55% of merchants turned off by group deals

A survey finds that 55% of merchants would not run a deal on Groupon or LivingSocial again

February is turning out to be a rough month for Groupon. Last Friday, the company finally decided to pull its controversial Tibet ad after it sent angry viewers into a frenzy. And then over the weekend, a Groupon for $20 for $40 worth of flowers from FTD.com turned into a big mess when people who purchased the deal discovered that the prices had been jacked up for Groupon but were actually lower on the FTD website, which prompted Groupon to cancel the deal. 

And now, a survey of merchants and their marketing methods released Tuesday by MerchantCircle found that 55% of merchants who have run a deal through a group buying service like Groupon or LivingSocial would not do so again. 

This is not the first time the monumental success of Groupon and LivingSocial has been called into question, specifically with regard to how much merchants really benefit from the group buying services. In September 2010, a Rice University study surveyed 150 small business owners who had run Groupon deals as a way of bringing in new customers without spending a lot of money on marketing. Out of 150 respondents, a full 32% said that the promotion was ultimately not profitable. 

So what, exactly, is the problem? For starters, the study found that for those unprofitable deals, Groupon customers were rarely willing to exceed the face value of the Groupon deal. Only 25% actually spentmore than what the deal was worth, and less than 15% returned to the business. Restaurants appear to get the short end of the stick on this one. More than 40% of the restaurants surveyed in the Rice University study turned a profit on their Groupon deal.  

One restaurant owner observed: “Most of the Grouponers were what we call ‘dealseekers’; they felt entitled to special treatment, didn’t spend more than what the Groupon itself cost, they didn’t tip, and most won’t be repeat customers.”

Stinginess combined with the massive 50% cut that Groupon takes per deal means that at best, the business would be lucky to break even. 

Not surprisingly, of the 32% of businesses who said their Groupon deals were not profitable, less than 8% said they would be willing to run another Groupon campaign. 

Another service business owner noted that her employees had to adjust to the frugal Groupon customer: “After a few weeks they realized that the groupon customer is not as friendly or open to spending money as the average customer.”

On the flip side, the Rice University study found that 66% of the businesses surveyed did turn a profit on their Groupon campaigns, and interestingly, the common link in determining whether or not a deal would be profitable turned out to be employee satisfaction. The study found that if employees were "satisfied with the promotion," the likelihood of the Groupon campaign's success were significantly higher.

The MerchantCircle survey did not go deeper into respondents' reasons for why they would not run another group buying promotion. Rather, it investigated which marketing methods are gaining popularity among local businesses. The survey received more than 8,400 responses and found that Facebook is the most popular marketing method for local businesses. Some 70% of respondents said that they actively promote their businesses on Facebook, which is up from 50% last year. This year also marks the first time that Facebook has surpassed Google in the survey as the most widely used marketing method.

By contrast, only 11% of respondents said that they have run a group buying deal and 20% said they plan to do so in the near future. 

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