Possible Shortcomings of Groupon

The other day I was reading an article titled Grouponed to death? at The CX Rx. It hit a lot of points that I’ve always thought about these deal sites like Groupon, Living Social, and the 100′s of other clones that have been popping up.

To put the rest of the article into context, it’s important to know that Groupon works by selling coupons for a business’s service. The business agrees to give a discount of at least 50% and also agrees to give Groupon 50% of the revenue they take in from the coupons. This means that the business gets 25% of the list price for their product or service. At least, that’s how I understand it.

I’m not a business owner, but it’s hard for me to rationalize why any business would give up 50% of their, already cut in half revenue, providing their product or service for 25¢ on the dollar of their normal prices.

It’s hard to believe that you would actually turn over loyal customers and instead it seems like you’d get plenty of people coming to get a good deal, then never coming back. As Jay Ehret puts it:

The thought process goes like this: I get a new customer by giving them a discount: 50% off. They will appreciate the discount, see how great we are, and become a new customer. But that’s not how the customer thinks. They get their coupon, buy your stuff, and they like it. Then you ask them to buy again, but now you’ve doubled the price!

At the same time, you’re alienating your current customers by giving deep discounts to new customers, and offering nothing to the loyal customers that have been keeping you in business up until then.

I’m sure this isn’t a new idea, but I would like to see tools that allow your current customers to tap into their own social network. Reward both the current customer and the new customers they’re able to bring to your business. Provide coupons to both. If you’re not giving a middle-man 50% of the reduced profits, you might even be able to offer discounts comparable to Groupon, without going out of business.

  • http://thecxrx.wordpress.com Amanda Wingard-Phillips

    I’m glad you liked my post about Groupon for small businesses. I have a follow-up post in the works that should add a new dimension to the debate. Knowing people read my blog is good motivation to keep working on those half-done posts!

    • Anonymous

      I’m looking forward to reading your follow-up post. I had this post sitting in my drafts for a couple weeks before I finally finished it and got it posted.

  • Lethrface

    Great post bro. I think the big issue is that people are trying to cater to the new age of “everything can be done on the internet.” I think if they were to continue to use Groupon and things like this, they could possibly tell all of their customers “hey, check out this great deal at Groupon’s website” and offer them the knowledge of it being out there. At the same, time, as you stated, the cost effectiveness of this is questionable. I think it comes down to the stores figuring out “what is a more cost effective way to get these coupons to customers without coming up short.” In most cases, I can see where printing your own coupons to give to customers would be the more cost effective approach as you would save a good chunk of change on the paper and ink alone. Now, if the coupon is for a specific product and the cost effectiveness of it is, say, you save more from taking that 25% than you would from printing the coupons yourself, then go for it.

    On another note, it could also be that some (not all) stores will gain more revenue from using services like groupon because then they get their name out there for more people to see and come and shop. I guess it really just depends on the store and their business model. I don’t see too many stores being able to take such a percentage cut from these services and while it is a good idea in theory, in practice I can see stores ditching the Groupon services.

  • http://www.themarketingspot.com Jay Ehret

    Thanks for sharing, Rex. What a business owner must confess if he/she thinks that he needs to sell product at 50% off is that there is one of two issues:
    1. Awareness
    2. Value

    I happen to think the two are related. The more value you create, the more awareness you create. Value is not created by subtracting from the price tage.

    • Anonymous

      I do agree that Value and Awareness are related. I could see using Groupon could provide some awareness to a relatively new business that doesn’t have many customers. As your post points out, though, it’s some pretty pricy advertising.

  • Mukund

    1. There are many businesses that have “use it or lose it” inventory. They are currently getting $0 for it. Getting 25% of “full price” is better than 0, because they have fixed costs.
    2. Even if 10% or less of those discounted customers come back next time at full price, they have gained 10% new customers.
    3. Groupon is not for all local merchants, certainly not for those that sell inventory that does not have a limited shelf life.

    • Thinker

      My understanding is that Groupon does not pay on unused coupons, only those that are redeemed.  Theoretically, Groupon would be better off if all coupons went unredeemed.  

  • Social_Media

    The difficulty for most retailers is clear:  in order to provide a Groupon coupon that attracts attention, the offer must be so good that it appeals to the coupon hopper customer who probably can’t afford your products or services on a regular basis.  Essentially, Groupon coupons attract the wrong customer, and because of Groupon’s share, the retailer pays more per customer than they would with any other advertising method.  Television, for example, has long been a staple of local advertising, and the quality of commercials has vastly improved via established advertising agencies such as Cheap-TV-Spots.com.  Retailers can craft a TV offer that they’re comfortable with, and with a well-planned air time schedule, reach many potential customers who might never even venture onto a group coupon site.