The story of the demise of Washington, DC, restaurant Back Alley Waffles went viral today because its owner blames Groupon’s payment scheme for putting him out of business. Waiting a month for partial reimbursement on the $2,600 worth of waffles he served to coupon holders while continuing to fulfill discounted orders was too much for the cash-strapped startup to handle. So Craig Nelsen shuttered his waffle house after only three months in business, leaving hundreds of coupon holders high and dry.
Groupon, which will now refund the unserved diners for their purchases, explained its payment practice in a statement that was published today on several news sites (including the Huffington Post, the Mail Online and the Washington Post). Protecting itself from being left holding the bag when merchants go out of business before fulfilling their coupon orders is one reason Groupon staggers payments over three months, communications director Julie Mossler told Yahoo! Small Business Advisor.
But the angry wafflemaker, who told his own story on the Back Alley Waffles website, declared that his shop has “closed indefinitely due to the bloodthirsty business practices of Groupon.”
Small business owners’ disillusionment with daily deals promotions are nothing new. When a business offers a promotion through programs like Groupon or Living Social, customers—or “grouponistas,” as Back Alley’s owner calls the coupon holders—pay half price for a product or service. The daily deal promoter’s cut is typically half of that, so merchants get ¼ their usual rate for products or services.
RELATED: Daily deals promos better suited to certain businesses
Businesses that underestimate their margins or their capacity to serve coupon holders wind up losing money, failing to win new customers, or driving away loyal patrons when the coupon crowds descend. But those who structure deals strategically can see increased profits and tidal waves of new business. On its revamped GrouponWorks website, launched this week, Groupon includes testimonials from thousands of customers who’ve had such experiences. Merchants who are the most careful are the ones most likely to succeed, says Groupon’s Mossler, who adds that more than 50 percent of merchants who use Groupon become repeat customers.
Tea for two and gourmet bagels
Roy Fong, the owner of Imperial Tea Court in San Francisco and Berkeley, Calif., says he has “tried every daily deal promotion” to come along in the last 18 months and is calling it quits. Through Groupon, Living Social, and Bloomspot, he has offered $15 coupons for a tea tasting experience for two—normally priced at $30. At the daily deal rates, Fong reaps $7.50 for a labor-intensive service in which his staff introduces customers to traditional tea presentation and explains various categories of teas before serving them the tea of their choice.
Fong says that in his experience, “The more coupons you sell, the more you lose.” Adding insult to injury, he says, “the coupon holders all want to come in during lunch hour or when you’re busy on the weekends, so it stops you from doing your regular business. It’s a losing proposition.”
Corey Kaplan, owner of NYC Bagel Deli in Chicago, couldn’t disagree more. Kaplan used to spend $100,000 annually marketing his four downtown locations on park benches, billboards, and buses. But he was never able to calculate a return on investment for his ad campaigns. Two years ago he offered a Groupon Daily Deal: for $4 customers could get $10 worth of food. Hungry Chicagoans snatched up 10,500 coupons in two days. Kaplan brought 10,000 customers in the door for a cost of $80,000. He repeated the offer a year later, and participates in Groupon’s GPS-enabled Deals of the Day program daily.
“It’s expensive, but if you price it right and put a limit on your sales, it’s a very beneficial tool,” Kaplan says. “Seeing your name on the side of a bus doesn’t make somebody run in to eat. But they come in to redeem a coupon, and it’s up to me to make that first-time customer a permanent customer.”
Custom framing shop Framed By Kosal in Monroe, Conn., has mixed reviews for daily deals. Store manager Mariaelena Eang says she has used both Living Social and Groupon to offer $100 gift certificates applicable toward framing artwork. Groupon sold the coupons for $39 and Living Social sold them for $40.
Eang says she wanted to reach the younger clientele that the daily deal companies attract. But because many coupon holders had never purchased custom framing before, they misunderstood the offer. “They think they can come in and get any frame for $100, so it turns into us explaining to them how custom framing works,” Eang says. “The coupon was for $100 toward framing, not for the complete frame. When you’re explaining that, you get the feeling that the customer feels like they’re being taken, like this was some kind of gimmick.”
The frame shop dealt with another challenge that restaurants don’t face: Because the Groupon offer ran online for three days, shoppers came to the store to get quotes on framing jobs before deciding whether to purchase the coupon. “The second day the offer ran, we spent all day with 10 customers and not one of them bought a frame,” Eang says.
Nevertheless, Eang would be game to repeat the experience. “As a marketing tool, we’d probably do Living Social again. Our first instinct was to do this for exposure, and with Living Social last September we got about 200 hits on our website. In the end we did make money, but not per customer, and we know a lot of customers came just for that offer and won’t return.”
Are coupons on the straight and narrow?
Cheryl McMahon, owner of Karma Salon in New Haven, Conn., says she got burned by a Living Social promotion, and will never try another one. McMahon says a sales rep persuaded her to offer a coupon for a high-end service at a tremendous discount as a way to generate new business. She offered a $150 coupon for a hair-straightening treatment that, depending on the length of a customer’s hair, she normally prices at $300-$400 and spends up to 4 hours per customer processing.
But McMahon acknowledges she hadn’t calculated the impact on her business. “I didn’t realize how much it would cost me, and I didn’t go out and buy a less expensive product to service the coupon customers,” she says. “I was performing a $400 service for $75. The money I was getting from Living Social didn’t even cover the supplies, let alone the time that was booked out. It was all at a loss for me,” she says.
Worse, the promotion backfired as a strategy to bring in new customers. The discount for a popular but very expensive process was so steep that women from as far away as New York City purchased coupons and made daytrips to have their hair straightened, never to return.
“Daily deals expanded my office space”
Mitch Goldstone gasps “oh no!” when he hears McMahon’s story. “Structuring the deal correctly is the most important part,” he says. President and CEO of Irvine, Calif.-based ScanMyPhotos.com, Goldstone credits his Groupon sales success with helping him move his 22-year old photo-digitizing business from a 1,200-square-foot retail center to a 6,000-square-foot corporate headquarters.
“You need to create a deal that is profitable for Groupon and the merchant, and enticing for the customer. You could go out of business quickly if you’re losing money on every deal,” he says. Goldstone hit the jackpot offering Groupon customers a 69 percent discount to scan 500 print photos. It means he gets only $14.50 instead of his usual $98 for each deal, but says, “all of my customers have selected extra products, DVDs, photo enhancement, and higher resolution.”
Goldstone also knows that the average customer has 5,000 snapshots at home, and if their experience with the first 500 photos is good they’ll return to scan more. “You need to dazzle,” he says. “It’s like going to a fine steakhouse: We provide the steak, but people want salads and appetizers and drinks.”
Even the Washington waffle man has acknowledged that daily deals aren’t all bad: The Washington Post reported that Craig Nelsen told them his “previous experiences with other social couponing sites ScoutMob and Living Social had been positive, but Groupon’s compensation method proved onerous for the small operation.”