When you look at your marketing options, Groupon should be the first off the list. This is a fact I will outline for you in detail. I have linked you to some of the most poignant and well written articles I could find to back my claims up, so on with it:
Why Groupon will Fail.
Groupon represents a trend sweeping the country, the group buying craze. Fueled by the recession, retailers, service providers, and most actively restaurants are allowing Groupon to sell certificates for a certain amount of buying power (say $50) most often for half price ($25). The consumer gets a whopping 50% discount, and as you might expect the certificates are selling like crazy.
Groupon then turns around and pockets at least half (sometimes all) of the sale price ($12.50), and forwards on the remaining $12.50 to the small business owner who is responsible for supplying the consumer with the $50 worth of product. The fact that merchants would be willing to make such a deal is indicative of the state of the economy. It just isn’t a good deal for them, and already some are publicly complaining that their ‘promotion’ has led to huge losses, and they must tough it out while the thousands of certificates that Groupon sells come in.
Outside of profit and loss, what are some of the symptoms of this Groupon fatigue? Among the worst:
1) Customers who are ‘deal hawks’ that only visit for the deal, not to ‘discover’ new places, and become regular customers.
2) At restaurants groupon holders who only tip on the discounted total not the normal amount, leading to staff fatigue and resentment.
3) Overwhelmed merchants whose reputation is damaged with their full price paying customers because they are unable to provide the same level of service when all the Groupon wielding customers flood them after an offer.
These reasons compound the fact that it is a bad deal for business owners to sell their goods at 75% off. I mean is it that hard to figure out? I don’t care how flashy their marketing is; it’s bad business, period. Businesses have been struggling to make a profit for the past few years, and running 75% off specials is only going to make it harder.
So expect to see Groupon start making the deal better for merchants as more and more get burned, or just reject the Groupon come on in the first place. Groupon will have to lower its take in order to continue to sell. When you ask a Groupon merchant if they think it was valuable to them, you are likely to get the answer ‘Yes we feel that we got exposed to a whole new group of customers that we hope will become regulars’ the truth is that privately many of them would tell you that they are very glad the onslaught is over and they can get back to selling at a profit.
Groupon will fail because it is a short term fad marketing ploy, that will not inspire repeat enrollment among merchants, other than those who game offers to trick consumers into a deal that really isn’t. So Groupon will expand rapidly and then begin its inevitable transformation into a modern day direct mail marketer with a ‘pay ahead for a discount’ value to consumers. That transformation will not justify the lofty valuation placed on it by investors and will likely lead to its acquisition by a larger firm, and the end of Groupon as we know it today.
At GuestFeed I advise my clients to not get lured into a deal with Groupon, or any of the other copycat group buying firms cropping up everywhere. It seems all you need is a big email list and some true believer sales people to hit the streets these days. I urge my clients to do the math and to really break down the numbers to discover the real cost of such an offer. It is hard work running a restaurant and even harder when you are doing it to lose money.
For consumers a great deal, for merchants a big mistake. What do you think? Have you had any experience with Groupon you would like to share?
I am here to talk it over anytime, just hit me up. Twitter: @spirocks
****UPDATE****
I plan on updating this post as more stories surface regarding small businesses experience with Groupon.
Consider the Boston Herald piece in which Jeff Gates, one of Bostons most successful restaurant owners said:
“They (Groupon and clones) are deflationary weapons of mass destruction and are very, very dangerous for the restaurant industry to get involved in,” said Jeff Gates of Aquitaine Group. “I don’t think restaurants realize how challenging the bottom line is without giving half off to your customers. (They) lose track of what they’re giving away.”
None of Aquitaine Group’s six restaurants – including Aquitaine Bar a Vin Bistrot, Metropolis Cafe, Union Bar and Grill, and Gaslight Brasserie du Coin – offer the deals.
Here is the piece itself followed by several more stories below:
Recently Entrepreneur wrote: “A recent study by Rice University surveyed 150 small to midsize businesses that had used Groupon, asking about their social-coupon experience and whether they would use the service again. While 66 percent of the 150 respondents said that their Groupon deal was profitable, a significant 32 percent found it unprofitable. And 40 percent of the respondents said they would not use Groupon again — notable, considering Groupon claims that at least 95 percent of its sellers request to be featured again.
Before you jump on the social-coupon bandwagon, make sure your business can handle it. Here are five Groupon nightmares that could happen to you — and how to avoid them…”
Here is the article:
Then there are others who are writing about warning signs regarding Groupon’s future. The likelyhood of a fad type waning of interest and saturation of market with competitors is written about in this article which provides some interesting historical references:
Thanks for reading.
