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(Charles Rex Arbogast/AP)
(Charles Rex Arbogast/AP)

Part One: Group-buying

Group-buying publicity like drinking from the fire hose Add to ...

In this four-part series, we'll look at the group-buying landscape, and the opportunities and risks for small businesses considering offering daily deals

It's like they came out of nowhere.

A few years ago, deal-a-day group-buying sites like Groupon didn't even exist. Today, they're household names, seized upon by eager consumers as the coupon books of the 21st century, deluging participating businesses with coupon-wielding, discount-seeking customers.

Groupon's success has inspired a legion of clones and competitors. Their schtick is simple: Every day, they e-mail their customers with a deal at a local establishment. If (and only if) enough customers buy in, the deal takes effect, and the customer walks away with a coupon for substantial savings at a business they might never have tried before.

Founded in 2008, Groupon spurned a $6 billion takeover bid from Google, and is on track to pull in $1 billion in revenue. That figure represents how much consumers were willing to spend to sample the wears of oftentimes-untried local businesses. They're popular, yes. But unambiguously positive? That remains to be seen. In this series, we'll take a closer look.

How it works: Groupon and its imitators are remarkably consistent. From the businesses' perspective, here's how they work: First, the business approaches the coupon site (in rare cases, it's the other way around). If they're accepted - and it's not guaranteed - then the coupon company will work with the advertiser to determine what deal to offer, and at what discount. Typically, discounts start at 50% off, though many are steeper.

On the day the deal runs, the coupon company runs the ad on its website, and sends out an e-mail blast to its e-mail list - or, more frequently, a demographically-targeted portion of it.

Interested customers then buy the coupon directly from the coupon-seller, which collects the money and gives the customer a uniquely-identifiable coupon. A cap can be placed on how many coupons are sold. The coupon company usually takes a 50% cut of the coupon revenues, and pays out the rest to the advertiser in installments.

The advertiser, for its part, braces for impact. It's up to the advertiser to track coupon redemptions with provided tools, and report results back to the coupon site. There's plenty to do: The phones start ringing, the clients start arriving, and it's up to the business to convert them into repeat customers.

Risks and rewards: Merchants say that, as publicity goes, being featured on a well-trafficked coupon site - especially Groupon - is like drinking from the fire hose. Even getting featured in a daily e-mail blast puts a business' name in front of tens - or even hundreds of thousands - of interested consumers, even if not a single one actually buys the coupon. When customers do buy the coupons, the potential to create a repeat customer is evident, as is the potential to spread word-of-mouth.

But for a small business, there's risk associated with the popularity of these offers. If a coupon advertises a 50% discount, and the coupon site keeps half of that, the merchant is only going to make 25% of what they would per item.

"One of the misconceptions that merchants need to look past is that they want to make money from the deal," says Gary Lipovetsky, the president and co-founder of DealFind, a Toronto-based group-buying site. "They shouldn't be looking at it that way - they're getting marketing."

Rather than making money from a deal, merchants are essentially paying for advertising with their own products.

Handling the sudden influx of customers and coupons presents logistical challenges as well - from adding extra staff to handling difficult customers who think that having a coupon means not having to tip.

Finally, some observers question the wisdom of introducing a brand to customers at a steep discount: It can instill the impression that a business has higher margins than it really does, or that its product is bargain material, rather than a high-value offering.

Major players: This market was pioneered by Groupon.com, which started in Chicago and quickly spread to nearby large markets, including New York City and Toronto. However, it's hardly the only player in the market today; after all, a single deal-a-day site can only feature so many daily deals before it bogs down in a sea of special offers. As a result, there's been plenty of room for competitors to take up its business model.

Among the rapidly-proliferating competitors, LivingSocial.com might be Groupon's most prominent counterpart; the Washington-based site actually predates Groupon, but only adopted its business model after Groupon became successful. It competes in most major markets across the United States and Canada.

Smaller, Canadian-raised sites are making headway in this space as well: DealFind.com, TeamBuy.ca and WagJag.com are all Toronto-based businesses that will send between dozens, hundreds, and - in some cases - thousands of clients to participating merchants. All work on the same premise as Groupon, with little variation.

Now, niche group-buying sites are starting to emerge, like EthicalDeal, a Vancouver-based site that promotes an environmentally-friendly deal every day. Right now, the service is offering daily deals in Vancouver and Victoria, with Toronto coming with the next few months.

"Our conversions are excellent," says Annalea Krebs, EthicalDeal's founder. "We'll send a restaurant 500 customers in 24 hours."

What a restaurant does with 500 new customers, however, is another challenge completely.

Special to The Globe and Mail

The series continues next Monday with: Small businesses offering group deals: What to expect? Other Stories can be found on the Web Strategy section of the Your Business website.

 

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