Effectiveness of Social Promotions Running Head: EFFECTIVENESS OF SOCIAL PROMOTIONS

What Makes Groupon Promotions Profitable For Businesses?

UTPAL M. DHOLAKIA* Rice University

March 12, 2011

* Utpal M. Dholakia is the William S. Mackey, Jr. and Verne F. Simons Distinguished Associate Professor of Management at the Jones Graduate School of Business, Rice University. The author gratefully acknowledges Anita Dholakia for inspiring this study, Rice University for providing the financial support to help conduct it, and the many small business owners who gave unstintingly of their time to provide their responses to the studys questions.
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Electronic copy available at: http://ssrn.com/abstract=1790414

Effectiveness of Social Promotions

Abstract

Although social promotions are wildly popular with consumers, it is unclear how businesses running such promotions fare. We develop and empirically test a conceptual framework specifying the determinants of a profitable Groupon promotion. Features of the promotional offer and employee satisfaction are hypothesized to affect customer behavior on the occasion of Groupon redemption and longer-term, respectively, which in turn impact profitability of the promotion. A survey-based study of 150 businesses that ran and completed Groupon promotions between June 2009 and August 2010 provides support to the proposed framework. Businesses suffering unprofitable promotions reported significantly lower rates of spending by Groupon users beyond its face value (25% vs. 50%) and return rates to purchase from the business again at full prices (13% vs. 31%). Many respondents reported disillusionment with the extreme price sensitive nature and transactional orientation of Groupon users. Based on these findings, suggestions to modify social promotion offers to better balance the value offered to consumers with positive outcomes for businesses are provided.

Key-words: Social promotion, Groupon, social media, price promotions.

Electronic copy available at: http://ssrn.com/abstract=1790414

Effectiveness of Social Promotions

What Makes Groupon Promotions Profitable For Businesses?

It's a great marketing tool. just not great with making profit. small business owner

Business circles have been abuzz in recent months with the sky-rocketing popularity of social promotion sites (e.g., Fowler 2011; Lyons 2010; Underwood 2010). Groupon (www.groupon.com) is currently the best known and the largest one of these sites. Launched in November 2008, the site has grown to cover more than 300 markets in 35 countries as of February 2011. Groupon currently features one or more daily deals for each market it operates in, offering consumers significant discounts mostly for small and medium-sized local businesses, such as $40 worth of sushi for $20, or a $175 facial at a spa for $59. When purchasing a Groupon, consumers pay for the product up front, and then have a stipulated amount of time, up to a year, to redeem it at the business. Groupon promotions have a strong social component. Each promotion is valid only if a certain minimum number of consumers, pre-specified by the business running the promotion, purchase the offer. Not surprisingly, the news of Groupon promotions spreads virally through Facebook updates, Twitter tweets, and text messages on a daily basis, as consumers encourage family members, friends and acquaintances within their social networks to tip the deal (i.e., reach the critical mass stipulated by the business) so that everyone can get the offer. Fueled by its popularity, the label Grouponer has entered the contemporary lexicon in recent months to describe deal-savvy, socially networked online shoppers. Groupons and other similar social promotions provide compelling utilitarian and hedonic benefits to consumers (Chandon, Wansink and Laurent 2000). Not only do these promotional offers possess many of the most appealing features of traditional paper or online coupons, but they also have additional innovative benefits. First, Groupons offer substantial --- at least 50
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Effectiveness of Social Promotions percent, but often as much as 70 or 80 percent --- discounts off regular prices, providing consumers with low-risk opportunities to try out new products and services such as restaurants and spas that have just opened or ones they have not tried before. Furthermore, most offers are from small, locally-based brick-and-mortar businesses, a retail sector that has suffered in the past decade as consumers have migrated to online channels (e.g., Dholakia et al. 2010). Second, the Groupons short time frame, usually a single day, creates a sense of urgency to purchase the offer, and makes the anticipation of waiting for the next Groupon an exciting daily ritual for many consumers. As one industry expert observed, It's a cents-off coupon married to a Friday-after-Thanksgiving shopping frenzy (Steiner 2010). Not surprisingly, Urban Dictionary has coined the phrase Groupon Anxiety to refer to the preoccupation and feeling of anxiousness and not being able to sleep knowing that a new Groupon will be released after 1 a.m.1 Furthermore, the promotions social aspects encourage many groups of friends or family members to buy Groupons together and share a positive experience like taking a cooking or wine-tasting class, or enjoying a meal at an upscale restaurant (Armando 2010). For many small and medium-sized businesses, particularly for ones that are new or struggling, hordes of new customers flocking in because of a social promotion may seem particularly appealing during times when consumers have cut back on so many products and services (Dong-Hun 2009; Kotecha et al 2008). Some prior research also supports the effectiveness of price promotions in drawing new customers to businesses (e.g., Walters and MacKenzie 2008). Consequently, it has been argued that a social promotion can provide valuable exposure to a small business, with the efficacy of the exposure increasing as social promotions become more and more popular (http://www.grouponworks.com). Furthermore, as Greenleaf (1995) has observed, one powerful reason that firms use price promotions is that they can
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http://www.urbandictionary.com/define.php?term=groupon+anxiety

Effectiveness of Social Promotions increase profits. Not surprisingly, Groupon recently reported that it has a waiting list of over 35,000 businesses wanting to be featured on the site nationwide, and that it can currently promote only about one in every eight interested businesses on its site (Sherr 2010). Fueled by this popularity, numerous social promotion sites such as LivingSocial, eWinWin, SocialBuy, and BuyWithMe have been launched in recent months, and the whole industry represents a beehive of venture capital and technology startup activity.

Research Objectives Despite the media frenzy and investor enthusiasm surrounding the social promotion industry, there is little actual evidence regarding the effectiveness of social promotions for small businesses. This issue is particularly relevant because small and medium-sized businesses constitute the core customers for social promotion sites, and the success of these sites over the longer term hinges on the profitability and repeated use by small and medium-sized businesses for running promotions. Accordingly, our goals in this research are two-fold. First, we develop and empirically test a conceptual model that elaborates on the determinants of social promotion profitability. Drawing upon existing price promotion research (Alba et a. 1999; Blattberg and Neslin 1990; Carol 1976; Lewis 2006), studies of relational marketing program efficacy (Dholakia 2006), and theories linking employee and customer satisfaction (e.g., Koys 2001; Schneider, White and Paul 1998), our proposed model includes key components of the Groupon promotion that impact its profitability for the firm. Specifically, we include features of the promotional offer such as the Groupons face value, the depth of price discount offered, and offer redemption duration, as well as the role played by the satisfaction of the firms employees with the Groupon promotion. We
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Effectiveness of Social Promotions also take into consideration measures of relevant customer behavior both on the occasion of Groupon redemption (the offers efficacy in attracting new customers and their spending beyond the Groupons face value) and over the longer term (repeat full-price purchases by Groupon users). These three factors are hypothesized as influencing the Groupon promotions profitability (see Figure 1). Our model also includes the two key consequences of Groupon promotion profitability that are of interest to social promotion sites, the venture capital community and to small and medium-sized businesses: whether the business will run another promotion in the future and whether they will recommend a Groupon promotion to other businesses. These outcomes are indicative of the longer-term viability of the social promotion business model. Finally, in the absence of available theory, we also conduct an exploratory investigation of the determinants of number of Groupons sold during a particular promotional offer. Second, informed by the results of our empirical study, we provide a number of actionable insights to marketing practitioners. In particular, our findings are expected to be useful to the many small and medium-sized businesses considering whether they should run a social promotion and how to prepare for such an offer, to venture capitalists weighing investment opportunities and strategies in the social promotion space, and to the founders and managers of social promotion sites. Finally, we discuss the issue of sustainability of social promotion sites in the longer term and provide specific suggestions regarding how social promotions might be structured in the future so as to be beneficial to both small businesses and consumers in a more equitable manner.

