Group buying sites: A word of warning

For Sarosh Mehta, owner of the Casablanca bar in Brisbane, it seemed like a perfect deal.

When group buying site Cudo approached him late last year to consider running a discount deal on its site, Sarosh saw the chance to introduce his business to a range of new customers.

Sarosh says he ran a deal with Cudo that sold well, but he vastly underestimated the number of people that would sign up to the “rather generous” discount whereby coupon buyers could receive $70 worth of anything from the menu for $20.

“We agreed to a rather substantial deal, which in hindsight we think was a little too generous,” he says.

“We discovered that the hundreds of customers did not spend beyond the voucher value. There was no additional income for us, not even people buying a glass of lemonade or whatever. We were hoping that wouldn’t be the case.”

Sarosh says he simply couldn’t deal with the influx of activity. Cudo chief Billy Tucker says this led to a number of customer complaints about coupon redemption.

Sarosh admits none of the problems were Cudo’s fault, but he wishes the payment timetable could have been spelled out in more detail.

“We’re giving massive amounts of food and drink for that value… I would never do it again,” he says.

Sarosh is one of thousands of small businesses that have been swept up in the group-buying craze, selling discounts and coupons to thousands of deal-hungry shoppers.

But SMEs who have tried group buying are warning naïve entrepreneurs to look before they leap.

They warn that these sites – specifically Groupon operating under the StarDeals brand in Australia – may not deliver as much of a financial benefit as first thought.

Businesses that advertise on group buying sites – usually SMEs in the entertainment or hospitality industries – are promised the sites will provide them with new customers and an influx of revenue and the chance to dramatically boost their profile.

But a number of companies have now said that while their business was given some exposure through the StarDeals experience, there was little or no financial benefit at all, as their businesses could not cope with the sudden demand.

Others say when the initial customer base is gone, they don’t come back – leaving the business with little more than an expensive promotion.

Problems emerge with the structure of deals

The financial structure of group-buying sees money pass through several pairs of hands and the process grows more complicated depending on which group buying site is organising the deal.

Over the past year, three distinct financial models have emerged.

The first is where a group buying site pays the merchant entirely upfront or over a set period of time for all the vouchers sold by the group buying site. Scoopon, Jump On It and Cudo all do this – Cudo usually pays within five to 10 days.

The second is the model used by Spreets, where the group buying sites takes its percentage from vouchers sold and then provides the merchant with an initial payment. The rest is provided when all the vouchers are redeemed by the merchant and then sent back to Spreets.

The third model, which is used by StarDeals, is the most difficult to manage, according to group buying experts. The company holds onto 100% of the merchant’s funds until the vouchers are packaged up and sent back to StarDeals as proof of purchase.

The disadvantages here are obvious. Not only do businesses have to wait quite a while for any financial benefit, but the merchant must have ready capital on hand to be able to service the influx of new customers the deal creates.

“You don’t make any money from them at all,” says the owner of Melbourne restaurant Sahara Nights, Farid Melhem.

“I’m giving away free pizza, free salad and drinks. I open up the shop, but you’re essentially not making any money at all even though people are enjoying the food and people are in the store.”

The Sahara Nights deal on StarDeals saw 186 coupons sold, providing a $28 discount – a total cost of $5,208 in lost sales to the business.

Another restaurant manager, who wished to remain anonymous, claimed the fact StarDeals holds on to the money until the vouchers are redeemed is a fact that wasn’t fully pointed out properly until the deal was signed.

To be fair, Stardeals explains its model up front. In a statement, the firm told SmartCompany that rather than treating these deals as a guaranteed source of income, most companies use them as a “marketing investment”.

“We discuss each and every deal with all of our merchants very carefully in advance of entering into any agreement and each deal is structured to meet their sales and marketing objectives.”

But Cudo chief Billy Tucker also says there is a problem with the StarDeals model of keeping payment until vouchers are redeemed and says customers need to be told up front what’s going on.

“We’re dealing with very savvy small businesses, which don’t really have a huge amount of time on their hands. There are people putting together contracts and aren’t being transparent about it. As soon as they progress, they feel they’ve been taken advantage of.”

“I’m not surprised they’re getting pissed off.”

OurDeal chief executive Julian Holeman says while he doesn’t wish to name anybody, he admits he has heard of similar complaints among businesses which feel they’re ambushed by discounts they can’t afford.

And it looks like this practice isn’t limited to just Australia. In a study conducted by the Harvard Business Review, less than half of the 150 merchant participants said they wouldn’t participate in another deal.

Their main reasons? “A significant proportion of Groupon redeemers are extremely price sensitive, barely spending beyond a discounted product’s face value. Not surprisingly, repeat-purchase rates at full price were also low – just 13% – for these businesses.”