Published on: February 23, 2011by Kate McMahon
Amid all the internet hoopla about Groupon.com and its controversial Super Bowl TV ads – Trivializing Tibet! Belittling Endangered Giant Whales! – lies a cautionary tale for independent businesses about the dangers of deep discounting.
And that would be the demise of the Yo! Philly cheese steak shop in Alameda, CA.
Yo, what, you ask?
While even a solitary monk in Tibet has likely heard about the Super Bowl ad debacle and the ensuing mea culpa from Groupon, the demise of Yo! Philly is a local story, reported on the hyper-local website AlamedaPatch.com.
Owner Tom Stanley said he hoped the Groupon coupon would help rejuvenate his cheese steak shop, which opened in September 2009. Instead, he told Patch, “it put the nail in the coffin.” Getting $1.50 for a $10 sandwich will do just that.
For those who are unfamiliar with the nation’s No. 1 online daily deals site, here’s how it works. Groupon offers a daily coupon for each of its 160 North American markets – and if enough subscribers click “buy” then the coupon activates.
For subscribers the lure is the bargain – “$30 worth of Thai food for $15” or “A $100 spa service half-price.” What’s not to like about that? For businesses, Groupon means inexpensive marketing to a burgeoning new internet-savvy, deal-seeking audience. When it works, it’s great. The entry price is simple – offer a deal, Groupon handles all of the transactions, provides logistics and marketing support and keeps half of the revenue.
Which is precisely how Groupon has become the hottest, hippest and fastest growing site on the internet – attaining a whopping $1.5 billion value in only 18 months, according to the New York Times
The Groupon site includes testimonials from businesses raving about an influx of new business and success due to the coupons. But elsewhere online are the tales of Yo! Philly and other businesses which experienced the pitfalls of offering a drastic discount to a bargain-hungry customer.
Tom Stanley conceded his mistake was failing to set a cap on the number of coupons he would offer. He told Patch that Groupon never told him about the cap option, but it has always been available and Groupon is now encouraging participants to set a maximum limit.
Stanley thought he would sell 100 to 200 coupons, yet 900 were sold and 800 used. Customers paid $5 for $10 worth of product, but he only got $2.50 per sale from Groupon, which after tax was worth closer to $1.50 per coupon. And each cheese steak cost him $5 in supplies alone.
Should Tom Stanley have paid closer attention to the fine print? Absolutely. Would his business have foundered had he not tried the Groupon coupon? Quite possibly. Is there an inherent risk in trading revenue for new business? Yes.
All of which a small business should consider before signing on with Groupon or group-buying competitors such as LivingSocial.com, BuyWithMe, CrowdSavings.com and more.
The Patch story included blog posts from other disgruntled Groupon businesses, including one who wrote “I’ve had to raise prices to cover the massive hit we got … yikes.”
The jury is still out for Mona’s Table in Alameda. Owner Mona Personius empathized with Stanley. “I also have high end products and the 1/4 of the purchase price doesn't break even. I think I have made some new customers but also some very unhappy ones - yelp - I'm having growing pains. Hopefully this doesn't sink me.”
Happily for Mona the next two blog posts were from enthusiastic Groupon customers urging her to hang in there.Comments? Send me an email at email@example.com .