Online coupon sites give small businesses a boost

Two Brothers Self Service Dog Wash is a small business in Virginia Beach and, like most small businesses, it has little money for advertising.

Its owners show up at dog parks, canine-themed events and pet-friendly hotels to pass out fliers. They depend on customers to spread the word.

Still, they struggle.

"A lot of people don't know we're here," said David Henderson, who owns the shop with his brother, Jared.

Two months after Two Brothers opened in September 2008, some entrepreneurs in Chicago started Groupon.

The Internet-based venture works with businesses to offer daily deals - typically half or more off a product or service - to its subscribers. For example, a subscriber may spend $25 to get a spa treatment worth $50 or $150 for golf lessons that usually run $300.

In June, in the middle of its slow season, Two Brothers signed up to do a daily deal. They offered a Groupon for $8, good for a dog wash worth $10 to $22, depending on the size of the dog.

The deal sold to nearly 200 Groupon users, David Henderson said. And traffic on the Two Brothers website, which had been getting about 15 to 20 hits a day, rose to 380 hits after the deal appeared.

"My brother and I were both pretty happy with the response we got," Henderson said. "And I would do it again. It was so easy. It was something cool and something different that we could do that didn't cost us money up front."

Groupon has built its business on the need for small merchants like Two Brothers to promote themselves. The company has expanded to about 185 markets in 22 countries, after buying a competitor in Europe.

It began offering deals locally in April and quickly spawned competition.

ScoopCoups started in Hampton Roads around the same time, offering similar daily deals and partnering with a local charity that receives a percentage of sales. Bill Dempsey, who worked in marketing for the National Basketball Association and now lives in Smithfield, founded the site with several partners and modeled it after Groupon.

The Virginian-Pilot Media Cos., which publishes The Virginian-Pilot, launched PilotOnline.com Daily Deal in late June as a promotional vehicle for merchants that balk at more expensive, traditional advertising. PilotOnline.com's version looks and works like Groupon, but in addition to delivering deals to subscribers' inboxes daily, the deals appear in the newspaper and on The Pilot's website.

The daily deals operators focus on local businesses, though some have offered coupons for local franchises of national chains.

"It was a way to explore your city," said Julie Mossler, Groupon's spokeswoman. "That's been our mantra."

The daily deals trend capitalizes not so much on consumers' desire to find a bargain but on businesses' desire to attract customers close to home - both geographically and demographically, said Peter Fader, professor of marketing and co-director of the Interactive Media Initiative at Wharton, the business school at the University of Pennsylvania.

"The reason it's succeeding is more because it's striking the hyper-local nerve than it is about the discounts," he said. The trend taps into "all of these merchants who are just dying to have better connections with their customer base."

For each coupon sold, Groupon and PilotOnline.com take 50 percent of the price. ScoopCoups takes 15 percent of the coupon sale, Dempsey said.

The merchant gets the rest. It pays nothing to offer the deal but has to accept the revenue cut. Two Brothers, for example, earned $4 for each dog wash purchased during its June offer.

In exchange, that business got its name in front of all of Groupon's subscribers, in their e-mail inboxes, exclusively for that day. Subscribers usually will at least look at the deal and, even if they don't buy the coupon, might learn about a business they never visited before, said the site operators and businesses that have participated.

"That exposure to that 20,000 people is what we were after, not so much the sales," said Myra Wood, director of marketing for Ocean Breeze Waterpark in Virginia Beach.

The park offered a Groupon in April for $13 for entry to the park, which usually costs $26. It did n't even open until the week before Memorial Day but sold 2,185 coupons, making it the best-selling Groupon deal in Hampton Roads so far, Mossler said.

"We really liked that they were focused on selling one product," Wood said. "It was totally dedicated to us for that one day."

The discounted coupons earned the park a quarter of the amount it would have collected for a full-price ticket, but Wood and other merchants said they tailor the deals so they don't lose money. For Ocean Breeze, which averages 220,000 visitors each year, the Groupon buyers account for barely 1 percent of sales.

