Groupon chief executive Andrew Mason, left, prepares for the opening bell ceremony celebrating his company's IPO at the Nasdaq Market in New York November 4, 2011.BRENDAN MCDERMID
Last year, Toronto butcher Marlon Pather thought it would be a good idea to drum up traffic at his meat shop by offering 75-per-cent discounts through a number of Internet deal sites.
As more than 20,000 consumers took advantage of the offer, his shop was inundated. Beset by complaints, it was forced to close, later reopening under a different name.
For many small businesses, especially those that are new or struggling, the possibility of hundreds of new customers has made social promotion sites such as Groupon, RDeals, Dealfind and many others very alluring.
Yet as Mr. Pather's experience illustrates, such sites offer both advantages and challenges in successfully driving revenue growth. "It's not entirely clear that they're a good thing for small business," said Eileen Fischer, director of Entrepreneurial Studies and Family Enterprise at York University's Schulich School of Business.
"Just being able to produce the quality of product and service that you want to provide can be severely impaired if you've got too many consumers coming in the door," she said, "and this is where it's particularly problematic for small businesses because they're often not set up to deal with the impact."
For some, like Lisa Kozoriz, managing director of Toronto's The Ten Spot beauty salons, the nine-month promotion she worked out with Groupon in December of 2010 was beneficial.
The Ten Spot had just opened in a new location and Ms. Kozoriz saw the Groupon deal as a way of advertising it to potential new clients. The discount brought in an influx of customers, she said, "and we saw a good amount of retention from that." As far as revenue is concerned, however, Groupon "offered the deal at quite a reduced rate. So it wasn't as if we were looking to make money off this," she pointed out.
Bringing customers to a new dealership was also the main reason Paul Laframboise, manager at Downtown Hyundai in Toronto, offered a car maintenance package worth $85 for just $25 through Rogers Communications Inc's RDeals.
"There's certainly an added bonus to being advertised on Rogers radio stations," he said, "and we took that into consideration in absorbing the cost on this service for $25." What's more, he said, customers with older cars will have a chance to see the dealership's new vehicles when they come in.
Marketing experts acknowledge that social promotion sites do increase traffic, providing consumers with cheap, low-risk opportunities to try out new products and services. But that doesn't mean those consumers will pick up regularly priced items or services as well.
For Neil McPhedran, president of Green Shag bespoke tailors, the advertising bump his business got last Christmas from participating in an RDeals promotion just as the site launched definitely outweighed any financial gain. "We got more out of that tag-along exposure than the deal itself," he said.
By offering its line of specially designed cufflinks for $30 instead of the usual price of $80, he added, Green Shag lowered inventory and "drove traffic into the store, that's for sure." But half of that $30 went to RDeals, and Mr. McPhedran had to pay a processing fee as well.
While arrangements may vary, most social promotion sites want businesses to offer discounts greater than 50 per cent. The participating company will only receive their share of the sales in increments over a period of time, usually starting after 30 days – and this can play havoc with its cash flow.
For Doug Bruce, vice-president of research at the Canadian Federation of Independent Business, offering deep online discounts "takes away the ability of the small business person to set their own prices. It may be good in the longer term, but in the shorter term, if cash flow is tight, it gives you less flexibility and one less tool to use to boost your cash flow."
"Generally, small businesses aren't fat," Ms. Fischer agreed. "They're run on thin profit margins, and if you're doing deep discounting you need to be very clear that you're not losing money with every sale."
No one can control how many people will click on a company's coupon offer. Even if a business owner thinks the price point won't lose money, he or she may have to bring in extra staff and supplies to meet the demand. The best way to deal with impact on cash flow, Ms. Fischer said, "is capping the number, making sure to put an upper limit on the absolute number of people who can redeem the coupon. If that's not possible with the site you're dealing with, then deal with a different site, because that's where you stand to lose control of your service quality and to lose too much money."
Small businesses ought to consider daily deal promotions a form of advertising and have funds set aside to meet extra inventory and salary expenses. For Ms. Kozoriz, her company was financially prepared to take a hit on profits from its discount offer. "It was part of the investment in a new shop," she said.
Indeed, one of the few surveys on the effect of Internet deals on small business showed mixed results in revenues. A United States study of 150 companies using Groupon, carried out by Utpal Dholakia, professor of management at Rice University's Jones Graduate School of Business, found that 66 per cent of respondents reported profits, while 32 per cent did not.
In the end, Ms. Fischer said, "it's not a direct way of making money. The only way it makes you money is if you are able to attract and keep new customers."