Editor’s Note: This Guest Post is from Greg Sterling, one of the leading analysts in the local online technology space.
Greg Sterling is a Contributing Editor at Search Engine Land. He writes a personal blog, Screenwerk, about media and the connection between online and offline. He also posts at Internet2Go, which is focused on the mobile Internet. Follow him @gsterling.
In 2010 Groupon reportedly made $760 million according to documents obtained by the Wall Street Journal. However the unprecedented growth of the daily deals segment and Groupon in particular has left some casualties in its fiery wake.
In early 2010, just as Groupon was gaining national visibility and momentum, anecdotal stories emerged of small businesses that couldn’t handle the customer volume or for whom the Groupon promotion turned out to be highly unprofitable. There were also gripes by some business owners about the type of customers Groupon delivered – bargain hunters who don’t repeat.
There have also been many success stories. Groupon claims more than 90% satisfaction among its merchant customers. And an independent study of about 100 small business daily deal marketers found a similar satisfaction figure.
However, a Rice University sponsored “Groupon Effectiveness Study” (September, 2010) among 150 small businesses found that satisfaction levels were considerably lower than these deal site surveys suggested.
Among the respondents with negative experiences, the Rice study offered verbatims about undesirable customers using Groupon. “One restaurant owner observed that ‘Most of the Grouponers were what we call ‘deal- seekers’; 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.’”
The Rice Study also reported that two-thirds of merchants using Groupon found it to be a “profitable” experience. What’s more, the general appeal of the business model continues to grow. The idea of paying for customers rather than clicks is compelling to most small business owners because it effectively eliminates risk and opacity from the online marketing proposition.
A 2011 Opus Research-MerchantCircle small business survey of 8,456 merchants found that the Groupon marketing model – paying a percentage of a sale – was the most popular among a range of choices, which included search PPC and pay per call. A similar Opus survey in Q4 2010 found the same result by an even wider margin.
Yet more than 50% of those who had some experience with daily deals in the 2011 survey said they would not repeat. Similarly the Rice study found 42% of respondents would not run another Groupon or daily deal promotion.
There’s a curious contradiction here: businesses love the idea of the daily deal but often the experience is disappointing. The model as it’s presently constituted is in need of some tinkering and alteration. Education and proper expectation setting are also important in overall merchant satisfaction. Small businesses need to understand what they’re getting into and how to make the most of it. Deal providers need to offer “best practices” and guidance to business owners so they can take full advantage of the opportunity.
Yet regardless of how it evolves, the Groupon model has already had a significant and probably lasting impact on the future of local online marketing.