The deals gain them customers who otherwise wouldn't have visited and could return to buy at regular prices, Wood and David Henderson said. Coupon holders also often spend beyond the deal's value. Two Brothers, for example, sold dog food to a Groupon customer who now will likely continue to shop there, Henderson said.

"It's no money up front," Henderson said of the deals. "Yeah, we don't make a lot of money from people coming in the door, but we get people coming in the door."

The daily deals operators say they wouldn't exist without Facebook or online social networking. They depend on users to share a deal, posting it on their Facebook or Twitter pages, or encouraging others to check out the site.

That expands the subscriber base and leads to sales. It allows a good deal to "go viral," or spread quickly from person to person and generate excitement.

"Bottom line: Marketing is word of mouth," said Cecilia Ramirez, a brand marketing consultant based in Virginia Beach. "It's referrals."

Groupon developed the "group-buying" concept to encourage such dissemination. Each deal requires a certain number of consumers to agree to buy the coupon before it will "tip," or become valid.

If too few people sign on, the deal goes away, so those who want the deal have an incentive to get others to buy. They also have to buy that day, because most deals last no longer than 24 hours.

"It creates a sense of urgency," said David Mele, general manager of Pilot Interactive, which operates PilotOnline.com Daily Deal.

Less than 5 percent of Groupon's deals fail to tip, Mossler said. She and Mele said the deals that sell the most coupons in Hampton Roads are those for activities, such as skydiving lessons or a Virginia Aquarium membership, and health and beauty services.

PilotOnline.com follows the group-buying format. ScoopCoups doesn't require a minimum number to sign up for its coupons, and it sometimes allows a deal to last a couple of days.

The operators' subscriber lists determine their success. The more consumers who sign up, the more coupons the sites can sell. The more coupons they sell, the more they attract other merchants to offer deals.

"What makes the model work is people knowing about the site," said Dempsey of ScoopCoups. "It really comes down to critical mass."

Groupon has nearly 60,000 subscribers in Hampton Roads, out of 12 million worldwide, Mossler said. It also has raised about $170 million in venture capital since launching. The company does not release revenue numbers, Mossler said.

PilotOnline.com Daily Deal has 57,000 e-mail subscribers, Mele said.

ScoopCoups has more than 1,000 names in its subscriber database, said Dempsey, who is the company's only employee at this point. "We're making money, but we're not selling hundreds of thousands of coupons, which is exactly what we want to do," he said.

The daily deals operators grew out of an earlier discounted-coupon concept on the Internet. The previous incarnations included sites like Restaurant.com, which offered similar discounts: maybe $10 for $25 to spend at a local eatery.

For those deals, consumers had to take the step of finding the sites and searching for coupons they wanted. Unlike the daily deals, those coupons remain available indefinitely. They also typically have conditions for use, such as a restrictions on days of the week or a minimum purchase necessary.

Cheap Local Deals, based in Chesapeake, expanded using this concept and now offers coupons in about 10 metro areas for various types of businesses. It takes 100 percent of the price of the coupon in exchange for generating customers for merchants. It also offers an "optimized" online search to draw consumers to the site, said Mike Cynar, the company's president.

"You can't sell to people you're not in front of," Cynar said.

The daily deals sites take a more personal approach. The consumer has to sign up, asks for the deals to arrive by e-mail and gets engaged by choosing to look at the deal.

Groupon plans to get more personalized, Mossler said, targeting deals not only by region but also specifically for each subscriber based on the goods and services he or she likes.

"People want these Groupons," said Wood, of the water park, who has bought coupons herself for frozen yogurt and a yoga package through the site. "You open this. It's like a present. Somebody just sent me something that's half free."

Carolyn Shapiro, (757) 446-2270, carolyn.shapiro@pilotonline.com