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Women swimmers competing in race (Jupiterimages/(c) Jupiterimages)

Part Two: Group-buying

What to expect when taking the group-buying plunge 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

"They tell you your phone's going to start to ring - and it does," says Susan Lewandoski, co-owner of the Gramercy Grill, an upscale Vancouver restaurant. "If I said the phone rang every minute, I'm probably underestimating it. It is not humanly possible to answer these phone calls."

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Ms. Lewandoski signed her restaurant for a promotion with Groupon, the group-buying, deal-of-the-day coupon site that blasts promotions to hundreds of thousands of customers in most big-city markets.

The company has also spawned a legion of imitators, many of whom are doing a rollicking business of their own. While there are subtle differences between the competing companies, most operate on strikingly similar models.

For many businesses, though, the group-discount model remains an untested novelty. When taking the group-buying plunge, what can a business expect?

Signing up: The first step is to pick a service to work with. This doesn't have to be a lifelong commitment: Many businesses alternate between coupon companies from one promotion and the next. This gives them the chance to be promoted on different mailing lists, reaching more prospective customers.

Groupon itself is widely acknowledged to be the 800-pound gorilla in the space, with over 550,000 subscribers in the Toronto area and 400,000-plus in Vancouver, but other firms - LivingSocial, WagJag, DealFind, TeamBuy and others - can deliver droves of customers as well.

Michael Moran, co-owner of 44wide, a Toronto gallery that specializes in printing photographs on large-scale canvasses, says that when he started his firm, Groupon initially turned him down based on his company's low web profile.

So he turned to WagJag - itself a local firm, more eager to work with him - and sold hundreds of units with his first deal. He repeated the process with TeamBuy, with good results. Within days, he says, Groupon called him back, wanting to do business.

"All the organizations look and see what their competitors are doing," he says. "They can see how much product was sold and at what value."

Today, he's got an exclusive deal with Groupon, selling thousands of discounted canvasses each deal at both ends of the country, with the goal of building up a customer database that will lead to higher-margin repeat business.

Preparing the deal: Coupon deals are more complicated than a simple discount: Most coupon services work hands-on with client firms to, as they put it, "structure the deal." (Unlike self-serve online tools like Google AdWords, group-discount sites deploy battalions of sales and customer-service representatives to work directly with business owners.) Different business categories have different options for creating their deals. For instance, Zane Caplansky, the owner of Caplansky's Delicatessen, a deli catering to Toronto's smoked-meat aficionados, put stipulations on his LivingSocial deal, preventing redemptions on holidays, as well as on weekends until April, when his patio is open. He says he was also able to negotiate payment terms with the company.

There's also the question of how much discount to offer and on what items, in order to cushion the expense of the deal.

"You want to make sure that you price it so that customers spend slightly more than the coupon is worth," says Mr. Caplansky.

Also included in the deal-structuring process is the minimum number of coupon-buyers needed to make a deal "active," and a cap on the maximum available to be sold. Larger coupon vendors usually sell so much that the minimum virtually ornamental. The cap, however, is more germane.

The influx: "Obviously, when you hit 500,000 people, you're going to get e-mails and calls," says Kelsey O'Neill, Groupon's spokesperson. Merchants affirm her experience: when a deal goes live in a large market, there's an influx of enquiries and customers that needs to be dealt with.

"Every single day for the first two weeks, it's like new year's eve," says Ms. Lewandoski, at the Gramercy Grill. In her case, this meant making sure that she had enough staff on to cover the rush, as well as making sure that every last server was up to speed on the details of the deal to ensure a smooth experience for customers.

Ms. Lewandoski says she was in contact with her agent at Groupon throughout the process; the company provides briefings for merchants on exactly what to expect on the day a deal goes live, how to handle it.

At some sites, there's another dimension: Groupon and WagJag both prominently feature discussion forums, where merchants and prospective coupon-buyers can interact. At 44wide, Mr. Moran said he found talking to clients to be a highly productive experience as he sought to create repeat customers.

Redemptions: Coupons issued to buyers are individually numbered, so the merchant can track redemptions; this is important for measuring the deal's effectiveness, to say nothing of making sure that no customers get clever and try redeeming the same coupon twice.

Reporting requirements vary from company to company. Many, especially the larger ones, offer online redemption-tracking services. (Groupon even has a mobile app for merchants that can scan coupons; meanwhile, LivingSocial lets customers redeem their coupons with an app.) Ms. O'Neill says that Groupon customers can expect to see 10 per cent of their coupons redeemed in the first 10 days, and 20 per cent within the first month; merchants will also see a spike as the deal draws to a close. The payout of revenue from the coupons varies between companies; some merchants have reported success in negotiating terms.

After that, turning discount buyers into repeat customers is in the hands of the merchant. But for many, a full restaurant is a good start.

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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