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Study Unlocks What Makes Groupon Work for Businesses

Tickers in this article: GRPN

CHICAGO ( TheStreet) -- When Groupon (GRPN) was launched four years ago, it created an entirely new model for marketing small businesses. Although the site was ostensibly a discount service aimed at saving its users money and exposing them to new experiences, it also gave independent businesses a chance to reach a wider base of potential customers. And that customer base grew exponentially, along with Groupon itself.

But such a dazzling rise was impossible to sustain long term. Groupon has had to fend off competition from copycat sites such as LivingSocial and Amazon Local (AMZN) , and its stock price has tumbled 90% since the company's IPO last year, reflecting general uncertainty about the long-term success of the daily-deal business model.

The business press has been filled with big-picture analysis of Groupon's travails and delivered less recent analysis of the small picture: whether Groupon and its rivals deliver for the businesses that offer the deals. Are daily deals a great marketing opportunity? Or a risky bet that often doesn't pay off?

One of the few researchers examining the daily deal market from that perspective is Utpal Dholakia, a professor of management at Rice University's Jones Graduate School of Business. His latest study, How Businesses Fare With Daily Deals As They Gain Experience , surveyed more than 600 small businesses across the country about their experiences.

The paper is a must-read for any business owner considering signing up with a deal site, offering a wealth of specific details: how likely they are to make a profit from a deal; the percentage of people who redeem a deal and become repeat customers; and which types of businesses see the best return on their investment. 

"Many small-business owners don't think through the reasoning and implications of offering daily deals, and then they get hurt," Dholakia says. "I want to help them increase their chances of success."

The study breaks down the key metrics small businesses need to know before signing up. Overall, about 60% of the deals offered were profitable for the business that offered them (roughly 20% of the businesses broke even on their deals; the rest lost money). About 80% of the people who redeemed the deals were new customers, and about 20% ended up patronizing the business again. About one-third spent more than the deal value (often a key factor in whether the offer was profitable).

Remarkably, a company's marketing budget (or lack thereof) made no difference: Companies that spent nothing on marketing were just as likely to have a successful promotion as those that spent a lot of money advertising. The size and age of the business also had little to no impact on overall profitability.

One differentiator was the number of deals offered: while only 45% of those business offering their first deal reported making a profit, 76% of deals were profitable for those businesses that had run seven or more. Clearly, there is a learning curve when it comes to offering deals, and those who master the right mix see a payoff.