Coupons at social commerce sites like Groupon bring people into brick-and-mortar stores. But are bargain shoppers really good for business?

The people at Davis Jewelers weren’t sure what to expect from their first Groupon promotion.

Sure, the Louisville, Ky., store had dangled a dynamite deal: a $100 gift certificate for the low, low price of $49. But Groupon generally features restaurants and spas—not fine jewelry.

“I said to myself, It would be okay if we just sold 200 of them,” says Shannon Haste, Davis’ director of marketing. The retailer, however, beat that number and then some—the final total reached 330. “It was really neat to watch the numbers climb,” Haste says. Even neater, the store experienced something resembling a Christmas rush in the middle of August: The day the offer hit inboxes, phones rang off the hook, and the website received 10 times more hits than usual. 

It’s just one of the many success stories attributed to “group deal” sites, which have become the hottest thing in Internet sales. (They’re also called social commerce sites, because they are often hooked up with Facebook and Twitter.)

The biggest name in the field, Groupon, launched in 2008 and already claims 15 million members. The Chicago-based site recently made headlines when it sold 400,000 coupons for Gap, and reportedly turned down a $6 billion buyout offer from Google (Groupon declined comment). It has spawned a parade of similar companies, including Try It Local, AOL’s new Wow.com, and LivingSocial—considered the second-biggest name in the space—which on Dec. 2 received a $175 million investment from Amazon.

Shannon Haste

Yet jewelers so far have been skittish about climbing aboard the bargain bandwagon. Only a handful have used these sites, mostly in bigger cities, and those that spoke to?JCK said they have received “mixed results.”

The model should appeal to jewelers for several reasons: Unlike flash sellers like Gilt Groupe and Rue La La—which host strictly ­limited-time sales featuring discounted big-brand jewelry, home, and fashion items—Groupon and LivingSocial work with local mom-and-pop shops. They can also stipulate the deal must be redeemed in-store, which drives traffic to brick-and-mortar locations.

On the other hand, Groupon drives a hard bargain. The site is extremely selective about the companies it features, turning away seven businesses for every one it uses. The company says it relies on online reviews at places like Yelp and Citysearch, general word of mouth, and research into the company’s history to vet applicants. What’s more, Groupon requires merchants to offer discounts between 50 percent and 90 percent, though it has occasionally allowed 45 percent off for higher-ticket items. (See sidebar for more details on how Groupon works.)

And while it costs nothing for a retailer to be listed, the site generally claims about half of each coupon sold. (The buyer’s money is paid directly to Groupon, which remits the rest to the retailer in three parts—one day after the sale, 30 days after, and 60 days after.) So in the case of Davis Jewelers, it received $25 for each $100 gift certificate—meaning it theoretically lost $75 on every coupon sold.

And yet, Haste thinks the economics worked out in the store’s favor, noting that most—though certainly not all—buyers spent considerably more than $100. “We moved some small products and small earrings,” she says. “But we also sold $1,000 pieces. If you are getting customers in the door, it’s your job to up-sell them.”

“We don’t position Groupon as a fast way to make money,” warns Julie Mossler, Groupon’s consumer marketing manager. “The businesses who do the best on Groupon consider it part of their marketing budget. A lot of times jewelers are dealing with the same customers over and over again. This gets new faces in the door.” In Davis’ case, 46 percent of the buyers—153 people—were new, and are all now entered in the store database.  

Charlotte, N.C., jeweler Laura James, who offered a $75 gift certificate for $35 on Groupon in June, believes the site raised the profile of Laura James Jewelry. “It was incredible for me,” she says. “We just opened here. And the funniest thing is we got people that live around the corner that didn’t know I was here. I am in a center where there are a lot of other boutiques, but people didn’t realize there was anything new here. For me this was much cheaper than spending 20 grand on marketing.”

And though James’ gift certificate didn’t stipulate any restrictions on what customers could buy, she made sure she put out older inventory after it ran.

Things didn’t work out quite as well for Atlanta’s Lilly Porter Fine Jewelry, which sold only 25 Groupons.

“We were featured as a side deal,” says store president Bess Viau, alluding to a Groupon practice in which offers are tiered based on how broad of an appeal the deal is likely to have, and how many people the business is trying to reach. “If we were a main deal, we may have gotten a better response.”

And while all 25 Groupon buyers were new customers, many of them were “cheap,” complains Viau. “We did get some people in here who were never in before. I might do it again if I built it around a specific product. But it took a lot of time to get everything right, and maybe that could have been better spent somewhere else.”

Sarah Worden

Things went slightly better for Sarah Worden, owner of Charlotte Ehinger-Schwarz in Memphis, Tenn. Worden nabbed 31 new customers with her Groupon, and she’s confident she’ll make money because her business is based on repeat purchases. In fact, she’s seen some of the new buyers return already.

“I might try it again,” she says now. “But I struggle with the whole concept because you are basically offering discounts.”

For all the success that can be had on these sites, some retail experts note they are fundamentally another form of price-cutting.

“Any kind of coupon or discounting is a dangerous game to start playing,” cautions Laura Ries of retail consultancy Ries & Ries. “We say coupons are like crack. Once you start, you can’t stop. It devalues the product in the mind of consumers.”

Of course, discounts attract people. The retailers JCK spoke to say it remains to be seen whether the bulk of these new customers become regulars or one-shots. And yet most thought Groupon was worth trying…at least once.

“A lot of times jewelry stores always do the same thing,” says Haste. “This gave us a chance to show that we are trying something different.”