March 1, 2011, 12:00 AM

Local Hero

(Page 2 of 3)

Among the features is the merchant-facing hub GrouponWorks.com that helps business owners calculate how many vouchers they should offer based on their capacity, industry and such specialized data as a restaurant's table turn rate or the number of sales clerks on staff.

If a manicurist with a small shop wants to offer 3,000 vouchers, Groupon will advise against it. "We want merchants to have a good experience," Solomon says.

Bruce, the operator of the Virginia inn, says she was well prepped by Groupon. She was told up front that she needed to be online to respond to customer questions about the deal on Groupon.com. A chart from Groupon based on similar merchants' experiences gave her an idea of what to plan for.

"It gave me benchmarks like 25% will use it within the first 30 days," says Bruce, whose Groupon deal doesn't expire until the end of April. "The first week was crazy. Groupon can easily overwhelm a business if you are not well educated. But they were right on the money."

In a sign that it's feeling the heat from rivals, Groupon has created the Groupon Merchant Partner program that guarantees businesses a certain number of voucher slots per year if they agree not to work with Groupon competitors. Bruce, who had been considering trying out LivingSocial and another deal site called Twongo, joined once she was guaranteed three deals for the year. That's an attractive offer because more businesses are clamoring to work with Groupon than the deal marketer can accommodate. In Chicago, the backlog has run as long as six to eight months, Solomon says.

The number of deal openings will increase since Groupon launched Personalized Deals last summer, which tailors offers to buyers' preferences and buying history. Instead of every Groupon subscriber in a city getting the same offers each day, now, for example, there can be some deals aimed at young sports enthusiasts and others to wine lovers based on information Groupon acquires from surveying consumers and compiling their buying history.

Groupon also is providing lower-priced options for merchants that don't want to pay a 50% commission on products and services they've already discounted by at least half. Groupon Stores, where merchants can offer their own deals on Groupon's e-commerce platform, takes a 30% commission. A merchant creates a store on Groupon.com, gains followers, and offers all the deals it likes. While Groupon doesn't send those deals to all subscribers, customers that have previously bought Groupon vouchers from the merchant will receive its new offers.

As for that 50% commission, Groupon says it has never been set in stone, and some merchants say they have been able to negotiate lower commissions.

Really big competitors
Groupon's success is drawing competitors, and big ones at that.

Amazon.com Inc., the No. 1 online retailer, invested $175 million late last year in Groupon's nearest rival, LivingSocial. And in January Amazon helped raise the profile of its new partner by offering a $20 Amazon gift card for $10, selling 1.3 million of the deals in 24 hours.

That was a daily-deal site record, eclipsing the 441,000 vouchers Gap sold on Groupon last August, and offered a glimpse of Amazon's power to sway web shoppers towards LivingSocial. In fact, traffic to LivingSocial.com jumped 82.3% the week of that deal to 3.1 million unique visitors, drawing eyeballs from Groupon whose traffic dropped 19.5% to 6.2 million that week, down 19.5% from a week earlier.

Social network giant Facebook got into the act in November when it launched Facebook Deals, an add-on to its Facebook Places services used by 150 million mobile consumers. In one deal, Macy's Inc. offered shoppers who checked in through the Facebook Places mobile app 20% discounts off apparel and other items or 10% off consumer electronics, furniture and mattresses.

"We launched Places to let you share where you are with your friends and see who's nearby," wrote Jon Fougner, a principal on Facebook's product marketing team, on the social network's blog. "Now with Deals, you also can see what offers are nearby and share those deals with your friends."

Google goes local
But the biggest threat to Groupon probably comes from the suitor it spurned, search engine giant Google.

Google is working on its own daily deals platform called Google Offers, according to reports. And at least one merchant says he's been asked to participate. Imran Kasbati, co-owner of Chicago-based quick-serve restaurant I Dream of Falafel, says he was contacted recently by Google and asked to participate in a deal where his company would offer $10 worth of food for $5. Kasbati says Google pitched a 50/50 split of sales, much like Groupon. Google Offers will also mimic Groupon in sending out its local deal of the day by e-mail, according to Janney Capital and other analysts.

What makes Google such a potentially formidable rival is its ability to meld local offers with its dominant search engine. Those offers would complement several steps Google has taken in the past year to build more local information into the search results it presents.

For example, business owners can today update their Google Places business listings with information such as hours, photos and videos, boosting their search results. Although there's no charge, only 2 million of 50 million local merchants have verified their business listings, according to published reports.

Still, with local businesses clearly responding to web marketers like Groupon, Google in October launched a program called Google Boost that could help the search engine monetize local business listings and grab a chunk of the $5 billion in revenue still going to publishers of printed Yellow Pages.

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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