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Groupon – A New Truth of Advertising
Posted on January 18th 2011
Yes, Groupon has been valuated at 6 billion dollars thanks to Google. But what exactly were they buying? What does Groupon do so well that Google can not replicate it or go vertical with it? That’s the real question. It may be that Groupon now owns the social couponing market and that’s why they are so tasty.
Before I rant on why Groupon is, at best, a win-lose or win-break-even concept for businesses, let’s take a look at what Groupon does for the consumer.
In a world where we climb over each other in a riot to find the best deals on Black Friday, we now look at discounts as a strategic stand on our buying habits. ”We win with discounts” is our new motto. And everyone around us congratulates each other on their dominant deal as we flex our savvy scouring ability. We spend much of this time finding deals on items we don’t care about. So, it may be fair to say the formula for the majority of the ‘saving culture’ is formed as such: happiness = (cost x discount)/time. After all, the ultimate goal is to save money and time to spend it on other items that make us happier in the future. Right?
Groupon’s effect on this equation shows us that it is obviously consumer driven. It cuts the time in half because now the discounts are spoon-fed into our inboxes. The discounts are much larger than traditional coupons which is the basis of Groupon's model. The cost of the item is almost a non-issue. The cut rates make anything a viable option.
As a consumer, this will drive us to seek the highest happiness value as time approaches instantaneous. (Figure instantaneous out and Google may try and buy that, too!)
But what about the businesses? What does Groupon mean to our small businesses that are now incorporating this ‘couponing’ model into their structure?
When a business approaches Groupon they are assured of one thing. Their business will get more traffic and they will be introduced to consumers who may never have found out about them in a traditional sense. And this is true. Groupon is location-based and one of the hottest items right now. Businesses are lining up, one after another, to get their moment to shine! For the next year, I expect to have each of those eager businesses shoved in front of me like a nervous school kid on stage so that I may do my 1 minute judgment on whether the item is worthy or not. Wow. That sounds horrible.
Groupon will get you traffic. It will get you seen. It will almost always sell your discounted items. It will also take 75% (or more!) of the deal leaving the business owner with little or nothing to profit from. Ah ha! But wait? No profit? That’s right! Groupon sells its grand venue for displaying your product as it’s model. And who is going to argue about the exposure? After all, many people now know your business exists and may think of you when they want your service. Let’s hope so.
I have spoken to several small business owners in our area on their experiences with Groupon. In one case, the ‘winner’ of the coupon was not aware they purchased online and tried to pay twice. The same business owner sells a service and is now at a win-lose outcome because the time available was already scarce. Also, Groupon bit so hard on the back end cost, there is no income to be made.
Groupon is merely an advertising model. It’s an ad disguised as a coupon in an effort to channel a coupon-hungry consumer to the storefront of a business, "temporarily." As you might expect, once the coupon no longer exists….neither does the interest. As a business owner, I can find other ways to market my business but I am informed about the power of Groupon and the purpose it serves. If I mistakenly think Groupon is a source of revenue then I will choke slowly on the almost zero return on investment. The advertising model, at best, has now put you in the top of mind of customers and the possibility of talking one-on-one with the possible long term customer.
The truth behind Groupon's model is that traffic is not everything. In a study done by Rice University, the study provided evidence that employee satisfaction was a large factor in the Groupon promotion.
The study provides evidence that “satisfied employees” is the most important factor for the Groupon promotion to work successfully for a business. If employees remain satisfied through the promotion, the likelihood of its profitability is significantly higher. The percentage of discount offered and the number of Groupons sold did not predict the deal’s profitability, nor did the percentage of Groupon users who purchased beyond the Groupon’s value or purchased again at full price.
“Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal,” Dholakia said. “So employees need to be prepared for this type of customer and the sheer volume of customers that might come through.”
This type of advertising would not be cheap even if you went a traditional route like a billboard or TV commercial. It is important that businesses focus on a building relationships instead of creating one-time transactions for the customers. Businesses can also benefit from provided discounts for various products or services instead of one big item. Try using Groupon as a window to an unknown service that no one knows about. If you sell chairs and your company offers a stool, promote the stool!
Groupon for the consumer is a big win! Clearly! But for businesses, Groupon is just another cog to add to the their marketing efforts. Your strategic approach to the use of Groupon is the best way to ‘win-win’ with this relationship. As Dholakia mention in the study, “Right now, these deals are tilted too far in consumer’s favor.”