promotion to work successfully for a business. If employees remain satisfied through the promotion, the likelihood of its profitability is significantly higher.
• The percentage of discount offered and the number of Groupons sold did not predict the deal’s profitability, nor did the percentage of Groupon users who purchased beyond the Groupon’s value or purchased again at full price.
• 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, so employees need to be prepared for this type of customer and the sheer volume of customers that might come through.
• Groupon promotions offer the most benefit for businesses in which the promotion does not cannibalize sales to existing customers.
• Among the service businesses (restaurants, educational services, tourism and salon and spa), restaurants fared the worst and salons and spas were the most successful.
• Businesses with unprofitable promotions reported low rates of spending by Groupon users beyond the Groupon’s face value and low rates of return to the business again at full price.

Dholakia outlined some strategies for success:

• Use promotions for building relationships instead of creating one-time transactions. Instead of offering $60 worth of food for $30, parcel it out to offer $20 worth of food for $10 over the customer’s next three visits.
• Don’t offer discounts on a total bill; rather, offer a specified discount for various products or services.
• Choose items judiciously to sell unpopular items or use unutilized services through the promotion.

Is your business right for a Groupon-like daily deals marketing campaign?

Download the complete study at the Social Science Research Network »