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Google Offers and Groupon: Good or Bad for Business?

Late yesterday, Google introduced its newest service, Google Offers, which will send users daily emails about deals in their area. If this sounds familiar, that's because Google Offers is a direct competitor to Groupon, LivingSocial, and other daily deals services. Google actually tried to buy Groupon last December, but their $6 billion bid was rejected, and instead the search engine giant developed Google Offers. Daily-deals sites like Groupon and Google Offers appear to be a healthy market, but even if the sites make a profit, the model would collapse if the local businesses offering the deals didn't find them profitable. So, does Groupon work for business?

Yes, says Utpal Dholakia, an associate professor of marketing at Rice University's business school. Dholakia conducted a year-long survey of 150 businesses that ran Groupon promotions between June 2009 and August 2010, with questions such as whether the Groupon brought in new customers, whether the customers spent more than the amount covered in the Groupon deal, and what percentage of those customers came back a second time. The Groupon promotion was profitable for two-thirds of the businesses surveyed, although almost half of restaurants found the promotions unprofitable. "Surprisingly," Dholaka writes, "only two factors predicted the Groupon promotion’s profitability: how satisfied employees were with Groupon shoppers, and the promotion’s effectiveness in reaching new customers." In fact, "satisfied employees"--employees who were prepared for the rush of new customers and/or compensated for lower tips or longer hours worked--were the most important factor in the success of a Groupon promotion. Despite this success, though, Google Offers may still have its work cut out: over 40% of businesses said they would not offer another promotion, including 20% of businesses who found the promotion profitable.