Savior Or Enemy? The Many Faces Of Groupon

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.


0 # Mike Schinkel 2010-10-15 09:44
Good points all.

Additionally one of the issues I have with GroupOn and the like are they train customers to expect things for 1/2 price. Because of competition in the free enterprise system that we Americans are so proud of, the efficiency of markets ensure that most businesses don't get the luxury of a >75% gross margin. Almost anytime a business can establish those kind of margins they'll be a competitor who'll say "Well hell, I can do it for 50% gross margin and beat the pants off them", and so on.

GroupOn-style programs simply creates an imbalanced economy system and leads retailers to operate in a manner unhealthy to their businesses, and that's not sustainable. But I think ultimately that's your point.

What I'd rather see are companies that work with retailers to offer exclusive experiences for their members for premium prices instead of targeting the most price conscious of customers. This could actually *add* value for everyone involved instead of having a company that some may view to be a "necessary evil" because they look to carve off a piece of the retailers margin by adding little other value that a cheaper price. Hell, almost anyone can sell at 50% off; that's why arbitrage is so profitable when you can find it!

Hey, come to think of it, sounds like a good startup. Wanna pair up and try it? ;-)

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0 # GFRRTDEFF 2010-10-16 01:05
Yeah, I started down the topic of incenting an entire generation of coupon customers, but figured I'd save that rant for another post... I've been evangelizing a concept I call Experience-Based Loyalty for the better part of 6 years, so I couldn't agree more with virtually every point you make above. On the topic of pairing up, I'm afraid my dance card is packed full :-)
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0 # Ben Dyer 2010-10-15 16:47
Having long ago turned around a retail hardware chain (yes, real "hardware" like hammers), I had to liquidate a number of underperforming stores and saw how "going out of business" sales worked wonders with ever increasing deep discounts. We weren't concerned about repeat customers in those locations and moved our best inventory to our keeper stores. Price absolutely moves goods but doesn't necessarily create customers.

I wonder if some of these flash marketing coupon concepts are sustainable. They are very costly for the merchants, and the buyers have pockets full of other coupons to blow before they may come back. Peter Drucker famously said the goal of a business is to create customers, and I think an added layer of engagement is ultimately more important than the frisson of the "steal."
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0 # Contus 2010-10-22 10:20
Groupon must really be a mixed blessing for a lot of businesses, given how little revenue most of them receive from Groupon and how much strain a Groupon can create in a short period of time.
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