Groupon can be too much of a good thing

A facial at Cellular Intelligence.

TEXT OF STORY

Bill Radke: More and more businesses are trying to get consumers to spend are turning to an online marketing phenom called Groupon. Have you heard about this? Millions of members worldwide get huge discount offers in their e-mail every day.

Last week, Groupon offered a half-off coupon at the Gap -- the first time it ever featured a national retailer. Half a million people clicked "Buy," and they temporarily crashed Groupon's servers. The company's CEO says more promotions with big chains are on the way for the holiday season. Now, when you're the Gap you can handle a half a million new customers in a day. But being Groupon's "pick of the day" can be a whole other story for a small merchant.

From the Entrepreneurship Desk at Oregon Public Broadcasting, Marketplace's Mitchell Hartman reports.


Mitchell Hartman: Here's how this works: Every day, Groupon offers a different discount coupon in each city where it operates. This week in Portland, I could have bought a month of yoga-aerobics for 35 bucks -- that's 75 percent off. Or I could have gotten some very cheap tattoos.

The vendor is typically a neighborhood business trolling for new customers. Dara Levy offered an introductory facial at her Chicago spa recently.

Dara Levy: It's a triple exfoliation. A scalpel-like tool -- it's really just a sharp razor...

Not for me, but she says women love it. What Levy loved were the 1,300 potential new customers Groupon sent her way.

Levy: You see through a ticker how many Groupons are sold by the minute, and people catch the fever and get on board. It's scary at first, because your phone is literally ringing off the hook.

Groupon would have let Levy cap how many facials she sold -- though she decided to take the risk of an unlimited sale. Now, she's had to hire an extra aesthetician, and she's still trying to schedule all the new clients.

I spoke to one tour operator who sold a thousand coupons in a single day. Now he has irate customers who want to go out next weekend. He can't schedule them for months.

Making customers wait -- even for something they bought at a big discount -- can backfire. Philadelphia resident Thea Gallis used an online coupon service called LivingSocial -- it's a rival to Groupon -- to buy a half-off ticket to an international beer festival this summer. Then she had to cool her heels for a drink.

Gallis: There was a separate line, so we had a much longer wait than the people that had normal tickets.

Gallis says she isn't likely to go to the beer festival again, or buy any service on Groupon, such as house cleaning, that she has to wait to schedule. But she likes offers like the one from the Gap.

Gallis: That was one that definitely appealed to me. It could be something that's on your terms, instead of having to schedule it with someone.

But there are consumers who are turned off by Groupon's ever-growing mob effect.

Farhad Ghafarzade: Right now, I don't buy Groupons.

Farhad Ghafarzade of Portland says he doesn't want to compete with bargain-hunting Groupon groupies who can inundate a small shop. But get this: Back in March, Ghafarzade himself offered an incredibly successful Groupon deal for his own business, an eco-friendly auto garage. He'd just opened up, and suddenly had 700 new customers coming in for an oil change.

Ghafarzade: We discounted it from $40 down to $15.

Groupon took half of that as its cut, leaving the garage with just $7.50 -- a big loss. Ghafarzade says it was definitely worth it for the PR.

Groupon spokeswoman Julie Mossler.

Julie Mossler: We never position Groupon as a way to make money. To us, it's about driving traffic in through the doors.

But if a business doesn't convert that into repeat traffic -- or drives consumers away with long delays -- it can be hard to recover from the Groupon experience.

I'm Mitchell Hartman for Marketplace.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

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