The Real Problem With Groupon

It’s taken me awhile to get back to this post, but hopefully it doesn’t seem too outdated.

I somewhat recently read an article about a London bakery who offered a Groupon deal for 75% a dozen cupcakes. They had 8,500 people sign up for the deal, a staggering number for such a little bakery. One would thing an influx of customers like this would be a good thing for a company. It sure is, when the company is large enough to handle a larger-than-expected swell in customers. Need A Cake, the aforementioned bakery, was not at all prepared.

Dubbed her “worst ever business decision,” Rachel Brown and her staff needed to make 102,000 in a short amount of time to handle the orders. They couldn’t handle it on their own and were forced to hire 25 extra workers, resulting in a loss of $3 per batch of cupcakes equaling a $20,000 loss for the company. Needless to say, this type of incident is not the first of its kind, but should be the last. Why? Because small businesses need to understand Groupon, and Groupon needs to understand small businesses.

While working in social media for the last 14+ months I have learned a lot about marketing on social networks and how different companies approach the process. The smart ones focus on building relationship and creating engaging content to keep their fans and followers around for an extended period of time. The not-so-smart ones want to win the “I have more fans than you” battle. Here’s the thing: if you want fans, it is very easy to get you those fans. Put up some money and we can advertise the hell our of your business and reach your fan goal. But guess what? Those fans, aren’t fans. They will not promote your product to their friends and family. And they most certainly won’t be loyal to your business.

Groupon is an offline version of the Facebook brand media buy. And that’s a big issue. For big businesses it is fine because they already have large customer bases that are loyal to them. For small business it can be devastating. A small business is attracted by a group deal because they believe it will bring them many long term customers they may not have reached otherwise. Believing in this is a mistake. Sure, you will get a few, but the percentage of lasting customers versus one time deal seekers will be very small. And this is Groupon’s biggest folly…they don’t actually help businesses. Big businesses can handle the losses they incur from running a group-buying deal, but small business can potentially be shut down because of the money lost from a deal.

Rarely does a business do a Groupon deal twice. I have yet to see one (if you have, please tell me in the comments) occur. There is a reason for that. A great business that opened up entirely new market to the world didn’t understand the scale of what they were trying to do. It’s unfortunate, because it’s possible that they could help small businesses. Even putting a cap on the number of people that can purchase a deal would help, as it would provide an “exclusive” label to each deal for small businesses that make them more intriguing, and could get people to visit the business even if they missed out on the deal.

For Groupon’s sake, I hope they figure out a way to change their business model. Otherwise small businesses everywhere could be in trouble.