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.

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.

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