March 1, 2011, 12:00 AM

Local Hero

Groupon sparked a revolution in online marketing that could save local stores. The Internet's heaviest hitters are getting in on the action.

Katie Evans

Managing Editor, International Research

Lead Photo

Cynthia Bruce tells a story that's increasingly familiar to local retailers and service providers. She ran her first Groupon campaign in October, offering 450 vouchers good for 50-65% off rooms at her 7-room hostelry in Virginia, the Highland Meadows Vineyard Inn.

She expected to sell 200 vouchers, and would have been content with 100. Online consumers snapped up all 450 in six hours.

"I thought it would work," she says. "But, still, for a seven-room inn, that's amazing."

Amazing is a word that often comes to merchants' minds when they speak about Groupon. The Chicago-based company that only launched in November 2008 has created a phenomenon with its vouchers offering deep discounts on mostly local products and services. Fifty million consumers have signed up to receive its offers via e-mail, and Groupon sold $787 million worth of vouchers last year, according to investment bank Janney Capital Markets.

For millions of local stores, spas, restaurants and other businesses with little experience in online marketing, suddenly there's a way to use the power of the web to bring in customers—lots of them.

"We are making the marketing power of the web available to mom-and-pop merchants," says Groupon president and chief operating officer Rob Solomon, 44. "We help small businesses get what they want most, and that is getting customers in the door."

More help is coming for local merchants. With Groupon showing the way, the Internet's heaviest hitters—Google Inc., Amazon.com Inc., Facebook Inc. and eBay Inc. among them—have poured money in the past year into initiatives aimed at helping consumers find the local products and services they want.

Meanwhile, scores of Groupon-like daily deal web sites have emerged, such as LivingSocial and BuyWithMe, while online retailers like Gilt Groupe are offering local deals through its Gilt City service that highlights local steals by city. Even neighborhood associations are introducing Groupon-like offers to drive business. All that's pushing Groupon itself to introduce new services and sweeten its offer for merchants.

This whirlwind of activity is producing a continuous stream of innovation. Many of the latest are aimed at using the smartphone that connects shoppers to the web to show them where they can find products in stock and at the best price—including at retailers' e-commerce sites.

An eye-popping offer
Behind this sudden focus on online marketing for local businesses is the reality that consumers who used to turn to the Yellow Pages for information about nearby stores and services now go to the web. A survey of online consumers last year by BIA/Kelsey found 97% of them go to the web to research local products and services, and that 58% had used an online coupon in the previous year.

But it took Groupon to come up with the magic formula for connecting the web to local businesses in a way that makes sense for both shoppers and merchants. That secret was to offer deep deals—typically 50-90% off—if enough shoppers agree to buy the deal. Merchants set the minimum number of vouchers that must be bought for the deal to take effect, and don't pay anything if not enough consumers sign up; if the threshold is met, Groupon typically takes 50% of the amount consumers spend.

That's generated some grumbling among merchants. After all, a retailer, spa or restaurant offering a $100 voucher for $50 has to share the $50 with Groupon, getting only $25 for $100 worth of merchandise, food or services. But Groupon's Solomon says 95% of businesses that run a Groupon offer want to do it again, suggesting that businesses see Groupon as a powerful customer acquisition tool.

The Groupon model brings in plenty of cash for the young company—nearly $400 million last year based on Janney's estimates of Groupon's 2010 voucher sales. Combine that revenue stream with the deep information about the buying habits of millions of consumers that Groupon gathers each day and it's easy to see why Google reportedly offered $6 billion for Groupon late last year. Groupon, to the amazement of many, turned down that eye-popping offer and is said to be considering a public sale of stock that could value the not-yet-three-year-old company at $15 billion, analysts say. In a sign of investor excitement, Groupon raised $950 million in new capital this year, shortly after rebuffing Google.

Groupon spent some of its cash on TV ads that first aired during the Super Bowl, and that proved to be a rare misstep. Following widespread criticism that the ads made light of environmental causes and efforts to defend human rights in Tibet, Groupon founder and CEO Andrew Mason apologized and the company pulled the ads. Just a week later, florist FTD Group Inc. offered a Groupon offer, then pulled it and offered refunds after consumers complained that they could get a better deal on FTD's web site.

