Some business owners say they lose money on Groupon and other coupon deals

Jefferson Dodge

Some Boulder County employers are airing concerns about Groupon and similar group discount programs, citing costs that they say can be debilitating to small businesses.

Groupon and similar outfits, like LivingSocial and Best of My Town, are pitched as a way for businesses to get their names out there and create repeat customers by getting people in the door with significant discounts — 50 percent or more — on products and services.

“It’s been the single worst business decision I’ve ever made,” Rachel Bacchus, owner of Boulder-based ELDO Esthetics and Waxing, says of her experience with Groupon.

Bacchus says she wanted to offer $20 worth of waxing services for $10, but a Groupon sales representative talked her into offering $40 of services for $20. After the offer ran in June, Bacchus says, every time a customer walked in with a Groupon, she lost money, because Groupon’s 50 percent take meant she saw only $10, which didn’t cover her costs. She says her customer service suffered because she was inundated with clients.

“We were in survival mode,” she says. Ted Palmer, owner of the Roundhouse Distillery in Boulder, is more optimistic about the Groupon special he ran last week. He’s offering a distillery tour and tasting that includes two cocktails, valued at $10, for only $5. He told Boulder Weekly that after two and a half years of being in business, the distillery wanted to raise awareness about its presence in town, which the Groupon offer is intended to do.

“Groupon is just a way to get people in the door,” he says. “If you’re using Groupon to actually sell your product, and you’re discounting heavily, you’re probably not going to see much return on the investment.”

Palmer acknowledges that he will take a loss with the cost of the drinks and tour (Palmer is getting half of the $5 and splitting the cost of Groupon’s credit-card fees.) But he also says one in three visitors buys a bottle of the gin, agave or coffee liqueur that the distillery makes. If that trend holds up, he says, it will be a profitable arrangement.

Coupon shoppers

But some say the type of client attracted by Groupon is the person who is not likely to spend more than the amount of the coupon — and who is not likely to return to the business unless there is another deal.

“They’re not spending the money like they should,” says Frank Kaven, owner of Martini’s Bistro in Longmont, which has used Groupon and a couple of similar programs offered by local daily newspapers. “I’ve had people leave that didn’t even spend the entire coupon. … I can tell you my employees don’t like it, because they’re not getting tipped on the entire bill the majority of the time. And I’m getting the sense that most are coupon shoppers and are not coming back.” (Groupon vouchers advise customers to tip on the full amount of the bill.)

The amount that Groupon collects is subject to negotiation. In Kaven’s case, the deal was $15 for $30 of food/drink. He secured a deal in which he keeps more than 50 percent of the coupon price, $8.50, and he flat-out declined to cover Groupon’s credit-card fees.

“I said, ‘Heck no,’” Kaven recalls. “Are you going to come over here and all of a sudden pay my credit-card fees when these people come in?” He says he also balked when Groupon wanted to take 60 days to pay him his share, even though the deal was only running for 24 hours. (Groupon officials say they pay out over a period of time because sometimes they have to give refunds, and they also want to avoid cash-strapped businesses looking for a quick fix.)

“The way they structure the program is not the best, because you have to play by their rules,” Kaven says, adding that he wishes he could have excluded Fridays and Saturdays from coupon use, to funnel customers into days when business is slower. “Unless you stand your ground with Groupon, you can be taken advantage of.”

He says that after expenses, he expects to have discounted his product by 40 to 45 percent in the Groupon deal.

“Aug. 26 is my last day for Groupon, thank gosh,” Kaven says. “It’s great that all of a sudden you may have some money up front. The problem is, it’s an ongoing expense until it’s done. A new business, for sure, would not want to get involved in this type of program, because it’s just too expensive.”

“We don’t do Groupon, because it’s ruining our industry,” says a representative of the Laughing Grizzly Fly Shop in Longmont who declined to give his name. “It’s complete trouble. You gonna make your guide go out and guide clients for $15? Guides can’t make a living on 15 or 20 bucks.”

He says a guide could take on dozens more people for each fly-fishing trip, “but then people don’t get a good, quality guided trip, so we do not participate.”

