When you look at your marketing options, Groupon should be the first off the list. I am not making this up off the top of my head, it is my job to stay abreast of the trends in our industry and 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
Although not acknowledged above, most merchants will agree that their Groupon promotion was profitable. The problem for them (as hinted above) is that their margins were worse than for walk-ins. And repeat business was terrible.
And that’s the bottom line with Groupon: unless it starts to deliver quality customers instead of bottom-feeding “pond scum” in the metaphorical sense, why should any new customer sign up?
Paul, thanks for reading and taking time to comment, though I disagree that most would “agree” the promotion was profitable. I believe most would “say” it was to cover their butt with their bosses or save face when questioned. But it is nearly impossible to make money at a 75% discount off the price you can expect a regular customer to pay. I ran though countless amounts and scenarios with my clients to try and find one I could say might be beneficial and found none. The return on investment is horrible, instead of running a $25 for $50 groupon, why not just mail a $25 gift certificate to everyone in your town? it will cost you $12.50 less at the least, and the PR benefits are a huge upside, plus you can control the flow out and thus back in. When I started researching the real feedback, I found many situations where honest people said they regretted the decision, and very few that could tell me they were doing it again. Groupon is currently making absurd money (50 million/week), and they are still trying to get a huge buyer (Google, Yahoo, Ebay, Amazon) to take them over. The smart speculation is because they know the repeat enrollment is not there in sustainable numbers, and the investors want to get out while they can get huge money back. We will see if they find the buyer they are seeking.
Good article Spiro…..This is not a good way to support your local business and in trun a good way to stimulate our economy. I am glad to see something like this happening……….
http://smallbusinesssaturday.com/
* and in turn not a good way to stimulate our economy
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