Suzzette Metcalfe, owner of Milwaukee's Pasta Tree restaurant, picked up some marketing advice at a recent restaurant industry seminar in Las Vegas: Do not do Groupon.
"But I'd already done it," Metcalfe said. In fact, Pasta Tree's recent Groupon offer of $40 worth of food and drink for $20 broke a local record for the category, selling 5,061 "Groupons."
Merchants like Metcalfe typically lose money on every Groupon deal they sell. But daily deal websites like Groupon and competitor LivingSocial have been such a big hit with consumers that more and more businesses are signing on.
It works like this: Groupon and Living Social develop e-mail networks of consumers who want to see deals. Businesses sign up with deeply discounted offers -- typically 50 percent off -- for goods or services. The consumer buys and pays for the offer, and has a set period in which to redeem the coupon.
Groupon pays the merchant upfront but keeps half the purchase price of each offer, plus a charge to the merchant for the credit card transaction fee. That adds up, for example, to less than $10 to the merchant for each $20 Groupon offer purchased. The consumer then redeems that offer for $40 worth of goods or services. If some consumers don't redeem their Groupons, the merchant still keeps the money they paid.
Since its launch in 2008, Groupon has sold 37 million deals in North America and has saved consumers $1.5 billion, a company spokesman said.
Jon Olsen, co-owner of the local deal advice website MilwaukeeConsumer.com, said he's seen little downside for consumers who take advantage of Groupon offers.
"Ninety-nine percent of consumer experiences are positive," Olsen said. In the rare cases where there have been problems, Groupon has been good about making it right and giving refunds, he said.
But from the merchant's standpoint, there are a lot of negatives, Olsen said.
"The merchant really needs to do their homework before they sign on to a deal like this," he said.
Brian Benecky, owner of the Fan Appreciation sports apparel store in Brookfield, Wis., offered a Groupon deal of $40 worth of merchandise for $20 on the weekend before the Super Bowl. He signed up for the deal about two months before that and had no idea that the Packers would make it to the championship.
Groupon sold 550 of the Fan Appreciation deals, which expire in May. As of late March, about 60 percent of the buyers had come in to redeem their Groupons.
"If the customer spends exactly $40, you lose money," Benecky said. But the customer knows about the store and may come back again, he said. He also saw a big spike in his website traffic on the day the Groupon offer ran, giving him more exposure.
"I could see doing something like it once a year," Benecky said.
Dick Seesel, a Mequon, Wis., retail consultant, bought a Groupon deal for a neighborhood restaurant recently, then tried to use it right away. "For three days, we couldn't get near the restaurant."
That's a common problem, business owners say. Merchants get slammed with customers immediately after a Groupon or Living Social offer sells, then again in the days right before it expires.
Phil Bilodeau, owner of Thief Wine Bar, which has two Milwaukee-area locations, has done two Groupon offers, selling 550 the first time and 2,300 recently.
"It was almost overwhelming," Bilodeau said. "Everyone wanted to use it on the first day."
Bilodeau limited his financial loss by offering the deal only on wine by the glass, which has a higher profit margin than bottles. But he didn't limit the number of offers that Groupon could sell. If he does another offer in the future, he probably would put a cap on the number.
Attracting new consumers is the biggest reason merchants cite for using the social discount offers.
That happens, but merchants say they also attract a type of consumer that has become known as a "Grouponer" -- a person who buys the half-price offers with the intent of always getting a deal, but not returning to buy anything at regular price.
At Half Nuts, a West Allis, Wis., candy shop, the careful spenders who didn't want to exceed the $15 Groupon they bought for $7 bought small amounts of different varieties, owner Mary Ziegler said.
"Overall, long term, we probably picked up a few more customers," Ziegler said. "But for what it cost, we'd have to sit down and do the math. I'm not sure I'd ever do it again."
The Pasta Tree's owner started with a Living Social offer that sold 567 $20-for-$40 deals. So the huge response to her most recent Groupon offer came as a surprise.
"It's been overwhelming," Metcalfe said. Patrons have redeemed about 1,200 of the more than 5,000 Groupons from the recent offer.
The "Grouponers" are careful to stay just under $40, and some don't tip appropriately, she said. Overall, customers using Groupon deals are spending an average of $76 per visit, she said.
"I've definitely learned another lesson," Metcalfe said. She now believes Groupon-like offers are a good thing, but probably not for a restaurant that has to cover costs for food. Businesses that provide a service people need on a repeat basis -- an oil change shop, for example -- might benefit more, she said.
But misgivings like Metcalfe's notwithstanding, the Groupon style of discounting shows no signs of letting up.
"It seems like a business model you could easily knock off," Seesel said.
Competitors are trying, and they may find plenty of businesses that are interested. Groupon turns down seven deals for every one it accepts, spokesman Chad Nason said.
Facebook Inc. announced in March that it plans to introduce a daily online coupon service in five cities: Atlanta, San Francisco, San Diego, Dallas and Austin, Texas. The company said it will use its own staff to sell the discount program to local businesses.
Locally, JSOnline, the Internet version of the Milwaukee Journal Sentinel, recently launched DealWatch, a combination of ads and discount deals that can be purchased; WMYX (99.1 FM) radio has Milwaukee Perks; and Milwaukee magazine's website has Inside Deals.
Groupon's advantage is that it started selling to local retailers first, Seesel said.
"But it's not always the first one that is the long-term survivor," he said.
> Things to consider
Tips for businesses
* Think about your offer as a marketing expense, not an opportunity to make money on the sale.
* Set a budget for the amount you can lose (spend) on the offer. Limit the number of offers to be sold to not exceed that amount.
* Be ready to handle a big influx of business when your offer sells. Make a plan that will help turn your new customers into repeat business.
Tips for consumers
* Check for limitations and expiration dates before you buy an offer.
* Don't forget about it after you buy the deal. Toughest times to use your deal are at the beginning of the offer and just before it expires.