Could Groupon Sink Your Business?

Some businesses claim they've been burned by doing business with the social deal company.

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It looks like a joke at first. A new page on the website of Washington, D.C. restaurant Back Alley Waffles advertises in large red-and-black letters that "waffles are $450.00 each and are available by appointment only."

But Craig Nelsen isn't laughing. He owned the now-defunct waffle shop and he says that  brought his only months-old business down, prompting his blistering screed on the restaurant's website.

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"Due to the shocking business practices of an obscenity known as 'Groupon'—contemptible even by the nearly non-existent standards of the modern corporation—I can no longer afford to sell waffles for $8.00 and still pay, for example, my employees something north of a subsistence wage," he wrote.

Nelsen says that Groupon's payment structure led to the failure of his waffle shop. The company sends businesses their share of sales in three installments, and Nelsen says the wait for those checks was so long that he couldn't keep up on other basic business costs.

"They kept saying they were sending this check," he says. "Every day I was checking the mail and telling my employees, 'Hold on, see if the check comes.'"

He joins a chorus of companies that feel they were burned by doing business with Groupon.

In 2011, a UK bakery lost a year's worth of profits on a Groupon deal offering 75 percent off of a dozen cupcakes. When 8,500 people purchased the deal, the shop was forced to make and sell 102,000 cupcakes at a loss. Earlier this year, Consumerist.com reported that a Philadelphia-area specialty food market lost $10,000 on a Groupon deal.

A recent survey from Susquehanna Financial Group and daily deal aggregator Yipit suggests that daily-deal remorse may be a widespread trend among businesses. The January survey showed that of 400 businesses that had offered discounts through social-deal companies like Groupon and LivingSocial, a majority (52 percent) said they would not offer another deal in the next six months.

Many businesses may complain, but they do not share the same gripes. Food For All Market, the speciality grocer in Philadelphia, said Groupon never told them they could cap the number of deals sold. A Portland, Oregon cafe told TechCrunch last year that Groupon pushed it to accept a deal that was too large, relative to the cafe's average receipt size.

Groupon stands by its ability to help businesses expand their clientele.

"Groupon is one of the most effective marketing tools available to small businesses—it will yield an influx of traffic," Groupon spokeswoman Julie Mossler writes in an E-mail.

As for Nelsen's particular complaint about slow payments, Mossler says that "the math does not point to Groupon as the cause" of his business' failure. She notes that only 18 percent of the Back Alley Waffles deals sold have been redeemed, and Groupon has paid the restaurant two installments totalling $2,126, though Nelsen says that the checks came too late.

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Nelsen adds that he has dealt with another deals site, Scoutmob, which paid him more promptly. However, he admits that his restaurant was operating on a "shoestring" budget, and that he "was at fault as far as not really looking into the fine print."

Pay attention to detail and consider your budget—two lessons that businesses may want to take to heart when they sign on with social deal companies.

"There can be any number of reasons why companies might have negative experiences. More often it's a small business that jumps on the daily deal bandwagon without thinking through what they're trying to do," says Utpal Dholakia, a professor of management at Rice University who has studied business' experiences with daily deal companies.

He says that companies that decide to offer social deals need to consider how to keep the customers they draw in, and that many of these customers will be "price-sensitive"—potentially spending only a dollar or two above the value of the Groupon and being stingy with their tips, which can make for worse service.