Is the business model really so nonviable? Companies are coming to Groupon willing to give them exclusive coupons for their businesses, and Groupon gets to take 50% of the money from every Groupon bought.
I thought the only reason they were unprofitable was the issue of scale -- they were blowing large amounts of money trying to become as big as possible, as fast as possible. Once they are the 500 pound gorilla on the market and the majority of businesses go through them, I can't see them being as bad as they are now.
> Companies are coming to Groupon willing to give them exclusive coupons for their businesses, and Groupon gets to take 50% of the money from every Groupon bought.
Companies are not likely to be willing to give up 75% of revenue all that frequently, and there's a limited number of companies willing to do it even once in any given area.
In Rochester, NY, Groupon seems to have already blown through the low hanging fruit. Now we're getting tooth whitening and batting cage tokens as offers.
Great point. I have also noticed the decline in Groupon quality recently for my area.
That being said, once you are the 500 pound gorilla in the market, will people really have a choice but to go through you? I don't like ebay, but I deal with it because that is where everyone is. There must be some point where the hassle or loss of income is overcome by the potential benefits of advertising through Groupon. Even if that means they may have to tweak their % taken some, I could still see them being wildly profitable.
The choice there is not to go through anyone at all. It's not like all businesses wanted to hold flash 75% sales and just didn't know how before Groupon.
I'm not a business owner, so I can't talk authoritatively on the subject, but I think there's something in the combination of wide audience and well-known number of pre-paid vouchers that make GroupOn more attractive than old-world sales marketing. Then there's something in their skimming 50% off that's quite less attractive.
I'm not sure this is well-known, and it doesn't appear to be given the comments here, but Groupon offers a self-service option (i.e. not "featured") where their take is just 10%. I feel that is a relevant, and often overlooked, option for those businesses with typically lower margins.
I don't do deals myself, but I find the trend interesting.
Disclaimer: I work for a sustainable deal site for local businesses.
One factor that hbr is not mentioning is business owners (national and local) that participate on Groupon, for the most part, are having bad experiences. Obviously this depends on the industry (sky dive plus all around, coffee shops down all around) but not all industries can live off of 25% of their goods sold. I know many local business owners who ran a Groupon and promised themselves that they will never Groupon again because of the poor customer experience, and the large financial loss per Groupon.
The scale part is what worries me. I don't think Amazon needed as much money as Groupon needed to scale which is the biggest worry. At some point, the financial well will dry up on Groupon.
When that happens, I don't know what will become of Groupon. Maybe they should have taken the purported Google deal of a buyout for $6 billion :).
> business owners (national and local) that participate on Groupon, for the most part, are having bad experiences
My understanding is that Groupon's satisfaction rate is well above 50%. It seems that everyone forgets that, at worst, this is an advertising expense that guarantees revenue and foot traffic.
It is 100% dependant on industry. Ask any retailer if a Groupon makes sense when they depend on the margins their products produce.
The only way it makes sense is if they are able to get large volume discounts on whatever they are trying to sell.
Just running some #s here.
Local clothing ship buys jewelry for $5/piece and marks it up to $15. Groupon takes 75% of the $15. Groupon takes $11.25 out of the $15 and you just lost $.25 on the entire deal (not including expenses to find that piece).
Sure that same retailer could mark the piece up to $20 but groupon takes $15 of that and you break even. A $5 piece probably couldnt be sold for anything higher than $20...
I will agree that it generates foot traffic but most smaller businesses I have talked to who have done a Groupon or thought about it have had negative experiences or choose not to do it because of a scenario similar to the one above I portrayed.
A tire-kicker who has no intention of ever becoming a customer in the future, and just wants their 'deal' - no one wants those customers. Groupon doesn't seem to offer any way to segment or market your message/deal to subsets of people differentiated on any other signal besides those customers that "want a deal".
At $0.25 per, it really does not matter. Even at higher costs, the customer mix would need to be pretty horrible to compete unfavorably with traditional advertising where you very well might get zero custo,ers for your outlay.
In the example given, it's really $1.25, but even at $0.25, I'd still disagree. That's just the cost of getting someone in the door. If your sales process is just people browsing in a physical location, possibly that's OK. If it requires a lot of interaction with staff, that's cost that needs to be factored in.
Should that be factored in to the groupon price? Absolutely. Will most people know to do that (and goes groupon counsel people on how to do that)? Based on most groupon horror stories, absolutely not.
Those horror stories are actually somewhat scary for a business owner. Not being able to dictate what time your discount starts?
If people have a bad experience with the Groupon at your store, the store gets inflicted with tons of bad reviews due to long lines, long checkout times, etc etc etc. While in theory this sounds like a good problem to have, its not and won't provide a sustainable stream of customers (i.e. majority of these customers come once, have an awful experience because of the aforementioned problems and never come back).
While my sample size is small (~15 biz owners) I saw it first hand at a restaurant in Somerville. My buddies and I stayed for 3 table turns around us. I overheard everyone that was there because of Groupon and every single table had no intention of coming back. They didn't mention the cause, but I am assuming it was slow service because the place had a 1.5 hr wait (normally 15mins).
As I said in the comments field of the article, in response to a VC acquaintance's post...
A "land grab" strategy implies there is a means to lock out competition, and a strategy to defend and retain the land that is grabbed. So, one has to ask, what is Groupon's retention strategy for all this wallet-share they are grabbing?
