Groupon insights: what the surge in the group buying market really means for small businesses

I experienced my first Groupon earlier this week, a hair treatment in East London. It was good. Other than a slight hiccup with my original appointment, the hairdresser was lovely (entertainingly eccentric in fact), the setting was quality and the result absolutely perfect.

But it had to be really. At the end of the day, the only way this guy – an independent with his first salon I may add – is going to make any money from having gone into partnership with Groupon is to encourage repeat custom. Needless to say, I put my journo head on and started asking questions…

It turns out the salon sold nearly 1,000 deals. Each one cost £65 (instead of the usual £180) with about £20 of that, from what I can figure out, going to Groupon.

From the off therefore, there’s no way this endeavour would make money; rather it would be lucky to break even.

Then there’s the fact that’s a lot of customers to try and satisfy within a six month period for an appointment that lasts up to three hours. As a result, this salon has hired multiple extra staff to deal with the demand, plus opened its doors seven days a week (including on the recent bank holidays). So that’s more cost then.

Even more amazing, however, is the way in which the salon actually gets its money. For every person through the door, it has to send Groupon proof of the bought voucher. When each one is signed off, the money eventually comes its way.

In other words, the salon is laying out for the treatment far further in advance of the cash. That might not be a big deal for a large corporation, but for a tiny salon where cash flow is of paramount importance, you can well imagine it is.

To make matters worse, the salon had various experiences whereby the customer had in fact cancelled their purchase from Groupon and got their money back. Of course, they’d already been sent the voucher, so if they wanted to they were still able to have the treatment before the salon realised. It wasn’t until the salon contacted Groupon it was told this transaction was invalid. Inevitably the fault of a dishonest consumer, but still proof of a system that needs to perhaps be reconsidered.

Said hairdresser also told me of two other salons he knows of that have had to close down off the back of partnerships with this deals website giant. He wasn’t aware of them due to their boarded up windows, but rather because Groupon contacted him to ask if he could take on the additional customers who would no longer be able to get the original treatments they bought. He said no.

You might notice I’ve kept the name of the salon confidential; I didn’t think it fair to reveal who it was. But the point is, it doesn’t really matter; the one I went to was one of the luckier ones it seems.

It’s a tough one. The deal’s market is growing rapidly, and I don’t fundamentally disagree with it – it holds great marketing potential for many. But it’s not for everyone and it shouldn’t be taken as a quick fix to helping business as though it is.

In this case, the salon is coping. It will get through its 1,000 customers and it will do so to the best possible standard so as to encourage as many of them as possible to come back. It won’t, however, be using Groupon again.