Retailers shift their ad spending from TV, radio and print ads to digital ads.
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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.