Every time I end up in a conversation about coupons, there’s the inevitable one-liner delivered about how retailers hate Groupon – even though the wait list has been reported to be six months. Love ‘em or hate ‘em, but let’s call Groupon what it is: an on-demand, money-making fire hose of coupon customers. And therein lies the problem for both Groupon and the retailers. If either screws up their end of the bargain, the whole experience sucks – and it hurts BAD.
So what do the two players here need to consider before inking the deal? Firstly, Groupon has to do a yeoman’s job of coaching their prospects to understand the utter pain of having 10-15x the customers in a very short burst. And they need to help these retailers be really honest with themselves about their ability to deliver the product or service. For the retailer, it’s even easier: just don’t be greedy.
The economics are simple: if you’re a retailer, you need two things to be true. You need a cost-of-goods below 25%, and you need the ability to scale. The 25% is based on Groupon’s requirement of a minimum 50% consumer-facing discount, with the other 50% split evenly between the retailer and Groupon. Where Groupon hit the homerun was taking control of the transaction. Imagine a world without receivables, and where you’re driving additional profit by managing the float. That’s what gets you a billion-dollar valuation and a couple hundred imitators every week.
But back to the retailer, since this is the ‘horror story’ that really irritates me. Many local companies – especially restaurants – are well-adjusted to local advertising programs like Variety Entertainment. Conventional thinking has always assumed these programs drove trial and perhaps picked-up a few regulars along the way. But Groupon is trial marketing on steroids, and any business owner who doesn’t know upfront is just plain ignorant. So once you sign-up, you immediately lose the ability to cry foul like “Groupon killed my business” or “I couldn’t handle all the business.”
While consumers get great deals, the reality is Groupon is a big risk for most small retailers. Having the pricing flexibility doesn’t guarantee you can pull off the service side of the equation. In fact, if you have that much open capacity you may be closer to closing doors than you’d like to admit anyway.
So what does all this mean for the future of Groupon? I think you’ll see retailers begin to get a lot smarter about deploying the fire hose. And the offers will steadily become more service-oriented – specifically in high-volume businesses that have open capacity every single day like restaurants and hotels. At the same time, I’d expect to see progressively fewer products offered since fulfillment and inventory can become big issues very quickly. I’m not saying Groupon will melt away into Variety Entertainment-type player, but I do believe the hype cycle has just about maxed out, and we all see the signs of the backlash coming. From here on, that business becomes more Amazon-style in its focus on cost-per-customer-acquisition and e-commerce share-of-wallet. Perhaps it's time to break the business back to nice old simple models behind e-commerce.