The Conceptual Model of Social Promotion Profitability In the present research, our focus is on the assessment of a Groupon promotion program from the standpoint of the businesses running the offer. Our theorizing is done in the spirit of
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Effectiveness of Social Promotions Gupta and Zeithamls (2006) recent framework linking firms actions to customer behaviors, which in turn impact the firms performance metrics. Consequently, a useful starting point for developing our conceptual model of social promotion profitability is with a consideration of the key metrics that firms employ to evaluate a social promotions success. Prior research (e.g., Blattbergy and Neslin 1990; Mela, Gupta and Lehmann 1997; Walters and MacKenzie 1988) indicates that key metrics relevant in determining a price promotions profitability include: (1) its efficacy in bringing new customers to the firm, (2) the degree to which customers redeeming the promotion buy beyond its face value (often called upselling; Aydin and Zia 2008), and (3) the degree to which redeemers make repeat purchases from the business at full price in the future. These three profitability drivers play central roles in our proposed model of social promotion profitability, which is graphically summarized in Figure 1. Each one is discussed in greater detail next. [Insert Figure 1 about here] Determinants of Groupon promotion profitability New customer acquisition efficacy. A primary purpose of many price promotions is to encourage trial of a new product, or of an existing product among new customers. Short-term or one time discounts such as offers made through a Groupon promotion can reduce the consumers risk and make the products trial more attractive to novice consumers (Blattberg and Neslin 1990; Lewis 2006). For social promotions especially, exposure to a new customer base is one of the primary goals that many businesses seek to accomplish through the promotion. For example, in a video directed toward small and medium-sized businesses on its Grouponworks website, Groupon pitches the influx of new customers as a key consequence of running a Groupon promotion. Acknowledging its importance, new customer acquisition efficacy is a key driver of the Groupon promotions profitability in our proposed framework (see Figure 1).
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Effectiveness of Social Promotions Spending beyond the Groupons value. A second measure that is useful in assessing a price promotions success is its ability to generate spending among users beyond its face value. For example, a Groupon to buy $20 worth of food for $10 might yield average tickets of $40. In this case, the restaurant has succeeded in selling twenty additional dollars of its food and beverages at full price due to the Groupon promotion. Furthermore, a distinct and explicitly acknowledged function of many Groupon promotions is to serve as a loss leader, with the goal of getting customers in the door and have them spend beyond its value (e.g., Gerstner and Hess 1990). In our proposed framework, because we cover small and medium-sized businesses across a range of industries, we include the percentage of customers that spend beyond the Groupons value to operationalize upselling, rather than the value of the products or services sold at full price, which will be heavily dependent upon a particular industry. This measure is also expected to be available to a larger number of businesses (at least as an estimate) when compared to the measure of actual additional dollar sales, which requires a sophisticated customer tracking database that many small businesses may not possess (Payne and Frow 2005). Repeat full-price purchase. Whereas the first two measures characterize the consumers behavior on the occasion when the Groupon is used, the third measure in our framework operationalizes longer-term behavior of customers towards the firm. In essence, a price promotion succeeds when it entices new customers to try a particular offering through a compelling offer, and they like it so much that they buy it repeatedly, becoming the firms relational customers (Dholakia 2006). Based on this premise, Groupon promotions create the promise for small and medium-sized businesses that Groupon users will come back and purchase again. In fact, it is this allure of future repeat purchase from the new customer base which justifies the loss that is incurred by the business on the occasion when consumers redeem the promotion (e.g., Reichheld 2001; Scott 1976). In our framework, we operationalized this
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Effectiveness of Social Promotions construct with the percentage of Groupon users that return to the business and purchase its products and services a second time by paying full price for it. As the preceding discussion suggests, we hypothesize that each one of these three constructs will increase the likelihood of a profitable Groupon promotion, as summarized in the following hypothesis: Hypothesis 1: (A) New customer acquisition efficacy, (B) spending beyond the Groupons face value, and (C) repeat full-price purchase will each have a positive impact on the Groupon promotions profitability for the firm. Effects of Groupon promotion variables on profitability drivers In our framework, the three profitability drivers are, in turn, affected by features of the promotional offer including the Groupons face value, the depth of price discount offered, and the duration of the redemption period (see Figure 1). Each of these characteristics is considered in depth next. Face value of Groupon. Face value indicates the total value of the product that can be purchased through the offer. A higher face value provides a greater amount of discount (in dollar terms) to the consumer. For instance, a Groupon with a face value of $40 (purchased by the consumer for $20) will yield a discount of $20 whereas one with a face value of $20 (purchased by the consumer for $10) will only provide a $10 net benefit, even though both Groupons offer the same percentage discount. Thus, a higher Groupon face value provides important utilitarian benefits to consumers in the form of increased perceptions of savings (Chandon et al. 2006) and reduced financial risk of purchase (e.g., Conchar et al. 2004). Because of this greater offer attractiveness, a higher face value Groupon is expected to be more efficacious in acquiring new customers in our proposed framework. Such a prediction is also in line with the large body of research showing that higher value coupons are more likely to be redeemed than those having lower face values (e.g., Bawa and Shoemaker 1987; Reibstein and Traver 1982).
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Effectiveness of Social Promotions However, when the face value of the Groupon is higher, it is more likely to approach the amount that the customer normally spends during a store visit. Consequently s/he will be less likely to spend beyond the Groupons value when redeeming it. As prior retailing research has shown, consumers are good at adjusting their spending to account for a coupons use (Hess and Gerstner 1993); using a coupon does not necessarily increase the customers overall spending in the store during the visit (Russell and Petersen 2000). Thus, although we expect a positive effect of the Groupons face value on the promotions new customer acquisition efficacy, we also hypothesize that the higher is the Groupons face value, the lower will be the customers spending beyond this amount on the occasion of Groupon redemption. Depth of price discount. An important characteristic of the social promotion is the percentage discount offered off the Groupons face value by the firm, usually referred to as the depth of the price discount (Alba et al. 1999; Raghubir and Corfman 1999). From the firms standpoint, this is a key decision variable, with conventional wisdom suggesting that a deeper discount is not necessarily better: in fact, a greater discount depth if considered by itself invariably means that the firm will lose money on the promotion (e.g., Porter 2011). However, when the effects of discount depth on consumers behaviors are considered explicitly, the net effect could be different. From the consumers standpoint, prior research has shown that discount depth reduces price expectations (Kalwani and Kim 1992) and reference prices (Greenleaf 1995), directly contributing to the offers appeal for the consumer. This effect is even more pronounced for new customers because their level of risk is higher and is likely to diminish significantly upon receiving a deeper discount to try the product (Lewis 2006), making them more willing to purchase the Groupon and engage in the trial. In contrast, existing customers can find deep discounts to be off-putting (Dholakia 2006). Thus, the deeper the discount, the more will be the
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Effectiveness of Social Promotions number of new consumers willing to try the product that they otherwise would not have tried, thus increasing the promotions efficacy in acquiring new customers for the firm. Furthermore, receiving a deeper price discount lowers the price perceptions of consumers regarding the product being purchased (Alba et al. 1999) and unlike face value, this can encourage more spending, leading to a greater likelihood of spending beyond the Groupons value (e.g., Hardie 1996). In a nutshell, consumers may feel that because they are getting such a good deal, it is acceptable to spend more than they normally would. To summarize, this discussion captures the key trade-off involved in making the Groupon promotion work effectively for the firm: by itself (that is, without a consideration of its effects on customer behavior), a deep discount can be viewed as eroding profitability, but by attracting new customers and getting users of the promotion to spend beyond the Groupons face value, the deep discount can be contributory to a profitable promotion. Offer redemption duration. The redemption duration of the offer captures how long the consumer has to redeem the purchased Groupon before it expires. Offer redemption duration is another important decision variable for the firm, and in the case of Groupon promotions, the firm has considerable latitude in choosing the duration. For instance, in our dataset (described in detail in the next section), the redemption duration ranged from two weeks to one year. Just like discount depth, redemption duration has different implications depending on whether consumer behavior is considered or not. By itself, a longer redemption duration is undesirable for a firm because it may leave outstanding unredeemed Groupons as a potential liability that must be honored (at least at the value the customer has paid) as and when customers choose to redeem them (Inman and McAlister 1994; Kile 2007), and also potentially affect full-price sales adversely during this time (Krishna and Zhang 1999). However, from the consumers standpoint, a longer duration for redemption is likely to
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Effectiveness of Social Promotions act as a risk-mitigating mechanism and increase the promotions attractiveness to new customers. Furthermore, for firms which have relatively low market shares in the category (which is likely to be the case for most small and medium-sized firms running Groupon promotions), using a longer redemption duration can relax redemption pressure and even attract customers who may otherwise prefer other brands in the market place (Krishna and Zhang 1999). Furthermore, in the case of a Groupon with a longer redemption duration, more consumers are likely to redeem it at a time point which is distant from the time of purchase; consequently, the pain of paying for the Groupon is likely to have diminished (Gourville and Soman 1998), we expect more redeemers to spend beyond the Groupons value when the offer has a longer duration. Based on this discussion, our hypotheses are:

