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Some businesses are victims of social-couponing (Groupon, Living Social) success

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Sept. 16 (Bloomberg) -- Andrew Mason, founder and chief executive officer of Groupon Inc., talks about the company's growth and business model. Groupon offers a daily bargain to local shoppers through its website. Mason speaks with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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By Ylan Q. Mui
Washington Post Staff Writer
Friday, September 17, 2010; 10:07 PM

The business model seems simple enough: Convince merchants to offer steep discounts in exchange for a guaranteed stampede of customers.

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That is the premise of the wildly successful social-couponing Web site Groupon, which in less than two years has 18 million subscribers and spawned a host of imitators. But some businesses that advertise through the site are learning that the calculus is more complicated - and there can be too much of a good thing.

Posies Cafe in Portland, Ore., a homespun coffee shop that offers classes on baking buttermilk biscuits, signed up with Groupon several months ago. If Groupon could promise to deliver a certain minimum number of customers, the owner would sell them $13 worth of products for $6. The discount was typical of deals on the site, which are often for 50 percent off or more.

What Posies was not prepared for was the overwhelming response. Nearly 1,000 people bought the Groupon in the one day it was advertised, according to Posies, swamping the small coffee shop for three months.

In a blog post, the owner said that the volume of sales coupled with the steep discount threatened her business, forcing her to spend $8,000 of her personal savings to pay her employees and the rent.

"It has been the single worst decision I have ever made as a business owner thus far," she wrote on the Posies blog this month.

The owner did not respond to an e-mail request for an interview, and an employee at the coffee shop said she was on vacation. But her blog post has garnered even more attention than the initial coupon, prompting renewed debate over the wisdom of catering to crowds.

"What the aggressive deals create is. . . that social motivation for that person to share it," said Jason Keath, a media consultant who founded SocialFresh.com, which runs marketing events. "The nature of Groupon is kind of a social loop."

Groupon chief executive Andrew Mason responded to the Posies blog post on Friday with a lengthy entry on his blog explaining the structure of his deals with businesses. Typically, Groupon splits the revenue from the coupon with the merchant, and Mason said the company tries to prepare businesses for the potential onslaught of shoppers that may sign up.

More than 400,000 reportedly signed up for one promotion selling a $50 credit to the Gap for $25, crashing Groupon's Web site. A recent offer for half-price admission to Wolf Trap performances of "Legally Blonde: The Musical" or "The Sound of Music" sold about 6,000 coupons.

Mason said that Groupon allows merchants to set caps on the number of coupons sold, though Mason said businesses often prefer not to limit sales.

"We're proud of the satisfaction rate that we have," he said in an interview, noting that 97 percent of businesses ask to be featured again. "Most merchants are savvy business owners; they understand what they're signing up for."

Mason said Groupon is attractive to businesses because they don't have to pay for the advertising upfront, but that doesn't mean there are no costs.

Amy Kim, accounting manager for Spa World in Centreville, offered a Groupon discount of $40 for a day pass and foot massage, a package normally valued at $80. Worried that the response could overwhelm her staff, Kim said she limited the number of coupons to 1,000. In addition, she promised to reimburse the massage therapists for the difference.

"I guess they had the plus side of it, and the minus side of it, too," she said.

One of the local deals featured this week was for Dupont Circle restaurant and bar One Lounge. It opened about nine months ago and is still trying to get the word out among customers, so it signed up with Groupon competitor Living Social earlier this year. (Living Social's founder is the son-in-law of Washington Post Co. Chief Executive Don Graham.)

The promotion boosted business by about 5 percent to 8 percent for roughly three months, part-owner Niko Papademetriou said. It was enough to prompt One Lounge to offer a similar deal through Groupon, but he cautioned that the service was not a silver bullet.

"It's not a savior at all," he said. "It costs you money to do this."


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