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Study Unlocks What Makes Groupon Work for Businesses

Stocks in this article: GRPN

One differentiator was the number of deals offered: while only 45% of those business offering their first deal reported making a profit, 76% of deals were profitable for those businesses that had run seven or more. Clearly, there is a learning curve when it comes to offering deals, and those who master the right mix see a payoff.

"Learning goes on at multiple levels," Dholakia says. "Merchants start to offer the kinds of deals that hurt their margins less, they figure out the efficiencies of providing service and they improve their marketing to deal users." Another notable finding was that offering multiple deals over time did not seem to lead to diminishing returns: the same percentage of new customers (roughly 80%) bought a deal whether it was the first time being offered or the seventh.

Another striking finding was the difference in profitability between different types of companies. The businesses reporting the highest rate of profitability from deals were photographers (75%), health and fitness services (69%), tourism-related services (68%) and doctors and dentists (67%). Deals offered by restaurants and bars (44% profitable), and cleaning services (27% profitable) were much less likely to be successful.

"In cases where businesses have low variable costs, such as a yoga studio, profitable deals are more likely than in cases where the variable costs for the business are high, such a restaurant," Dholakia says. "Other factors which could make a difference are the extent to which the business is able to cross-sell other higher-margin products or services and the extent to which they are able to convert first-time users into repeat buyers." It may be easier to convince a person who tried out a fitness class to sign up for a full session than it is for a restaurant owner to lure back diners who stopped in only because they wanted a half-price meal.

Ultimately, every small business must determine their ultimate goal: Are they offering a deal to spread the word about a brand-new business? To bring in customers during off-hours? To offer a relatively inexpensive service but aggressively upsell other products?

Business owners must also do their own due diligence, understanding the fine print in their agreement with a daily deal site (on average, sites split the revenue from every deal sold 50-50 with the business offering it). Business that run repeat deals may benefit from trying out different sites and/or negotiating more favorable revenue sharing.

Groupon's stock price may be in free-fall, but its business model has already proven to be a success for many independent companies, as long as they structure deals that pay off for both them and bargain-hunters.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
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