Comments
17 responses to “Why Groupon Will Fail”
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It is very surprising to me that there has not already been more innovation and differentiation in the “group” buying industry. People see success and just make a clone. I believe we will see competitors in the space this year that will disrupt the current model and offer a valuable resource to local businesses wanting to bring in new customers in bulk to experience their business for the first time – at least if I have anything to do with it there will be.
Rob,
I agree and that is why this groupon model is going to change too, whether their take gets lower or the deals get weaker but once the initial run through is over the second time around places are going to ass or reduce the offer.
What one thing would you change?
Well, lowering fees as you mentioned would be a good start (or changing the pricing structure altogether). Also, having a stronger focus on the discovery of new places over the promotion of deep deals would help. The promotion of deep, singular deals definitely brings in results for that business, but much of the results come from impulse buyers buying for the deal, not for business specifically. This causes the deal hawks situation. If consumers had more options and could look for deals on their own time, then they would be more likely to goto a business with the purpose of experiencing that business. Consumer experiences are what bring customers back for more… not the fact that a business offers them a huge deal to start off.
But the real problem here is that the whole model is flawed in my opinion. These “group” buying services are not group buying services. They offer large discounts that are unlocked after a quota/reserve of people is met. These people are hardly ever groups of people that know each other and go out at the same time for a shared experience. They are mostly impulse buyers that will go to the business on their own. You saw it in the LivingSocial Super Bowl ad.. the guy was going around doing everything. Living the life with all these awesome deals.. alone. It was kinda sad. He wasn’t creating experiences with others at these businesses that would bring him back again.
There are a few other major changes that could be made, but they are a part of my startup’s secret sauce if you will ;). We are in the midst of development, and are still operating in stealth mode. I’ll send you some information when we finish our private beta.
I can tell you that Groupon HAS already started to change it’s way now offering restaurants up to 70% back on the split as they have started to place sales reps on the ground within markets.
Very interesting, I knew this had to start happening but thank you for
bringing it to my attention that Groupon has in fact started to create
better deals for restaurants. Do you work for Groupon or are you a client of
theirs?
-Spiro
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As an owner/operator of a “copy cat” website, your article is spot on with regards to Groupon, but it does not mean that the entire business model is flawed. Where Groupon and LivingSocial fail the most is that they put their members first versus the participating businesses. Groupon and LivingSocial will have to ultimately switch this to put the participating businesses first in order to succeed long term.
Your article is correct that these people sign up for discounts and may or may not spend more or return in the future. It is important to work with the local business and put together a deal that will be successful for the business regardless if they sell 10 or 500 deals.
Here is what I mean…
– We do a 70/30 split for all businesses. This means that they ultimately get 35% of the deal value. Most businesses (especially restaurants) have a cost-of-goods sold at 30%… so in this case they don’t lose money initially; whereas, with Groupon and LivingSocial taking their 50/50 cut comes out to a 25% payment to the Merchant… ultimately losing 5% on every sale.
– We put the Merchant first versus the Member. I want ever Merchant that participates with us to be 100% very satisfied. I’d rather sell 20% less deals and have a Merchant happy then to sell a ton and have them dis-like our program… sound familiar Groupon/LivingSocial?
– As part of the Merchant coming first we work with them to create a deal that they are happy with. If this means it is only valid (in the case of a restaurant) for weekdays, after 4:00pm, on catering only, or not on a holiday… then that is the deal we do. We also have no issues limiting deal volume or other parameters.
– Merchants should focus more with a local “copy-cat” versus Groupon or LivingSocial. In our market of about 350,000 people both Groupon and LivingSocial boast lists of 35,000+ (where we have about 11,000). A majority of Groupon and LivingSocial’s deals are for big name or non local deals (i.e. Amazon and Barnes and Noble). This is good for Groupon and LivingSocial, because like you said in your article–it’s all about who has the largest email list… which really stinks for the mom and pop business going after one of these large deals.
One of the classic pitfalls we see is a local business saying, “but I went with Groupon/LivingSocial because they have such a large list and it will reach everyone”… what they don’t understand is that they will lose 5% on every deal (assuming a 30% cost of goods… not including potential additional labor costs). Who in their right mind would operate a business and sell products at a 5% loss…
Local businesses will learn that Groupon and LivingSocial are not the best fit for their businesses… especially in markets with there is no local account executive and everything is handled out of a boiler room in Washington DC or Chicago. People like to do business with the local community… that is what we and other locally based copy-cat sites can do.
I wrote this, partly in response and partly inspired by your comment: http://spirocks.com/2011/02/groupon-the-restaurant-killer/
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The new wave of “deal sites” will take advantage of social media and social influence to offer better deals to more influential people. Word of mouth marketing has real value especially when you’re a local merchant. The reason organizations want to give celebrities free products is because it just makes good business sense. Take a look at a new venture called SocialLadder http://www.socialladderapp.com. The model is unique in that merchants can dynamically price their deals based on how influential the consumer is this seems to be where its going.