He adds that the Laughing Grizzly did try a Best of Longmont deal, with the condition that customers could not use coupons for trips or licenses.

“It’s been OK,” he say of that program.

“It’s just a way to get your name out.”

But there are some satisfied customers. Deena Garcia, who co-owns the Boulder County cleaning company Simply Clean with her husband Anthony, says they were quite happy with their LivingSocial deal, primarily because 83 percent of the coupon customers are re-booking with the company for cleaning services.

“It’s hard, though, when you figure they get half of your money,” she says. “But the whole point of it is you don’t have to do a whole lot of advertising, because you’re in the door at a lot of places where you probably wouldn’t have been with other advertising, so there are ups and downs.”

Garcia adds that LivingSocial is not charging her for any credit-card fees. When asked about Groupon, she replies, “Their fees are just stupid.”

Groupon responds

Groupon Director of Communications Julie Mossler told Boulder Weekly that it’s logical for businesses to cover Groupon’s credit-card fee because Groupon is generating customers for them, and Groupon must cover its costs, especially since businesses are not paying anything up front for the service.

In response to the concerns voiced by Bacchus and others who say they are losing money with each transaction, Mossler says, “There is a way to beat that, and it’s that you have to do your homework on the front end. It is really important to set up the right deal structure, and we do everything we can to encourage that, but there are a lot of blanks for you to fill in.

“And a lot of business owners don’t know that information, so they just say, ‘Give me a deal you think would work.’ And that doesn’t really work, because ultimately you know your business better than we do.”

In the Bacchus case, Mossler says she spoke to the Groupon representative who worked with her and maintains that the guidance given was sound, based on the information provided by the business. Mossler adds, however, that the information provided by a business, like how much the average customer spends, can sometimes be inaccurate, because the data is not tracked or the business owner is being optimistic, for example.

“If a certain deal structure was pushed towards, it’s because the rep was operating with the information the business gave her,” she says. “It should be noted that we’ve reached out to the business owner several times to help correct the situation. Certainly, if she’s in that bad of a financial situation — I mean, we’ve offered to change the split that we take or even extend the expiration date or anything that will help, and we haven’t heard back from her.”

She says businesses need to optimize the opportunity of the new customers by boosting the retail section, for example, training staff in a hair salon to recommend products or encouraging customers to set up their next appointment before they leave.

When asked whether Groupon sales representatives have an incentive to make more money by upselling clients from, say, $20 worth of goods to $40 worth of goods, Mossler responds, “I think that’s a very simplistic way of looking at it. We are driven to give the most compelling deal to a customer. We know that a $10 for $20 may not be as appealing as a $20 for $40. That being said, we don’t want to do something that is going to cannibalize the business or give everything away for free. We’re cognizant that if you’re not making money and you feel like this is creating an unfavorable financial situation for you, that’s not good for the merchant or for Groupon. We’ve learned that lesson.”

Mossler says the company is selective about which businesses it works with, and delivers an educated, high-income demographic, the vast majority of whom spend more than the coupon value when it comes to restaurants, for instance.

She says businesses that are unhappy with Groupon “shouldn’t go to the media with their complaints, they should come to us first. If we did something wrong and it’s the wrong deal structure, we will gladly cut you a check and fix it. If someone were to say, ‘I’m going out of business because of my Groupon deal,’ we would talk to them about reconciling some of that damage.”

Margaret Campbell, an associate professor of marketing at the University of Colorado’s Leeds School of Business, advises businesses to avoid giving a deal on their core product, because that targets only existing customers. She also cautions against discounting something with a low margin or making the deal too sweet, because businesses may end up with what she calls “brand-switchers and lookie-loos” who won’t be back.

The goal, she says, is to attract people who haven’t tried your product or service and get them to come back or find something else they like while they are there.

She says such deals are best for companies that offer items that have a short lag time — in other words, you may forget a brand if you only use the product or service every six months. Campbell also recommends fashioning a deal that requires multiple visits, like three rounds of golf. Finally, she suggests capping the number of participants to a manageable number.

“I think people need to give a lot of thought, up front, to what they’re trying to achieve,” she says.