Vendors and customers who are of the mindset to avail themselves of a Groupon-like service are driven by the value of the deals. There is no inherent loyalty to the voucher provider, or automatic lock-in of mindshare. If vendors and consumers can get a better deal from someone else, they will.
So, while Groupon, LivingSocial and the rest may currently enjoy decent margins, what prevents them from being locked into a race-to-the-bottom of razor thin margins as the markets saturate? To my mind, having the largest list of emails to spam with targeted offers is not a sufficient defense against this. It just slows the attrition.
So, then the question is, if there is nothing that prevents a race-to-the-bottom, aren't the companies that maintain the highest operational efficiencies (and profitability) - not the ones that grab fastest the most of the ultimately indefensible lands - going to be the ones that prevail, in the end?
And, let's not forget, this land grab strategy is/will be failure unless Groupon can actually raise the capital required to actually stay in operations and see through to fruition.
> So, then the question is, if there is nothing that prevents a race-to-the-bottom, aren't the companies that maintain the highest operational efficiencies (and profitability) - not the ones that grab fastest the most of the ultimately indefensible lands - going to be the ones that prevail, in the end?
Yes, yes, yes. As the OP correctly notes, this business model does not generate positive network effects for subscribers and, in my opinion, for merchants either (i.e. the larger the list of subscribers the smaller percentage of high quality sales leads generated). I think Groupon was scaling under the assumption that their business model was social and that network effects would be generated somewhere down the road once they were at scale. As we have seen, in mature Groupon markets where they are locally at scale, this has not occurred.
From my outside perspective, it seems that Living Social might be in a more sustainable place than Groupon (although I might be biased as I'm in their home market of DC). They generated some goodwill by taking a smaller cut of deal revenue than Groupon and, anecdotally, do a better job at maintaining good relationships with their merchants. Their deal quality (i.e. range/quality of merchants) has also been consistently better than Groupon's in my experience.
The question is whether this is a fad or not. Companies always try new marketing tricks. The type of marketing that stays is the marketing that benefits the company.
This type of group buying is relatively new and lots of companies (small and large) are testing it out. They're willing to chance making a bad decision to see whether it works or not. The question isn't whether Groupon is getting a decent cut, but whether companies are going to see this as a long term part of their business in the same way that other marketing techniques are. Businesses might find that they try it out, lose money, don't get repeat business, and it becomes another thing that no one uses in a couple years.
Groupon's business is that it has a mailing list (basically) of people looking for deals. That's the service they're offering businesses. At what point do deals of 50% off or more need such publicity? So, even if they become the 500lb gorilla and group-deal marketing isn't a fad, how likely is it going to matter? I'm not saying that it doesn't matter, but truly great deals tend to be spread (I'm remembering an Old Navy one that half my friends posted on Facebook).
Beyond that, there's a danger in marketing to people specifically looking for deals - and specifically people looking for deals that don't require much hunting. Companies spend a lot on price discrimination (getting people who will pay more for a product to do so). Companies use coupons that people willing to pay more will ignore or forget about, they sell different editions of products to get the back of your head saying, "I can't tell a difference, but am I going to be disappointed if I buy the cheaper one?", etc. If Groupon becomes so popular, there is also the risk that the deals will become easy to the point that you aren't getting extra marginal business to people who might not buy your product, but rather lowering your average price since so many people are on it. In fact, using a less-known deal site might be beneficial since it could grab the people who really wouldn't pay full price while flying under the radar of those who are just casual deal people.
The worst thing might be if the government decides that Groupon is selling gift certificates. Gift certificates are regulated including things like expiry dates. Right now, there's the possibility for me to spend $20 for $40 of goods and forget to redeem it within the (usually) short redemption period. That might change as Groupon gets bigger or one Groupon user decides to sue over the expired "gift certificate" and a judge sides with them. In fact, at least in Massachusetts, Groupon the gift certificate law would seem to apply since it includes merchandise credits and "and any other medium that evidences the giving of consideration in exchange for the right to redeem it for goods, food, services, credit or money." I haven't looked over Groupon's filings, but that seems like it would impact on their business - either by taking more money from them or the business depending on who keeps the revenue from non-redeemed cards. And even if it's the business, that means a change in how willing businesses are to sign up. I'm sure businesses are keeping track of how many sold to how many redeemed.
I'm not saying that Groupon is terrible or won't become valuable. However, there are pitfalls. "Group buying" might be a fad. Businesses might not find it in their interest to give Groupon half of the revenue or might find these lazy deal-hunters not in their interest. Larger size could become a hindrance as the larger they get, the more it will affect average sales price rather than just marginal sales price. And the government or courts could affect their business model. New things come with risk, but when the founders start taking a lot of the cash they receive as investment for themselves (rather than for the business), it's a bad sign for me. They're signaling that they see their business as risky enough that they want to make sure they're covered if and when it goes belly up. They aren't holding their wealth in Groupon stock; they're holding it elsewhere.
Amazing! I'm guessing 99.9% of Groupon users don't know this. I also can't imagine why Groupon is so generous in this respect, relative to other companies (even if it's clearly the "right" thing to do).
Actually some of the others do this as well. I believe that facet exists because of many States gift card laws. Yet another area that Groupon et al may hit issues with in the future.
I thought the only reason they were unprofitable was the issue of scale -- they were blowing large amounts of money trying to become as big as possible, as fast as possible. Once they are the 500 pound gorilla on the market and the majority of businesses go through them, I can't see them being as bad as they are now.