Competitors offer other criticisms. The Groupon shopper is price-sensitive and not likely to be attracted to local businesses that often compete more on service than price, says Tim Adams, founder of LocalMarketingProfitFaucet.com, which specializes in small business marketing. Justin Shapiro, co-founder of Bare Deal, which offers consumers weekly deals at local merchants in the form of free scratch cards, says consumers identify with Groupon, not the merchant selling the voucher. "People say 'I'm using my Groupon,'" Shapiro says.

Groupon evolves
In the face of the criticism and growing competition, Groupon is rapidly introducing services and features aimed at pleasing its customers, still mostly local businesses, although a few national retailers like Gap and American Apparel have tested Groupon offers as well.

Comments | 5 Responses

  • I love Groupon - it has really given me a lot of incentive to buy local. I am going to San Francisco this summer and have signed up to receive notifications there as well in case anything fun comes up to do while I am there. It is such a great resource! My main rule is that I will buy one if it is something I already need. For example, a car wash Groupon came up last summer right around the time I was going camping. I knew my car would get trashed during camping so I would definitely need the Groupon. It was great to have a deep discount right at my fingertips without having to research where is the best deal! Great article though - it is interesting to see where the heavy hitters are at regarding competing with Groupon - it will certainly be fun watching it all play out and it doesn't hurt that it is helping local retailers in the meantime!

  • Great article! I was very curious about the in's-out's of how these things worked. Just recently used GroupOn for the first time and it was a great experience.

  • {Google also is testing adding little yellow markers called Tags to listings in some cities to draw more attention to them, for a flat rate of $25 per month. A Tag in a search result might say "Watch videos about our business" or "Save $175 on your first visit."} interesting - i kind of hope they don't start this, i like an aesthetically clean search results page. i also can't wait to see where Groupon and this market is in five years from now. it should be interesting to watch how they manage to maintain market share.

  • Katie, Did an editor read this before publication? The opening anecdote is about a seven room hostel and their "success" on Groupon. Instead of a hundred or two hundred coupons, they sold 450 in six hours. Amazing? Yes, but either something was left out of the story or they shot themselves in the proverbial foot. Seven rooms times 365 days is 2,550 rooms per year at 100% occupancy. Most hotels, B&Bs and hostels would die for 100% paid occupancy, but realistically, they get well under 80% or realistically 2,000 guest nights per year. (If they were hitting that number - they didn't need Groupon.) The owners managed to sell 20%-25% of their total annual occupancy in six hours at a 50-60% discount, and then they get the privilege of splitting the revenue they do get with Groupon 50-50. Whatever their marketing budget was, they now have to sit around and wait for the Groupon coupons to show up. How many of those Groupon customers are their existing clients and they just cut the revenue on those rooms from 100% to about 25% (discount and Groupon share)? Second, if they filled rooms that their regular customers would have paid for, they risk having dissatisfied regulars. The rest of the article is informative. There is even a token mention of Groupon trying to figure out how to help advertisers manage Internet couponing. This type of web selling exuberance is bad for the advertising customer. I think one of your articles from a few months ago said 50% of Groupon customers don't return. This anecdote is an example of why and should be used as a cautionary tale. Maybe a few more articles that remind us marketers that we need to be aware of the business model, margins and product availability/occupancy - its not just about creating demand. JF

  • Thanks for the feedback. The article explains how Groupon is a marketing tool that has its downsides, but users like the hostel find Groupon is a good customer acquisition tool. The owner was extremely pleased with her experience for a few reasons. Her business is very much fueled by word-of-mouth and she was able to reach new customers who came back and who also told their friends. In this case, Groupon offered increased exposure for a small hotel—reaching consumers that typical marketing efforts may not have. Another point to consider is that is that most hotel rooms aren't actually booked at the standard rate. There are different types of promotions and discounts offered across the board. Half of a hotel’s job is to give a customer the impression that they are getting a steal. So, while the hostel may have lost some revenue against what they may have received if they were at 80% occupancy selling at retail price, the reality is that very few customers pay the full retail price of a hotel room and the increased volume made up for the loss in revenue per night. Groupon has its upsides and downsides. And I think I make that point. Thanks again, Katie

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