Hypothesis 2: (A) The Groupons face value, (B) the depth of the price discount, and (C) offer redemption duration will each impact new customer acquisition efficacy for the firm positively. Hypothesis 3: (A) The Groupons face value will impact the consumers spending beyond the Groupon value negatively, and (B) the depth of the price discount, and (C) offer duration will each impact the consumers spending beyond the Groupon value positively. Effects of employee satisfaction on repeat-full price purchase An important purpose of price promotions is to initiate what businesses hope will be longer-term profitable relationships with new customers (Dholakia 2006). To that end, as discussed earlier, a key metric to evaluate the promotions success is the degree to which coupon users return and purchase from the business again at full price. We argue that although the social promotions characteristics can bring new customers to the business and influence their behavior on the occasion when the Groupon is used, how they employees view them and treat them will influence whether longer-term benefits accrue to the business. Prior organizational psychology research indicates that employee attitudes and behaviors can significantly influence business
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Effectiveness of Social Promotions outcomes. For instance, in a longitudinal survey conducted in cooperation with a regional restaurant chain, Koys (2001) found that employee satisfaction at time period 1 had a significant effect on customer satisfaction at time period 2. Schneider, White and Paul (1998) similarly found that employee perceptions of a climate for service lead to subsequent customer perceptions of higher service quality. In line with these findings, we hypothesize that the degree to which employees of the business are satisfied with the promotion will positively influence the longer-term behavior of Groupon users. This discussion implies that adequate employee preparation may be necessary for new customer acquisition to translate into relational customers over the longer-term when a social promotion is run by the business. Such preparation may entail advance notice regarding heavier burden of work, training, and even appropriate additional compensation for the longer hours and potentially lower gratuities that employees might earn during the promotion period. Based on this discussion, our hypothesis is: Hypothesis 4: The satisfaction of the firms employees with the Groupon promotion will impact the repeat purchase of Groupon users at full price positively.

Effects of promotion profitability on intentions to repeat and recommend Finally, an important managerial issue for both social promotion sites such as Groupon and LivingSocial, and for venture capital firms currently making investment decisions in this industry, lies in the sustainability of the social promotion business model. As explained earlier, social promotions are extremely popular among small and medium-sized businesses at present, given their novelty and also because of the extensive press coverage these promotions have garnered in the past year. However, a more grounded measure of future potential lies in the assessment made by firms that have run such promotions regarding: (1) whether they will run
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Effectiveness of Social Promotions another a social promotional offer again in the future, and (2) whether they will recommend a social promotion to other small and medium-sized businesses. In our proposed framework, both these assessments are positioned as consequences of the promotions profitability. Specifically, we expect that when the firm enjoys a profitable Groupon promotion, it will indicate a greater willingness to run another such promotion in the future, and also be more amenable to recommending such promotions to other businesses. This is in line with ample customer satisfaction research which has established strong linkages between the level of the consumers satisfaction with the firm and his or her loyalty and recommendation intentions (e.g., Oliver 2010). Thus: Hypothesis 5: The profitability of the Groupon promotion will impact (A) the firms intention to run another social promotion in the future, and (B) its willingness to recommend Groupon promotions to other businesses positively.

Exploratory investigation of the determinants of the number of Groupons sold A managerial issue of considerable significance is what determines the popularity of a Groupon promotion among consumers. Groupons for a particular offer are sold during a relatively short time period, usually a single day, and are different from traditional coupons or price discounts offered by firms through other channels in at least one important respect: when buying the Groupon, the customer purchases the right to obtain the product or service according to the terms of the offer up front and then has a certain time period in which to redeem this right. In this sense, a Groupon resembles a gift card more than it does a traditional coupon (Horne 2007). Unlike a coupon, the firm (and the social promotion site) earns the revenue at the time when the Groupon is sold not when the customer redeems it at the store. The number of Groupons sold during the promotional period is therefore the crucial determinant of the revenue earned by the small business. Even more important, the greater the number of Groupons sold
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Effectiveness of Social Promotions during the promotion period, the more is the amount of exposure received the firm. As discussed earlier, this is one of the primary objectives of the firm in running a Groupon promotion, and consequently most firms would like to sell as many Groupons as possible. Prior research on price promotions suggests that the firms brand image and its standing in the local community will play significant positive roles in influencing the number of Groupons sold (e.g. Chandon et al. 2006). For instance, in an early study on this issue, Reibstein and Travers (1982) found that stronger brands (as measured by their market shares) enjoyed higher coupon redemption rates. Similarly, the breadth of appeal of a particular product is also likely to have a positive impact on number of Groupons sold. However, neither of these factors is under the direct control of the firm offering the Groupon (at least in the short term). What the firm can do is choose the characteristics of the Groupon such as its face value, the depth of discount offered and redemption duration. As such, an important question is whether these decision variables impact the number of Groupons sold. Given the newness of Groupon promotions and their differences from traditional coupons, previous research has not shed light on this issue. Accordingly, we conducted an exploratory analysis of the determinants of the number of Groupons sold. Specifically, our research question was: Research Question: Which characteristics of the promotional offer influence the number of Groupons sold?

