Groupon Merchants Telling a Different Story

When you reach the pinnacle of success as quickly and as publicly as Groupon has, it's only natural to have some detractors along the way. But what started out as a few recent critics has turned into a virtual case of piling on.

The latest case of negative publicity for the wildly successful group-buying startup comes in the form of a survey conducted at Rice University. The study interviewed 150 merchants that have collaborated with Groupon to offer consumers daily deals on their products and services, and the results were not nearly as glowing as the reports coming from the two-year-old company's headquarters in Chicago.

Thirty-two percent of the responding merchants said that their promotions, or Groupons, resulted not in profits but in losses, while 66 percent said their Groupons were profitable. More telling, perhaps, was that 40 percent of the business owners said that they would not run such a promotion again - a significant contradiction to the company's data that states that 97 percent of merchants come back asking for more Groupon promotions.

Separate from the study, one of the "criticisms" Groupon has faced in recent weeks is that the promotions have become so overwhelmingly popular that it is difficult for smaller businesses to keep up with the demand they create. The most famous example is the case of a small café in Portland, Ore., in which the owner claims that she spent $8,000 of her personal savings to help cover the costs incurred from selling too many Groupons, of which the company took too high a percentage of the sales.

The incident was highly publicized and Groupon CEO Andrew Mason immediately took to the blogosphere to both apologize to the merchant and to defend his billion-dollar company's business practices. That seemed to have quieted the criticism for the most part, but then came the Rice survey, which also revealed the following:

-    Among the service industries, restaurants fared the worst with Groupons
-    Salons and spas were the most successful
-    Unprofitable promotions were most prevalent from businesses that had low rates of spending by Groupon users beyond the deal's face value and low rates of return to the business again at full price
-    Respondents indicated they had largely negative perceptions of Groupon's competitors

Groupon has been called the fastest-growing company in history and was valued at over $1 billion before its two-year anniversary. It is on par with fellow startup phenomenon Foursquare for the amount of clone companies it has generated, with some very established businesses such as Travelzoo, OpenTable and The Knot also trying to get in on the daily deal/group buying action.

Maybe the Rice survey can provide Mason, Groupon and the scores of imitators a better blueprint for success in this dynamic but relatively uncharted space.