Marketing to Women: Groupon Deals Too Good To Be True?

June 23, 2011 § Leave a comment

No one knows how often it happens, but merchant fraud is a possibility in group buying daily deals like Groupon and Living Social.  Because most of the leading buying groups pays off the merchants in fairly quick order (Groupon pays in 60 days and Living Social in 15 days), it is possible for a fake or fraudulent merchant to sell a large amount of highly discounted offers, receive their payout and not redeem the sales by closing the business or not responding to calls for reservations or appointments.  It’s a scenario for a grab the money and run incident.

Groupon does hold money in reserve in cause of fraudulent activity, and takes steps to read online reviews and ratings for businesses that advertise with them.

One of the issues, however, with most group deals is that they encourage advertisers to provide uncapped deals and extremely discounted offers.  The standard offer is a 50% off offer, requiring businesses to take a 75% reduction in price.  That can be a hard road for many businesses, fraud or not, because of their inability to honor all of the sales in a timely manner.  A Rice University study in 2010 found that Groupon promotions were unprofitable for 32 percent of the businesses surveyed and over 40 percent of those businesses indicated they would not run a comparable promotion again. That’s the fear for many businesses – an offer might be too successful.  Adding to the fear for businesses is the low return rate of first-time customers.  Only one in five return to the advertised business.

Techcrunch tells a common story of one business:

In January, Salon 505 sold more than 3,000 vouchers through LivingSocial for $99 on January 21, with an alleged value of $550. ($550 for a half day spa treatment in Austin? Whatever.) With typical deal terms, that should be about $165,000 in revenue to the merchant. By February 16, there were reports of trouble redeeming vouchers. In that month, the salon redeemed about 120 vouchers. At that rate, it would take about two years to redeem all of the vouchers that were sold. In June, the 34-year-old business closed.

To be fair, it seems that consumers that have problems with their deals are usually taken care of by the group buying company.  But the business model seems to be questionable as a long-term business-building tool for businesses.

Some of the caveats for merchants have been detailed in Wired and include the following:

1.  In some states, it is illegal to discount alcohol, but Groupon offers don’t exclude it.

2.  In some states, the coupons must have a 5-year expiration, much longer than most group-buying provide.

3.  There are certain areas that require the merchant to refund money to the customer if the purchase is less than the amount of the coupon.

4.  Some states require merchants to hand over money received from expired coupons.

5.  Sales tax may be an issue if businesses are collecting the full amount of sales tax on the total regular price and then discounting the coupon.  If they are not calculating the tax on the original coupon purchase plus any additional amount charged at the time of redemption, they are charging too much sales tax.

There are models out there that do allow merchants to cap their deals, play nicely with the state requirements and try to work with well-known local businesses.  One of my favorites is Daily Deals for Moms, a group dedicated to their community.

Marketers wanting to try a group buying deal should talk with several companies and determine which ones have a base of consumers that fits their target market and ask questions about state regulations that might enter in to their deals.

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