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Study: Groupon Unprofitable for a Third of Businesses

  |  October 1, 2010   |  Comments

Rice University researcher surveyed 150 businesses that have used the promotions platform in 19 cities.

Social promotions such as those provided by daily discount site Groupon are more profitable for the consumers that buy them than for the businesses that offer them. That’s according to a new study from Rice University.

The study also found that the most important contributor to a successful campaign from the standpoint of a small business is whether its employees are happy during the promotion. This led the survey’s author to conclude that social promotions companies need to better balance consumer appeal with positive outcomes for the businesses offering them.

Utpal Dholakia, author of the study and associate professor of marketing at the Jones School at Rice, surveyed 150 businesses in 19 cities that completed Groupon promotions between June 2009 and August 2010.

According to Dholakia’s data, Groupon promotions were unprofitable for 32 percent of the businesses surveyed and over 40 percent of those businesses indicated they would not run a comparable promotion again. (The study found that businesses with unprofitable promotions reported low rates of spending by users beyond the Groupon's face value as well as low rates of return at full price.)

However, 66 percent of businesses told Dholakia their promotions were profitable.

The seemingly conflicting result is not overly surprising in light of mixed reactions to other Groupon campaigns, as reported in a recent ClickZ story on National Jean Company and Posie’s Café in Portland, Oregon. (While National Jean was happy with its promotion, the owner of Posie’s called the campaign "the single worst decision I have ever made as a business owner thus far.")

A Groupon rep did not respond to a request for comment by deadline. However, CEO Andrew Mason has previously defended Groupon in his blog, claiming 97 percent of Groupon's business partners have asked to be featured in the company's e-mails again.

According to Rice’s survey, happy workers may make all the difference between a good campaign and a bad one. That’s because happy employees make the likelihood of promotion profitability significantly higher, the survey says.

"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 in a prepared statement. "So employees need to be prepared for this type of customer and the sheer volume of customers that might come through."

The survey also says the percentage of discount offered and the number of Groupons sold did not predict the deal's ultimate profitability. The percentage of Groupon users who purchased beyond the Groupon’s value or purchased again at full price did not have any predictive powers either.

The study also found that Groupon promotions offer the most benefit for businesses when the promotion does not cannibalize sales to existing customers. And salons and spas were most successful among the service businesses. (Restaurants were least successful.)

In order to conduct a successful social promotion campaign, Dholakia said businesses must use promotions for building relationships instead of creating one-time transactions and shouldn’t offer discounts on a total bill; a specified discount for various products or services is preferable. Also, Dholakia recommends businesses choose items judiciously so that they can use the promotion to sell unpopular items or use underutilized services.

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ABOUT THE AUTHOR

Lisa Lacy

In addition to ClickZ and Search Engine Watch, Lisa's work has appeared in The Huffington Post, The Luxury Spot, LearnVest, MarthaStewart.com, GoodHousekeeping.com, amNewYork, and The Wall Street Journal. She's a graduate of Columbia's School of Journalism.

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