Study Method To test our conceptual model and answer the exploratory research question, we conducted a survey of firms that ran and completed Groupon promotions between June 2009 and August 2010. The survey was conducted in late August and early September 2010 in multiple stages. In the first stage, we called four small firms in one large US market that had recently run Groupon promotions and conducted 45 minutes to one hour long in-depth interviews with their owners to
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Effectiveness of Social Promotions gain a qualitative understanding of their experiences with Groupon promotions. This helped us formulate the specific questions to ask in the survey. It is worth noting that at this stage of the project, we intended to include social promotions from other sites, in particular, LivingSocial, in our analysis, to test the proposed conceptual model across a broader set of social promotions sites rather than just Groupon. However, very quickly we realized that all the other sites were largely new and did not have enough completed promotions to be able to conduct a meaningful analysis as we were able to do for completed Groupon promotions. We acknowledge that this broader investigation is an important research endeavor to accomplish so as to study a larger pool of businesses across different social promotion sites in the future. Next, we identified 360 small and medium-sized businesses throughout the United States and contacted them by telephone and/or email, inviting the owner or marketing manager of each firm to participate in our study. The firms were identified through a combination of searching on Groupons recent deals web-pages for various cities, and also conducting key-word searches using the Google, Bing, and Yahoo search engines to discover other past deals that were not listed on the Groupon site. Respondents were offered a $10 Starbucks or Wal-Mart gift card for completing our survey. In the study, we asked respondents a number of questions regarding their experience with the Groupon promotion. We asked how effective the Groupon promotion was in bringing new customers (using a ten-point scale anchored with 1 = not at all effective, and 10 = extremely effective), what percentage of these customers spent more than the Groupon face value, what percentage came back to the firm a second time and purchased its products and services at full price, and how satisfied their employees were with the Groupon promotion (using a ten-point scale anchored with 1 = not at all satisfied, and 10 = extremely satisfied). We also asked whether the Groupon promotion was profitable for their business (using a yes/no question), whether they
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Effectiveness of Social Promotions would recommend it to other small businesses (using a yes/no question), and whether they would run another Groupon promotion again in the future (using a yes/no question). Finally, we asked a number of open-ended questions regarding the promotion. The survey took ten to fifteen minutes to complete for most respondents. If we were unable to reach the firms owner or manager the first time, when contacting by email, we sent one additional reminder email approximately ten days after the first one. When using the telephone for the survey, we tried two additional times to reach the person. By the time all attempts at contacting respondents were complete, a total of 150 businesses, spanning 19 U.S. cities and 13 product categories completed our survey, resulting in a response rate of 41.7% for the survey. Note that the total includes four firms which had gone out of business since running the Groupon promotion. Excluding these firms, our response rate is 42.1%. Our respondent sample covered a number of large US markets. Chicago (16.7% of sample), Houston (10.7%), San Francisco (10%), Atlanta (8%), Seattle (8%) and Los Angeles (6%) were the cities with the largest number of study respondents. Considering industry categories, restaurants (32.7%), educational services2 (14%), salons and spas (12.7%), and tourism (8%) were the largest product/ service categories represented in the sample. For each firm, we matched data from the survey to information regarding the promotions characteristics and performance (date of the promotion, the face value and offer value of the Groupon, offer redemption duration, and the number of Groupons sold). Based on these values, we calculated the depth of promotional discount for each promotional offer. These variables were collected directly from the Groupon website so they are actual observed variables instead of being self-reported by the survey respondent. All of the analysis described next is based on the

Educational services includes businesses offering an educational class or classes of some type such as learning a particular language, cooking classes, flying lessons, etc.

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Effectiveness of Social Promotions sample of 150 businesses that completed our survey.

Results Procedure The variables to test the conceptual model of Groupon profitability are a mix of continuous (face value, price discount depth, redemption duration, employee satisfaction, new customer acquisition efficacy, spending beyond Groupon face value, and repeat full-price purchase) and categorical (promotion profitability, repeat promotion, recommendation) variables. Furthermore, simultaneous estimation of the model paths is necessary to obtain unbiased estimates. Mplus 6.0 (Muthn and Muthn 2009) is uniquely suited to accommodate these conditions. Not only does it allow the simultaneous estimation of a path analysis model with a combination of continuous and categorical variables, but it also provides estimates that are robust to non-normality. To test our hypotheses, we estimated a combination of linear and logistic regressions using Mplus 6.0 simultaneously, employing a maximum likelihood estimator and theta parameterization3. All continuous variables were standardized for inclusion in the analysis. Results of research hypotheses tests Hypothesis 1 was tested via a logistic regression of promotion profitability on its three predictors. Results revealed that of the three, new customer acquisition efficacy ( = .761, p < .05) and percentage returning for full price purchase ( = .713, p < .05) are both significant predictors of a profitable Groupon promotion; however the percentage buying beyond the
In Mplus, under Theta parameterization, the residual variances for the latent response variables of the observed categorical variables are fixed to one in the first group and are free to be estimated in the other groups as the default. Models where a categorical independent variable is both influenced by and influences another observed dependent variables, as is the case in our model, can be estimated only using the Theta parameterization in Mplus.
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Effectiveness of Social Promotions Groupons value was not. Thus H1A and C are supported by the data, but H1B does not receive support. It appears that for firms running a Groupon promotion, simply getting new customers to purchase the Groupon even when they do not spend beyond its face value on the occasion of redemption is sufficient to have a profitable promotion. This result supports the importance of the Groupon promotion as a means for the small or medium-sized business to receive exposure in a new customer base. Hypothesis 2 was tested using a linear regression of new customer acquisition efficacy regressed on Groupon face value, depth of price discount, and redemption duration. Results indicated that both Groupon Face Value ( = .21, p < .05) and redemption duration ( = .12, p .07) were significant predictors; but depth of the price discount did not emerge as significant. These results provide support to H2A and H2C, but H2B is not supported. The results offer interesting practical guidance to firms suggesting that they may be better served offering a coupon with a higher face value but a lower depth of discount to garner a profitable Groupon promotion. Hypothesis 3 was tested by a linear regression of the percentage of users buying beyond the Groupons value on the same three predictors. Results revealed that in this case, the Groupons face value was a negative predictor ( = -.15, p < .05), and the depth of the price discount ( = .25, p < .05) was a significant positive predictor. H3A and H3B receive support. Since offer duration was not significant, H3C was not supported. The managerial implication from these results is clear-cut: shorter terms of redemption are sufficient for Groupon offers; it is not necessary to offer extended redemption periods to have a profitable Groupon promotion. Hypothesis 4 was tested with a linear regression of repeat full-price purchase on employee satisfaction, and revealed a significant coefficient ( = .34, p < .001). Thus Hypothesis 4 receives strong support, highlighting the importance of getting employee buy-in for the
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Effectiveness of Social Promotions promotion in order to convert Groupon users into repeat longer-term customers. Finally, and not surprisingly, promotion profitability predicted the intention to run a Groupon promotion again ( = 2.86, p < .001) and the intention to recommend a Groupon promotion to other businesses ( = 2.34, p < .001) in logistic regressions, providing support to Hypotheses 5A and 5B. Thus, most of our hypotheses are supported by the data. Descriptive measures of Groupon promotion profitability In light of the enthusiasm surrounding the social promotion industry, an important managerial issue is to understand the extent to which firms that have conducted Groupon promotion programs already have enjoyed profitable promotions. In our sample, respondents reported profitable promotions in about two thirds (or 66%) of the cases. However, a significant number, 48 (or 32%) reported their Groupon promotion was not profitable. There were interesting differences in the profitability drivers between businesses that enjoyed profitable and unprofitable Groupon promotions. For businesses that suffered unprofitable promotions, only about 25% of Groupon redeemers purchased products or services beyond the Groupons value and less than 15% came back a second time to purchase products at full price. Furthermore, not surprisingly, few of these firms (8%) said they would run a Groupon promotion again. Restaurants appeared particularly susceptible to these negative outcomes: 42% of the restaurants in our study (20 of 48) reported unprofitable Groupon promotions. One restaurant owner observed that Most of the Grouponers were what we call deal-seekers; they felt entitled to special treatment, didnt spend more than what the Groupon itself cost, they didnt tip, and most wont be repeat customers. On the positive side, for two-thirds (or 66%) of respondents in the sample, the Groupon promotion was profitable. Furthermore, the firms in our study with profitable promotions saw twice as many redeemers buying beyond the Groupons face value (50% vs. 25%; F(1,141) =
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Effectiveness of Social Promotions 22.40, p < .001) and a greater percentage repurchasing a second time (31% vs. 13%, F(1,126) = 17,91, p < .001) when compared to businesses with unprofitable promotions. These firms also reported that the Groupon promotion was significantly more effective in bringing new customers to them when compared to those with an unprofitable promotion (M = 8.43 vs. M = 6.56; F(1,145) = 27.55, p < .001). In our sample, spas and salons were disproportionate beneficiaries of Groupon promotions: 82% of the spas and salons in our sample (or 14 of 17) reported having profitable Groupon promotions. Figure 2 summarizes the differences between firms with profitable and unprofitable Groupon promotions graphically. [Insert Figure 2 about here] Many of the business owners who had enjoyed profitable promotions had good things to say about the promotion. One respondent said Its the best advertising for small businesses! while another one noted We have run multiple promotions with GO, all of them very successful. With our business GO reached customers who never would have come to [activity redacted to maintain respondent anonymity] with us, as well as having those customers spreading the word to others about us. Appendix 1 summarizes the positive comments provided by respondents in our sample. Exploratory analysis of the drivers of number of Groupons sold We also conducted exploratory analysis to determine the predictors of number of Groupons sold. In a multiple regression analysis, the predictors included were the features of the promotion that the firm can control such as the Groupons face value, depth of promotional discount, redemption duration, and whether an upper limit was placed on number of Groupons to be sold. Note that the business running the promotion can choose to place a cap on the number of Groupons sold so that the promotion comes to an end when the specified number of Groupons is sold. In addition, we also included the time since the Groupon was conducted in days, and
21

