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updated 6/21/2010 1:45:30 PM ET 2010-06-21T17:45:30

Last October, when Philz Coffee offered users of the coupon website Groupon discounted gift cards for in-store pickup, Jacob Jaber, president of the San Francisco coffee chain, figured on a few hundred takers. He got more than 2,000. "I nowhere near projected the amount of people that showed up," says Jaber. "We just weren't prepared for it." He ran out of cards, irritating customers, and says he'll probably stick with word-of-mouth marketing from now on.

Jaber's mishap spotlights a challenge for Groupon, a Chicago-based startup that has sold nearly 6 million online coupons since its founding in 2008: Sometimes it works too well. Groupon offers users a daily deal at local establishments ranging from restaurants and shops to skydiving operations and spas. It works with businesses in more than 140 cities in 18 countries. When Groupon posts an offer on its site, it keeps 50 percent of the revenue. The local merchants can set a cap on how much they want to sell. The trouble is, those businesses don't always make the cap low enough and get overwhelmed by bargain-seeking hordes. A nail salon in Boston sold 4,000 manicures and pedicures before Groupon discovered the shop had just two stations to serve customers, says Andrew Mason, Groupon's founder and chief executive officer.

Privately held Groupon, which declined to comment on its financials, says it aims to double its U.S. coverage to 100 cities this year. In April the startup got $135 million in funding from Digital Sky Technologies, the Russian investment firm that also owns as much as 10 percent of Facebook. The risk from disgruntled customers is lawsuits, says Jeremiah Owyang, an analyst at research firm Altimeter Group. "Imagine you're a consumer and you didn't get the manicure or pedicure you paid for," he says. "Who do you sue, the small business owner or someone who just got $135 million?" Mason says Groupon hasn't been sued for unfulfilled deals, and adds that the company offers customers full refunds if they're dissatisfied. In the coming months, he plans to add online marketing seminars to better prepare small business owners for spikes in demand. "We say to businesses, the first day is going to be crazy," Mason explains.

Mission Minis, a San Francisco bakery that opened in January, was bombarded with 72,000 cupcake orders after a Groupon offer in March. Owner Brandon Arnovick says his frazzled bakers couldn't keep up, making some customers angry. Despite the chaos, he says the experience did have an upside: The shop has been baking as many as 1,700 cupcakes a day, vs. about 800 before the offer. Plus, the ordeal taught employees how to deal with disgruntled customers and work under pressure. "It was fun," he says. "Kind of."

Copyright © 2012 Bloomberg L.P.All rights reserved.

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