Clovis News

Groupon sparks Valley's dash for online discounts

Online discounter Groupon is changing the way small businesses market themselves in the Valley, with hundreds of consumers snapping up deals each day and local competitors vying for a piece of the action.

But do they really boost business for companies struggling through the economic downturn?

Many business owners say yes. Several Fresno businesses have offered repeated deals with Groupon or its competitors. A nationwide survey of small businesses by a professor at Rice University in Houston found that 66% of businesses contacted said their Groupon experience was profitable.

But about one-third said the deals didn't benefit their bottom line. Some said the bargain seekers never turned into regular customers, or even came back once to pay full price. And the steep discounts can be particularly hard for restaurants and retailers that have fixed expenses. Service-based businesses and others that see little increase in costs with more customers generally have an easier time, the study found.

The professor who headed the survey compares the explosion in Groupon imitators to the dot-com boom -- and says the trend is headed for a bust.

But local Groupon competitors tout their own unique twists on the business model that they say set them apart from the crowd -- including giving businesses a greater share of the profits and promoting deals on the radio. And being local helps, too.

"There's plenty of room," said John Kelly, founder of Fresno-based DrawCrowds.com, which launched last week.

Kelly is joined by another Fresno-based deal website, Valley Daily Deals. The site is owned by Peak Broadcasting, which runs several radio stations here. Washington, D.C.-based Living Social entered the Fresno market in September.

Rapid growth

They all compete with the industry giant, Chicago-based Groupon. It first splashed onto the Fresno scene in March and now has nearly 90,000 subscribers who get daily e-mails with deals for everything from baseball tickets to leg waxing.

Groupon has catapulted to success since it was founded in November 2008. Last month, the company turned up its nose at Google's offer to buy the business for $6 billion -- nearly twice the amount the Internet giant has ever paid for an acquisition.

Groupon offers consumers steep discounts if a certain number of people buy a deal online. The deals are heavily promoted through e-mail and sites such as Facebook. Groupon and the small business usually split the amount the customer pays. The promise is that in exchange for lower revenue on those sales, the business will bring in new customers who come back again and again -- and pay full price.

It worked for Yosemite Fitness at Willow and Nees avenues in Clovis.

The gym, the only one in Fresno with a rock-climbing wall, has done two Groupon offers, and last week began offering a two-day learn-to-climb package valued at $50 for $30 through DrawCrowds.com.

The gym's second Groupon was wildly popular, said general manager Sean Smith.

"We sold over 900. It was phenomenal," he said. "We're getting a good flow of traffic from that."

The seven-day rock climbing pass for $25 -- an 86% discount -- brought in four people who signed up for memberships in the first weekend alone, Smith said.

"The way I look at things like DrawCrowds and Groupon, they are advertising for your business," he said. "There are thousands of e-mails going out every day."

He said targeting people who are looking to spend money on a deal is more effective than blanketing a wider audience with ads they may not see.

Rotary Storyland & Playland holds the Fresno record for top-selling Groupons, with 4,362 sold in September. For $5 -- instead of the regular $13 -- customers got a wristband that gave them all-day access to the children's storybook-themed park and amusement park, including unlimited rides.

The parks don't have a way to track return visits, but that's OK, said president and chief executive Barry Falke.

"I look at it as a marketing expense," he said. "I'm selling our wristband for the exposure -- the day of and the potential to have several hundred people visit the park who normally wouldn't."

But not every deal is successful.

A blog posting about a bad experience with Groupon at Posies Cafe in Portland went viral last year. The owner sold nearly 1,000 Groupons and ended up using $8,000 of her personal savings to cover the extra payroll expense.

In Fresno, the owner of Twee Boutique & Gallery in the Tower District said she tried Groupon, but wouldn't do it again.

The shop, which sells handmade clothing, jewelry and other items, sold 82 Groupons for $20 worth of merchandise for $10.

"For every $20 of merchandise ... I only got $4.75," said owner Melanie Davis.

She said Groupon told her most people spend more than the $20. That didn't happen, she said. Davis also said Groupon users didn't turn into regular customers.

Groupon did not respond to calls seeking comment.

Many of the businesses with unprofitable Groupons in the Rice University survey echoed Davis' concerns, with 75% of them saying customers didn't spend beyond the Groupon value. And 87% of those businesses said customers didn't return.

One local company that tried Groupon-style marketing dropped the business after about six weeks. Fresno-based Live Discounts, which sells fundraising discount cards, tried it last August.

"We had plenty of interest in it, but the merchants were getting killed, weren't too successful as far as ... repeat customers," said co-founder Adam Lopez. "They didn't come back."

He said his company decided the work wasn't worth the money it was making.

Restaurants and retailers in particular have a difficult time swallowing the costs of such a promotion, according to Utpal Dholakia, an associate professor in management who led the Groupon study.

"Restaurants typically tend to have much higher fixed costs as a fraction of the total price," he said. "The cost of the food, the fixed costs of the rent and the utilities can add up to a much higher percentage of the final price than salons and spas."

Service-based businesses have an easier time because massage therapists, for example, only have to give more time -- not buy more product from a wholesaler -- to handle an influx of customers, he said.

Trying to do better

The local companies that imitate Groupon say they have found ways to overcome criticism the business model has received.

Kelly, of DrawCrowds, points to a feature called the DrawCrowds Marketplace, which allows businesses to post their own deals online and get a greater percentage of the proceeds. The Marketplace takes much less staff than the Groupon approach, he said, and Kelly plans to expand it to other markets.

DrawCrowds also has another key difference, he said. The more people who buy a deal, the deeper the discounts get. That gives consumers an incentive to market the deal to friends and increases the number of people exposed to the business, he said. Companies can build in protections like offering smaller discounts and limiting the number of deals that can be sold.

Valley Daily Deals uses what it knows best to promote its deals: radio.

The deals, which Peak Broadcasting first offered three years ago, are now broadcast daily on its radio stations, including KMJ (AM 580), KWYE (FM 101.1) and KSKS (FM 93.7).

They reach a broader audience than e-mail-based promotions, said Peak's director of digital sales Jeremy Price.

Despite the optimism of these companies, some are skeptical about the future of such promotions.

Lopez said the Fresno market is running out of businesses that can sell large numbers of deals. Groupon, with a budget that supports 1,000 workers, will survive, but smaller websites may not, he said.

Dholakia is pessimistic.

Two in five business owners in his study said they wouldn't offer a Groupon promotion again, with many saying they didn't see the return customers they had hoped for. That -- combined with a limited pool of businesses that can do such a promotion effectively and a skyrocketing number of competitors -- makes him think the business model is doomed.

"Two years from now, this whole thing will have collapsed on itself," he said. "There's no question about that in my mind."

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