Effectiveness of Social Promotions dummy variables indicating whether the business is a restaurant, spa, or education business. In this analysis, we used the logarithm of number of Groupons sold as the dependent variable to conform more closely to the normality assumptions of a multiple regression. [Insert Table 1 about here] Table 1 summarizes the results of the multiple regression analysis. Results revealed that there were four significant predictors of number of Groupons sold. In this case, redemption duration had a marginally significant effect ( = .14, p < .10), indicating that when the time allowed for redemption is longer, more Groupons get sold. This finding is in line with prior research on coupon redemptions which has shown that coupon popularity increases as a function of the length of the expiration period (Krishna and Zhang 1999). Interestingly, the other two promotion characteristics, the Groupons face value and depth of promotional discount did not have significant effects. Surprisingly, time since the Groupon promotion was conducted turned out to be a negative predictor ( = -.29, p < .001), indicating that the number of Groupons sold is decreasing over time in our sample after controlling for the other variables. This could be because of the fact as Groupon adds new markets, it takes time for Groupons popularity to increase in these markets. We are not able to control for market entry effects in this analysis because of relatively small sample sizes for most individual markets, and especially the new ones. We note that this is an intriguing result which deserves further attention in future research. Finally, both placing an upper limit on the number of Groupons sold ( = .18, p < .05) and having a business that is a restaurant (as opposed to other types of businesses; ( = .35, p < .001) results in significantly more Groupons being sold. In interpreting the former result, it is important to note that a limit on number of Groupons sold was placed only by 11% of businesses in our sample and the ones that did so placed relatively high limits, an average of 2,190. The fact
22

Effectiveness of Social Promotions that restaurants sold more Groupons indicates their relative popularity and wider appeal in local markets when compared to other types of businesses.

Study Limitations To enable a correct interpretation of the studys results, it is important to acknowledge its limitations. First, we note that the sample of businesses used in this study is a convenience sample. Since we did not have access to the full database of businesses offering Groupon promotions, a representative sample was beyond our reach. As such, we make no claim that our studys results reflect performance of the overall Groupon client base. Nevertheless, we note that our sample was diverse in its makeup, covering a range of U.S. cities and industries. Second, like any survey-based study, our results are susceptible to a non-response bias, i.e., the possibility that those who did not respond to our survey were systematically different from those that did participate. Nevertheless, we note that the 41.7% response rate can be characterized as healthy and in line with published research (e.g., Deutskens 2004). Third, we wish to point out that Groupon (and its competitors) are relatively new firms. Thus, while we focused on Groupon promotions whose redemption periods had expired, it can be argued that not enough time has elapsed for all the benefits of the promotions such as repeat purchase by more of the Groupon users to have accrued to the businesses included in the study. Although prior research has had difficulty finding long-term effects of price promotions beyond the shorter-term impacts such as the ones we studied (e.g., Pauwels, Hanssens and Siddharth 2002), examining perceptions of business owners after more time has elapsed after the promotion is likely to be useful, and add to the findings regarding social promotions presented herein.

Sustainability of the social promotion business model

23

Effectiveness of Social Promotions Despite the limitations noted above, there is evidence from this study that raises some concerns about the sustainability of social promotions as they currently exist. We believe these promotions are structured in such a way that they give too much value to consumers and not enough value to the small businesses than offer them. When we asked the businesses in our study whether they would run another Groupon promotion again in the future, 42% of the respondents told us they would not do so. Even among those businesses that had profitable promotions, almost one in five indicated they would not run another Groupon promotion again. There is widespread recognition among many business owners that social promotion users are not the relational customers that they had hoped for or the ones that are necessary for their firms longer-term success. Instead, there is disillusionment with the extreme price sensitive nature and transactional orientation of these consumers among many study respondents. One respondents observation is representative of this view: Businesses need to consider that this class of consumers are [sic] bargain hunters. By nature they are frugal. An assumption that the Groupon consumer is going to fit certain predictions in behavior would be a mistake. Appendix 2 summarizes some of the negative comments provided by respondents to our study. Furthermore, based on our studys responses, the news for Groupons competitors appears to be decidedly bleak. Although we did not ask this directly, many of our respondents volunteered their opinions regarding competing social promotion sites. These respondents largely indicated annoyance at the barrage of calls they receive from these competitors on a daily basis, and most reported a lack of success when using them to offer a promotion. Phrases such as rip off, imitators, ineffective, were employed, and respondents told us that the competitors never proved anywhere near the results that Groupon did, and that Groupon will beat out the competition, it is still the Kleenex of the business model. One respondent who had had a
24

