Daily Deals Arms Race – Groupon or Group-off?
Consider this. Marketing with no upfront payment. Cash within days. A steady stream of customers. Yes, you could liken it to a swarm of new customers just walking into your store because Lady Gaga happened to walk in. Too good to be true?
This is the idea behind Groupon, a deal-of-the-day website that features discounted gift certificates usable at local or national companies. Last year, the company raked in $713 million in revenue. Just within the first quarter of this year, it reported an additional $644 million in revenue. In its less than three years of existence, Groupon has established itself as the king of social buying sites.
So how does Groupon work? Groupon e-mails daily coupons to its members. The offer requires a predetermined minimum number of people signing up for the deal. If that number is not reached, no one gets the deal that day. Members buy the coupons, spending around $50 to $100 on goods and services, for example, and Groupon keeps a percentage of the purchase price.
Business owners can treat the coupons as quantity discounts. In tough economic times, if you are a small business owner, cash is king and the Groupon sales pitch resonates.
Business owners can also treat the coupons as sales promotion tools. These days, almost every company is going social. Getting the customer to follow your company on Twitter, to “Like” it on Facebook, to advertise on Google, to respond to Yelp, and to give a mayor’s special on Foursquare are just but a few of the social media marketing tools that companies employ to increase their social presence. Similarly, placing an offer on Groupon attracts a greater number of potential consumers to your brand and the resulting collective buying power.
However, as good as it sounds, there is a catch, and that is in the Groupon business model. (Source: Techcrunch)
1) Artificial scarcity in deals selection
Groupon’s process for selecting which deals it runs has little transparency. Is it a win-win situation for your business? They want businesses to sell bigger and bigger deals, so they can rake in more money. The fact that Groupon runs daily deals creates artificial scarcity and drives up pricing to absurd levels.
2) Customer loyalty and relationship management
It is definitely thrilling to have thousands of deal seekers walking into your store. But it wouldn’t be that great if all they do to show up with a slip of paper acknowledging the purchase, buy what they want, and walk out through the door. No email list, phone numbers, Facebook accounts or really any idea of where and how to find these people again. Furthermore, research by Rice University concluded that 40% of businesses surveyed said they would not run such a promotion again, with a major complaint being that Groupon users didn’t return to the store as full price customers. No coupons, no customers, no customer loyalty.
3) Keep growing revenue, or sink.
Groupon uses money from new deals (consumer’s credit card payments) to pay for previous deals. As such, they need to keep growing revenue. As of March 31, they owed merchants $290.7 million. Groupon pays merchants their share spread out in three installments, with the first one being 33% in 5 days. Paying merchants faster could lead to problems. Increased competition from Google offers and Facebook Deals would pressure Groupon in the area of payment terms. Google Offers pays merchants 80% of their share in 4 days. That is more than twice as much, and 1 day earlier. To match up, Groupon would need to earn cash faster and would need to grow faster, which may result in implications and problems for them.
With Groupon’s I.P.O filing now public, we question the sustainability of its business model and it’s viability towards your business. In any case, the heat is on in the daily deals arms race.
Is it a sustainable business model? Is it or is it not for your business? Only time will tell. Meanwhile, enjoy the discounts…. while it lasts!