Is Groupon a Good Deal for Small Business?

Jon Alexis, president of TJ’s Fresh Seafood Market & Catering, always knew his family’s business was unique to the area. Dallas-based TJ’s, has seafood air-delivered daily, has won countless local awards over its 22 years in business, and its shrimp is ranked among the 10 best things to eat in the city. Keeping customers coming back is never an issue, but finding new ways to capture a new audience remained a challenge in such a niche market.

Alexis said he signed up TJ’s with coupon Web site,, several months ago, offering two different promotions that run through April of this year. The results have been astronomical for business, according to Alexis, with more than 3,000 coupons sold on the site and the vast majority of them redeemed.

“Every business has different needs,” Alexis said. “We are so proud of what we do, that we are happy to give someone $30 of free seafood if they will come back again. Groupon is kind of like a nuclear bomb, you just have to use it once, and use it well.”

Nina Alexander Spinelli, owner of The Decorating Store in Union, N.J., on the other hand, chooses to run coupons the traditional way, in magazines, newspapers and the Yellow Pages. Alexander Spinelli said she has done so for 35 years and has no intentions of stopping anytime soon.

“These particular publications are what people read and are interested in,” she said. “I think I do get new customers, and you hope they will repeat. People want a value and discount these days.”

Alexander Spinelli said she runs promotions for 50% of fabrics at 30 days per discount. Although she doesn't track clientele, she feels many return for more business after getting the deal.

Especially in the current economic climate, people are seeking value, but do they remain loyal once the discount goes away? Sites like, and offer buyers daily deals on featured businesses in their area. Promotions bring new customers through the door, but who ultimately benefits more: the business or the consumer?

Created in 2008, Groupon has worked with more than 30,000 businesses in North America, according to spokesperson Julie Mossler, with the vast majority being small business owners. Perspective clients can send Groupon requests through, a site that gives statistics and demographics, along with testimonials from prior businesses that have worked with the company.

Mossler urged companies considering running a deal with a coupon Web site to be realistic about its expectations, and what kind of new clientele it can handle from the publicity.

“It’s easy to say you want 10,000 new customers, but be honest with yourself and what you can handle, because that is sometimes where people get tripped up,” she said.

Businesses have no upfront costs to run a deal with the site, and Mossler said they may break even or possibly take a hit in the first few days of their deal, but business often picks up afterward. One month out from the deal’s expiration, businesses nearly always experience a client rush from those looking to redeem their coupons.

Uptal Dholakia, associate professor management at Rice University in Houston, set out to test the effectiveness of promotions for small business owners in September 2010. His study, “How Effective are Groupon Promotions for Small Businesses?,” surveyed 150 businesses that ran and completed Groupon promotions between June 2009 and August 2010. Of the respondents, 66% said the promotion was profitable.

The 32% of respondents with unprofitable promotions reported significantly lower rates of spending by Groupon users beyond its face value (25% vs. 50%) and lower return rate to purchase again at full prices (13% vs. 31%).

“From all the hype about social promotions, the numbers seemed negative to me,” Dholakia said. “My hope was that we would find something positive to counter example what academics already know about promotions.”

Running promotions too often may change the mindset of an already loyal customer base, he warned. Promotions make customers feel they no longer have to pay full price for something they are perfectly willing to pay full price for, he said.

“If you’re not careful you can cannibalize an existing customer,” Dholakia said. “These promotions might be more effective for a new business that doesn’t already have established customer relationships.”

Brian Edgar, owner of Elevation Burger in Montclair, N.J., said Groupon appealed to him because of its loyal customer base. More than 200,000 members subscribe to the North Jersey Groupon community, so the opportunity to reach that many prospective new clients in one day had him sold.

“It’s a great way to get people in the store,” Edgar said. “It can reach a really wide audience with almost no expense for running the promotion.”

More than 1,400 Groupons were purchased for Elevation Burger’s $20 worth of food for $10 deal, he said. Within five days of the six-month promotion, 200 Groupons were already redeemed in store, increasing his typical clientele by 25%.

Expecting an influx of customers, Edgar started to prepare his staff two months before the deal took place. He hired four new people to ensure enough food would be on hand for the hopeful surge in new customers.

“We altered our schedule, had people come in at different times,” he said. “I can understand how some places like mom-and-pop stores could potentially get overwhelmed.”

At a certain point, however, Edgar said Groupon loses its cost effectiveness for business owners. Providing more than two promotions annually would most likely cost more than they would bring in, he said.

Groupon’s Mossler said 97% of all businesses that run a deal with the company choose to run a second promotion. It is, however, the business’ responsibility to adequately prepare for the exposure. Groupon sends all businesses training materials and has them work one-on-one with a representative from the site to prepare for their promotions.

“The businesses that do best prepare themselves,” she said. “It is their responsibility, and the more they put in, the more they will get out of the deal. Groupon customers aren’t looking for 50% off toothpaste, they want to find their new favorite restaurant, and that is the reason that these businesses want to be repeat customers with us.”

Groupon is equally effective for consumers and business owners, Mossler said, arguing Dholakia’s sample size was too small to be truly representative. The study surveyed 150 businesses, and Groupon works with 660 businesses per day.

“There was a hole for a long time for small businesses to have a presence online,” she said. “This brings foot traffic in your door; a radio ad or TV spot doesn’t do that.”

Promotions bring in price-sensitive customers, Dholakia said, who are historically known to be less loyal to brands in general.

“That is at the heart of the issue,” he said. “You get a disproportionably price-sensitive group. You might really like a restaurant, but that doesn’t mean you will only go there and not go anywhere else.”