Effectiveness of Social Promotions successful Groupon promotion told us I worked with another company shortly after my Groupon promotion and have to say that Groupon was 75% more effective in coupon sales, bringing in new customers and with their organization of coupons sold. In contrast, few respondents had positive things to say about other social promotion sites. We also note that many of the other sites are much less transparent than Groupon is in revealing how many promotions they have sold. Amidst the recent media frenzy regarding social promotions and the rapid multiplying of sites offering them, our results indicate a need for caution. Although the majority of Groupon users are satisfied and intend to run another Groupon promotion, an industry in which two in five customers are hesitant after a first purchase, and where the customer base is a relatively limited pool of small businesses with densely interconnected social networks that could quickly spread news of dissatisfactory results, may need to modify its overall strategy. One of our respondents comments sums up the crux of this problem: While I feel that [sic] was important for our business to determine whether or not social buying could be helpful, the experiment was a failure. It certainly did increase the number of guests coming into the restaurant, but the increase in revenue was nothing compared to the increase in cost of goods/labor. If we had seen even a moderate number of guests returning, I think we could have said the promotion was a success, but the number has been extremely low. So what should Groupon and its competitors do to address some of these problems? Several avenues seem feasible to us and are worth exploring further. First, social promotions could be structured so that relational behaviors of consumers are rewarded instead of transactional ones. For example, instead of offering $60 worth of food for $30, a sushi restaurant could offer $20 worth of food for $10 on each of the consumers next three visits. Social psychologists have shown that repetitive behavior leads to the formation of habits that are
25

Effectiveness of Social Promotions remarkably durable (Aarts and Dijksterhuis 2000; Ouellette and Wood 1998), and social promotions, just like other incentives, may be effective in inculcating habits, if designed appropriately. Second, rather than promoting the total purchase amount during a visit, a specific item could be promoted. Instead of offering a discount on the consumers total bill, for example, such as $75 worth of services for $35, a spa could offer $10 off for a facial, another $10 off for a pedicure and $15 off for a massage, during a single or multiple visits. Social promotions should offer the small business a good opportunity to cross-sell its products and services to customers and increase the amount of the total bill, a strategy which prior research on promotions has found to be successful (Kamakura, Kossar and Wedel 2002; Raghubir, Inman and Grande 2004). Third, the promoted items should be chosen judiciously so that the business is able to use unutilized capacity or sell unpopular items through the promotion. A yoga studio might offer classes on a weekday afternoon, for example, but not on weekends, or an apparel store might promote middle- or end-of-season lines but not the newest arrivals. Such an approach would have the added benefit of insulating the business from cannibalizing full-price sales to its existing base of customers. We note that each one of these suggestions concurrently entails reducing the attractiveness of social promotions to deal-chasing, price-sensitive, disloyal consumers that are not appealing to the businesses anyway; however, they are also likely to reduce the attractiveness of the promotions for others. To conclude, we believe that because of their many alluring features and broad-based consumer appeal, social promotions offer a potentially compelling business model; however, for longer-term success and sustainability, this industry will likely have to design promotions that better align the deals offered to end consumers with the benefits accruing to the small businesses that offer them.

