The e-coupon bandwagon - should you jump on?

It almost feels like the dot-com frenzy. Websites that alert shoppers to a deal-of-the-day in their community are in the headlines, making big money and attracting big investments.

Does it make sense for your small business to get in on the action?

Well, you know these websites are effective when Google wants in. Last week, the search-engine giant offered $6 billion US for Groupon, the Chicago-based e-coupon site that is the leader of the pack and operates in Canada as well. Groupon turned Google down.

I guess you can do that when you're hauling in a reported $50 million a month in revenue and have a plan to challenge Facebook.

Meanwhile,Livingsocial.com, another deal-of-the-day site, just got a $175-million infusion from Amazon. Last week, Postmedia Network, publisher of the National Post and other major Canadian newspapers, launched a new group-buying site,SwarmJam, adding yet another name to this fast-growing online marketing sector.

"In a world of clutter, these sites offer just one thing on one day," says Mitch Joel of Montreal digital advertising firm Twist Image. "It's simple, and that's really appealing right now."

Joel says the strategy can be "crazy powerful" for small businesses.

The premise is simple: when consumers sign up, they get an email every day alerting them to a special offer, typically a restaurant visit, a spa service or a consumer product.

The price is heavily discounted. Recently, I was offered $120 worth of wax and car detailing for half-price. The day before, it was an offer for a very different sort of wax and detailing: a $55 'Brazilian' (!) for a mere $25. Today, it was $15 for $30 worth of "upscale pub fare and drinks" at a local bar.

On Groupon, if a specified number of people sign up for the deal, then it's a go. The consumer buys the e-coupon from Groupon and redeems it with the vendor who sees an influx of new customers.

The deal for participating businesses looks sweet: You pay nothing to have your product or service featured. There is a cost, though. Groupon collects the money generated by any particular offer, takes 50 per cent and then "pays" you your half of the revenue over three months.

I was curious to know how small business owners would rate the Groupon experience. I spoke to half a dozen of them and discovered that while most are happy with their results, there are definitely a number of factors to be considered when playing the deal-of-the-day game.

Don't expect to profit

"You don't really make money off it," cautions Jacqui MacNeill, founder of Escents, a successful Vancouver based company that makes and sells naturally scented personal products. "I'd say it's revenue-neutral. It's more about customer acquisition."

MacNeill's18-year-old niece talked her into trying Groupon. "She's in the know," says MacNeil. "She said, 'It's in all these cities, you get people without it costing you a dime.'"

With eight stores in Vancouver and 150 wholesale partners across Canada, plus a distributor in Taiwan, MacNeil believes Escents still has potential to grow. She opted to offer $25 worth of products for $12.

Soon, 800 customers were showing up with their Groupon e-coupons to pick up lotions, washes and bath bombs.

Escents has never done any traditional advertising, and MacNeill says the deal-of-the-day method is better than other marketing initiatives in tracking results and customers.

She's planning another Groupon offer again in January.

Be prepared, you could be overwhelmed

"We thought we'd sell about 300 oil changes," says Ben Hsu, owner of Fountain Tire in Vancouver. "We sold 10 times that many, 3,200. That first week, we couldn't get anything done. Three of us were just on the phone non-stop, making appointments."

Hsu notes that he had to persuade Groupon to do business with him.

"They seemed to only want to feature companies that had been written up in the newspaper or had won awards," he says. "I thought they seemed snobby."

But he persisted, pointing out that his 18-year-old company had won two awards for customer service from automotive research firm J.D. Power.

The deluge of customers drawn by the e-coupons was overwhelming. Hsu had to hire extra staff and advise some customers there would be a two-month wait to redeem their coupon. They weren't happy.

"I pointed out the coupon is good for a year," he says, "But those people were really difficult to deal with."

His goal was to win new customers, so he didn't want to bring someone in the door if he couldn't give them proper service and attention. Hsu was prepared to renege on the offer if necessary - Groupon gives refunds to customers who don't take advantage of the deal.

"But the customers I'm gaining, they're so impressed with the service, they're going to be customers for life," say Hsu. "And that's what we wanted."

'Shop around' with other websites

"I get approached by people doing this kind of stuff almost weekly," says Rachel Sawatzky of Vancouver's CocoaNymph, maker and retailer of hand-made chocolates. "It's getting very competitive. It's getting interesting."

Townhog, another online coupon site, was in to pitch her recently, but Sawatzky is doing her next deal-of-the-day with Livingsocial. Of course, she could've gone with Wagjag, or Dealfind or Stealthedeal, or maybe Teambuy, the company that won an investment from Boston Pizza owner Jim Treliving on Dragons' Den.

And this time she's negotiated a lower commission than the 50 per cent Groupon charged her. But she's still evaluating the return on the investment.

"It didn't necessarily drive the type of shoppers I need in my business," says Sawatzky. "What I found was, I was getting the people who want the one-time deal. They want a big discount, and it's all about the dollar and not about the experience."

One problem was that a number of the 600-plus people who bought her coupon on Groupon were disappointed that they didn't get more chocolate for their dollars.

"They didn't understand that we hand-craft everything here, so it's a little different from a manufactured product," says Sawatzky. For her next deal, she's offering the discount on her chocolate-making workshops, not the product. "It's a chance to educate a thousand people over the course of day about why fine chocolate matters."

Mitch Joel, the online advertising expert, points out that as they mature, these sites are also accumulating some incredible business intelligence that entrepreneurs will be able to use to learn more about each customer and fine-tune their pitches.

"Eventually, they'll be able to tell you what kind of discount will bring you how many new customers," he says. "That's black belt-level stuff."

Good to know. Just be sure to use those coupons with caution.