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Effectiveness of Social Promotions References Aarts, Henk and Ap Dijksterhuis (2000), Habits as Knowledge Structures: Automaticity in Goal-Directed Behavior, Journal of Personality and Social Psychology, 78(1), 53-63. Alba, Joseph W., Carl F. Mela, Terence A. Shimp, and Joel E. Urbany (1999), The Effect of Discount Frequency and Depth of Consumer Price Judgments, Journal of Consumer Research, 26(2), 99-114. Alves Armando (2010), Consumers get together: from Group Buying to Collaborative Consumption, A Source of Inspiration, Available online at: http://www.asourceofinspiration.com/2010/07/15/consumers-get-together-from-groupbuying-to-collaborative-consumption/ Aydin, Goker and Serhan Ziya (2008), Pricing Promotional Products Under Upselling, Manufacturing & Service Operations Management,10(3), 360-376. Bawa, Kapil, and Robert W. Shoemaker (1987), The Effect of a Direct-Mail Coupon on Brand Choice Behavior, Journal of Marketing Research, 24(November), 370-376. Blattberg, Robert C., and Scott A. Neslin (1990), Sales Promotions: Concepts, Methods and Strategies. Englewood Cliffs, NJ: Prentice Hall. Chandon, Pierre, Brian Wansink and Gilles Laurent (2006), A Benefit Congruency Framework of Sales Promotion Effectiveness, Journal of Marketing, 64(4), 65-81. Conchar, Margy P., George M. Zinkhan, Cara Peters, and Sergio Olavarrieta (2004), An Integrated Framework for the Conceptualization of Consumers Perceived-Risk Processing, Journal of the Academy of Marketing Science, 32(4), 418-436. Deutskens, Elisabeth, Ko de Ruyter, Martin Wetzels, and Paul Oosterveld (2004), Response rate and response quality of internet-based surveys: An experimental study, Marketing Letters, 15(1), 21-36. Dholakia, Utpal M. (2006), How Customer Self-Determination Influences Relational Marketing Outcomes: Evidence from Longitudinal Field Studies, Journal of Marketing Research, 43(1), 109-120. Dholakia, Utpal M., Barbara E. Kahn, Randy Reeves, Aric Rindfleisch, David Stewart and Earl Taylor (2010), Consumer Behavior in a Multichannel, Multimedia Environment, Journal of Interactive Marketing, 24, 86-95. Dont-Hun, Lee (2009), Consumption trends for 2009, SERI Quarterly, 2(1), 100-105. Farmer, Liz (2010), Groupons coupons causing businesses boons, The Daily Record, August 22, 2010. Fowler, Geoffrey A. (2011), LivingSocial Gets Boost from Amazon, Wall Street Journal, January 20, B8. Gerstner, Eitan and James D. Hess (1990), Can Bait and Switch Benefit Consumers? Marketing Science, 9(2), 114-124. Greenleaf, Eric A. (1995), The Impact of Reference Price Effects on the Profitability of Price Promotions, Marketing Science, 14(1), 82-104.
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Effectiveness of Social Promotions Gourville, John T., and Dilip Soman (1998), Payment Depreciation: The Behavioral Effects of Temporally Separating Payments from Consumption, Journal of Consumer Research, 25(2), 160-174. Gupta, Sunil and Valarie Zeithaml (2006), Customer Metrics and their Impact on Financial Performance, Marketing Science, 25(6), 718-739. Hardie, Bruce (1996), Who Benefits from Price Promotions? Business Strategy Review, 7(4), 41-49. Hess, James D. and Eitan Gerstner (1993), Double Couponing: Pricing and Consumer Perspectives, Marketing Letters, 4(2), 153-163. Horne, David R. (2007), Gift Cards: Disclosure One Step Removed, Journal of Consumer Affairs, 41(2), 341-350. Inman, J. Jeffrey and Leigh McAlister (1994), Do Coupon Expiration Dates Affect Consumer Behavior? Journal of Marketing Research, 31(3), 423-428. Kalwani, Manohar U., and Chi Kin Yim (1992), Consumer Price and Promotion Expectations: An Experimental Study, Journal of Marketing Research, 29(1), 90-100. Kamakura, Wagner A., Bruce S. Kossar, and Michel Wedel (2004), Identifying Innovators for the Cross-Selling of New Products, Management Science, 50(8), 1120-1133 Kile, Charles Owen, Jr. (2007), Accounting for Gift Cards, Journal of Accountancy, 204(5), 38-43. Kotecha, Ashish A., Josh Leibowitz and Ian MacKenzie (2008), How Retailers Can Make the Best of a Slowdown, McKinsey Quarterly, 4, 104-107. Koys, Daniel J. (2001), The Effects of Employee Satisfaction, Organizational Citizenship Behavior, and Turnover on Organizational Effectiveness: A Unit-level, Longitudinal Study, Personnel Psychology, 54(1), 101-114. Krishna, Aradhna and Z. John Zhang (1999), Short- or Long-Duration Coupons: The Effect of the Expiration Date on the Profitability of Coupon Promotions, Management Science, 45(8), 1041-1056. Lal, Rajiv and Carmen Matutes (1994), Retail Pricing and Advertising Strategies, Journal of Business, 67(3), 345-370 Lewis, Michael (2006), Customer Acquisition Promotions and Customer Asset Value, Journal of Marketing Research, 43(May), 195-203. Lyons, Daniel (2010), Click and Save; Coupons?! Whod have Thought? Newsweek, 156(22). Mela, Carl F., Sunil Gupta and Donald R. Lehmann (1997), The Long-Term Impact of Promotion and Advertising on Consumer Brand Choice, Journal of Marketing Research, 34(May), 248-261. Muthn, Linda K. and Bengt O. Muthn (2009), Mplus User's Guide, 5th Edition. Los Angeles, CA: Muthn & Muthn. Oliver, Richard L. (2010), Satisfaction: A Behavioral Perspective on the Consumer, Second Edition. Armonk, NY: M. E. Sharpe.
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Effectiveness of Social Promotions Ouellette, Judith A. and Wendy Wood (1998), Habit and Intention in Everyday Life: The Multiple Processes by Which Past Behavior Predicts Future Behavior, Psychological Bulletin, 124(1), 54-74 Pauwels, Koen, Dominique M. Hanssens, and S. Siddharth (2002), The long-term effects of price promotions on category incidence, brand choice, and purchase quantity, Journal of Marketing Research, 39(4), 421-439. Payne, Adrian and Pennie Frow (2005), A Strategic Framework for Customer Relationship Marketing, Journal of Marketing, 69(October), 167-176. Porter, Jane (2011), Rebuilding Sales After Deep Discounts, Entrepreneur Magazine, February 28. Available online at: http://www.entrepreneur.com/article/218197. Raghubir, Priya and Kim Corfman (1999), When do Price Promotions Affect Pretrial Brand Evaluations? Journal of Marketing Research, 36(2), 211-222. Raghubir, Priya, J. Jeffrey Inman, and Hans Grande (2004), The Three Faces of Price Promotions, California Management Review, 46(Summer), 23-42. Reibstein, David J. and Phillis A. Traver (1982), Factors Affecting Coupon Redemption Rates, Journal of Marketing, 46(Fall), 102-113. Reichheld, Frederick (2001), The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value. Boston: Harvard Business School Press. Russell, Gary J. and Ann Petersen (2000), Analysis of Cross Category Dependence in Market Basket Selection, Journal of Retailing, 76(3), 367-392. Schneider, Benjamin, Susan S. White and Michelle C. Paul (1998), Linking Service Climate and Customer Perception of Service Quality: Test of a Causal Model, Journal of Applied Psychology, 83, 150-163. Scott, Carol A. (1976), The Effects of Trial and Incentives on Repeat Purchase Behaviors, Journal of Marketing Research, 13(3), 263-269. Sherr, Ian (2010), Online Coupons Get Smarter Groupon, Rivals Add Personalized Bargains Staff as Some Merchants Gripe, Wall Street Journal, August 25, B4. Steiner, Christopher (2010), Meet the Fastest Growing Company Ever, Forbes, August 30, 2010, Sutherland, Brooke (2010), Its a half-price kind of world: Millions of bargain hunters flock to online coupon sites like Groupon.com for deep discounts in everything from haircuts to meals, McClatchy-Tribune Business News, August 7. Underwood, Ryan (2010), Going Global: Groupon Versus the World, Inc. Magazine, 32(8), 116-118. Walters, Rockney G. and Scott B. MacKenzie (1988), A Structural Equations Analysis o the Impact of Price Promotions on Store Performance, Journal of Marketing Research, 25(1), 51-63 Wilkerson, April (2010), Courting with coupons: Online business helps Oklahoma retailers attract customers, Journal Record, August 3.
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Effectiveness of Social Promotions Table 1: Multiple regression results for number of Groupons solda Variable Standardized Regression Coefficient -.15 .03 .14 .18 -.29 .35 .09 -.07 t-value p-value

Groupons face value Depth of price discount Offer redemption duration Whether upper limit is placed on number of Groupons sold Time since Groupon appeared in days Whether firm is a restaurant Whether firm is a spa Whether firm is an education business
a

-1.56 .33 1.67* 2.35** -3.46** 4.06** .97 -.80

.12 .74 .09 .02 .00 .00 .33 .42

Dependent variable is natural logarithm of number of Groupons sold; **indicates statistically significant coefficient at the p=.05 level of significance; *indicates statistically significant coefficient at the p= .10 level of significance

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Effectiveness of Social Promotions Figure 1. Conceptual Model of Social Promotion Profitability

Groupon Face Value

H2
New Customer Acquisition Efficacy Groupon Promotion Profitability Repeat Promotion

Depth of price discount Offer Redemption Duration Social Promotion Characteristics

H1
Spending Beyond Groupon Value

H5
Recommend to Other Businesses

H3
Groupon Use Occasion

Employee satisfaction

Repeat FullPrice Purchase

H4
Longer-term Customer Behavior

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Effectiveness of Social Promotions Figure 2. Differences in profitability drivers between firms with profitable and unprofitable promotions

90% 80% 70% 60% 50% 40% 32% 30% 20% 13% 10% 0% % of study sample % buying more than Groupon value % repurchasing a second time 25% 31% 50% 66% Unprofitable Groupon promotion Profitable Groupon promotion

8.43

6.56

New customer acquisition efficacy

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Effectiveness of Social Promotions Appendix 1. Positive comments by respondents regarding Groupon promotions
Good program. Lot's [sic] of exposure. Good deals. Health club, Northeastern US. Thought it worked well in bringing customersGreat results for a one day promotion. Tourism business, Western US. [The employees] Enjoyed it. More work. More hours. Service business, Northeastern US. When I did groupon they were only in [city redacted to maintain respondent anonymity] for 1 month and I sold [redacted]. It worked at quite well with that number. I had several repeat guests and 2 massage and facial club memberships from them. Salon/ Spa, Western US Right now we think it's great because of the cash flow it creates. However we don't know the long term effects are of offering our service a [sic] such a reduced rate. Tourism, Northeastern US. Very low customer acquisition cost, relatively easy to on-board customers (although less informed about our business than other channels). - Food Business, Location withheld. We sold [redacted to maintain respondent anonymity]....received lots of exposure Restaurant, Western US. Groupon is wonderful because it was so many followers. We have been solicited by many other social networking sites but Groupon is truly the most popular and effective. We all use Groupon personally, and so it was great to be featured on there. It definitely spread our name to a whole new market who may have not heard of us otherwise and really did help us to expand our business. Food business, Eastern US. Very good offer. Easy to redeem through our point of sale system. Automotive services, Western US. [Employees] like the promotion because it drives new guests in, creates top of mind exposure for the restaurant and also increases word of mouth marketing for a brand that spends very little on advertising. Restaurant, Southern US. They are a great company to work with. A very pleasurable experience. Restaurant, Southern US. Groupon is the best way to increase your small businesses market share, or create brand awareness. It is amazing. Tourism business, Southern US. Loved it! Great way to bring in new customers. Very cost-effective way to do marketing. Food business, Southern US. It's a wonderful business model. I would need to get a slighly [sic] higher percentage of the groupon to do it again. Retail store, Southern US. It was a good way to bring a lot of people through the door. Education business, Southern US. excellent idea were very happy with Groupon. Salon/spa, Southern US. It was challenging to get through the Groupon promotion but we came out ahead at the end of the 6 mo redemption period. Food business, Southern US. We loved it and we have been asked to do another one but have decided to sign with Groupon exclusively for [redacted to maintain respondent anonymity] a year!... What a wonderful way to bring almost 2000 new clients to our door. Spa/ salon, Southern US.

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Effectiveness of Social Promotions

While our Spa has been in business for [redacted to maintain respondent anonymity] years, and in the same location all that time, it was amazing how many Groupon clients did not know we were there. From a business visibility standpoint it was very beneficial to us. - Spa/ salon, Southern US. They [the employees] loved the increase of business and the servers were very pleased with the extra tips. Restaurant, Southern US. Happy for increased traffic. Restaurant, Western US. Groupon created a buzz for us and we were still getting calls even after the Groupon ran from [redacted] who wanted to sign-up for [redacted to maintain respondent anonymity]. Education services, Southern US. It is a great idea, but a restriction on the number of groupons that can be purchased would be advisable. Restaurant, Southwestern US. I think it's brilliant. Quick influx of cash. Great visibility for our business created amazing traffic to the site the day we were featured. It's a great new client acquisition tool. Service business, Northeastern US. Groupon worked very well for us. It was a nice mix of existing customers and new customers who purchased. Existing customers tended to be very appreciative and slightly apologetic about buying; many used them to make much bigger purchases than their average. We've gained a few new, loyal customers because of Groupon as well. We're in a residential neighborhood without much adjacent retail, so we're relatively hidden to the larger metro area. Groupon has certainly increased our visibility. And unlike other advertising where there is a probability of impression to action, Groupon removes much of the probability and provides a measurable and tangible result. In other words, there's no guessing game as to whether your advertising dollars are well spent. Retail store, Midwestern US. The Groupon staff was very easy to work with. I am very happy with the execution and the results. Restaurant, Western US. i hope my competitors dont do it. to keep my edge on the market. Restaurant, Northeastern US. We felt it really brought our product [redacted to maintain respondent anonymity] to a new, younger audience which was great. Tourism business, Midwestern US. They (the employees) thought it was a great way to introduce or re-introduce customers to the business. We took the approach that each person who presented a Groupon was a first time customer and gave them extra attention. Restaurant, Western US. Very good for our business. We all succeed when the store succeeds. Retail store, Midwestern US. they (the employees) thought that it was a positive experience based on the fact that it drove additional business. Restaurant, Midwestern US.

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Effectiveness of Social Promotions Appendix 2. Negative comments by respondents regarding Groupon users
Many of the groupon user [sic] used it for only the value of the coupon (in our case $50) and nothing more. The return business has been non-existent. It was very harmful to our bottom line during the months we ran it. We still get people coming in to redeem their groupon even though the promo has been over for 4 months, and they are very upset they cannot get the full discount. Restaurant, Midwestern US. Great to see new faces, however, several customers did not realize that the coupon does not include gratuity, and only tipped on any amount over value. This upset some of our servers. Restaurant, Southwestern US. "The customers who try to take advantage of getting a discount.. but guess that's human nature. Occasional complaints from customers towards the business that were more groupon related. with the huge number of purchases there's really no good way to ensure people aren't printing their coupon multiple times. think they should have less than a year to redeem groupon- maybe 6 months"- Restaurant, Midwestern US the groupon clients try to swindle you out of more savings. most of them are cheap-skates. Salon, Western US The only downsides to Groupon are you never see of the guests return because they are bargain shoppers, it can create a wait that negatively influences full-paying guests and it it is difficult to track/redeem. Restaurant, Southern US Customers constantly printed the same coupon... or copied one coupon over and over and tried to use them after the original was redeemed. Our staff had to create an online monitoring web page to prevent multiple uses Restaurant, Southern US The types of customers that were attracted were not here to genuinely try our restaurant. Instead, they were here to get a deal. They knew they were getting a deal and that was the only reason they came.Towards the end of the groupons, we also had many people in the restaurant taking up valuable table space and ordering the bare minimum for their value. And, it then became these people who leave negative reviews on our yelp/citysearch pages. Restaurant, Midwestern US Customers seem to be predisposed to the belief that someone is out to screw them. We gave them the exact same value, however, they were looking for the 'gimmick'. This required more of our time in booking [redacted to maintain respondent identity] than would be so with a non-groupon customer. Business, Southern US People that but these discount coupons tend to be demanding and appear to only want the discount rather than a relationship with the business they buy from. Salon/ spa, Southern US. The consumers were cheap. Restaurant, Western US. The initial week can be overwhelming, and Groupon customers sometimes demanding. Specialty Food store, Northeastern US clearly a value oriented customer - some of whom tried to combine their offer with other promotions even though we were clear that you could not... in general, not a good fit with our core customer Retailer, Southern US waiters were frustrated by low sales & low tips since guests didn't tip on the full amount. Restaurant, Western US. Most of the customers had never heard of our business before and were coming for the treatment based solely on the deep discount of the service. They also did not feel as though it was necessary to tip the

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Effectiveness of Social Promotions

associates servicing them the appropriate amount because they were receiving the service at a discounted rate. Most were impatient and complained when anything did not fit their exacting expectations. We had hoped for more understanding from the customers. Spa & Salon, Western US. Customers were trying to use it with other promotions or offers. Also, they are easy to duplicate and abuse. Restaurant, Western US. It certainly attracts a certain kind of clientele - people looking for a flat out deal (professional 'grouponers' I suppose) rather than consumers looking for new products or services to continue with. Salon/Spa, Midwestern US. Our experience with Groupon was that it did bring in customers - as promised, but nearly all of them did not stay on beyond using their Groupon deal. For us, it was not the right fit. Service, Western US Some people try to get away with stuff not offered. You have to be very specific with all of the rules. You tend to get some people who don't even read the rules. But that's just typical. Retail Store, Midwestern US. The people who bought our groupons were not our typical customer. They are only looking for a deal. Restaurant, Eastern US. Difficult to administrate, brought in 'deal chasers' (people who follow the half price deals around town), guests didn't tip well Restaurant, Southern US It is obvious that many Groupon users are only looking for deals...not a business that they will return to many times. They buy the maximum number of deals allowed and then move on to another salon that has deals as well. The percentage of people actually looking for a new stylist was low and not many of them returned. Salon/ Spa, Western US.

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