Why Groupon is bad for your business (and mine)

Posted on March 10th 2011

Why Groupon is bad for your business (and mine)

Groupon, the so-called social buying site (even though there is very little social going on outside of the manipulation of basic human behaviors like their reaction to a situation where there is sense of scarcity) and the fastest growing company in history, is bad for your business.

It’s bad for your business for a number of reasons.

  1. It destroys the profitability within your market
    Coupons trigger people’s pleasure side of their brain, that is the site that gets addicted to things and that requires more over time in order to get the same satisfaction.  So if you run a 50% off campaign in your local area or in your industry it will be very hard for anyone in your sector to come back to the pricing levels that you used to get. In effect you destroy profitability not just for you, but for all involved. If you don’t believe that, check out Utpal Dkolakia’s recent study on Groupon. 32% of companies said that the Groupon campaign was unprofitable with only 25% of redeemers buying additional products beyond the ones offered through the coupon and only 15% of coupon users coming back.
  2. Over time discounts will affect service levels and customer satisfaction
    Even if you can withstand a one time coupon offer where you only get 25% of what you normally get, sustained couponing has to affect your profitability and  thus your service levels. With decreasing service levels, customer satisfaction will go down and you will lose not only the unprofitable coupon users, but all your clients.
  3. You destroy all customer loyalty
    It is a well documented fact that coupons destroy customer loyalty.  It is the one differentiator that can easily be copied by others. So if you shift your business to one where the differentiator is price (or coupons), you destroy customer loyalty – not just for you but for all parties in your market.

Instead of focusing on discounts and coupons companies should focus their efforts on longer lasting competitive differentiators like service levels, or uniqueness of their offering.

fgossieaux

Francois Gossieaux

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Comments

That is a very interesting piece, and you may be right, but the train has left the station.

When one of my clients tried advertising service instead of price discounts, sales dropped off a cliff. They went back to promoting a discount (not even the most generous one they'd ever offered) and business is booming.

Let's face it, Social Networking doesn't drive sales or traffic; Social Commerce does. Dramatically in some cases. The question is how many of those customers you can retain. On the plus side you HAVE captured their data and thus can go back and market to them over and over again with other promotions (and you WILL have to offer ongoing promotions).

I think the trick is to build the promotion into the overall cost of doing business so that you can still make a profit. If "nobody pays retail," then actually not paying retail amounts to the same thing. What nobody is paying is the MRSP. So if you set your pricing such that you can make the net amount you need while still offering what appears to be a competitive discount, you're fine.

I agree that Customer Loyalty does factor into the equation. I do virtually all my non-food shopping on line, and I'm "loyal" to certain sites or brands because they've given me good products or service in the past, usually (but not always) at a good price. In any case I trust them. But I'm still influenced by price, and if I can find the same item at more than one Trusted site, I'll go with the cheaper price every time. But I wouldn't go on Craigslist and hope I don't get ripped off just to save a few dollars. So I think that's where the "service" part comes in; if people come to your site because of a discount but get bad service and hate the product, they're not coming back again no matter what you do. But if they get good service and like the product, you have a much better chance of retaining them on some level.

Finally, when you closed with the admonition for clients to advertise "service levels, or uniqueness of their offering" I had to chuckle. Try that and see how it works. It won't. In every business, competitors look around and see what each another are doing and then do something similar in return. They have to if they're going to compete. So I think a better strategy is to be flexible enough to take advantage of the opportunities of the moment, and right now coupon sites are "what's happening" in online sales.

Selah.

Francios, in social media it also depends on if your are trying to sell a Commodity OR Value based service/product.

At @iGo2Group we beleive understanding what you have and how it is viewed is key to planning your B2B or B2C Social Media Strategy.

More on my blog here: http://bit.ly/ibSlTV

You make some good points. But I still can't get enough. I mean, Groupon isn't even offered in my area and I'm still addicted. When I was hearing about all the great Groupon deals, I thought I was going to miss the Groupon boat. But after doing so research I found Steals4All.com which gathers all the daily NAITONAL Groupon deals that I can buy regardless of where I live.

If the national deals went away and Groupon never came closer to home offering there local deals, I think that would be the only reason I stop using Groupon.

The Groupon business model is a win-win only for Groupon. The seller or the merchant is forced to subsidize his own groupon. Groupon claims they are providing an advertising program. If this is an advertising play, why do they manage the process, collect the money and then pay it out. There is a huge difference between providing free coupons that discount the price at the time of a purchase versus buying a short-term groupon coupon.

Groupon pre-sells coupons and is not a true coupon play. It requires a set number of buyers to agree to buy coupons that have a very short expiration date for one special offer. From the adverse comments from the merchants, it appears the groupons are painful for the merchants and they typically want the groupon to end as quickly as possible to reduce the loses from their groupon. The merchant's have come to learn from Groupon that they are also responsible for collecting the taxes based on the original amount, which further reduces the payment a merchant receives from Groupon. Groupon manages the payments and pays the merchant over a period of 90 days after the groupon to cover any issues that might come about. Groupon has many state class action lawsuits over the expiration dates of the coupons brought on by many disgruntled buyers.

Groupons for Product Sellers vs Services Sellers

If the Seller is selling Services then groupon makes a little more sense then a Seller selling a Product. A seller of products has an upfront fixed cost being the cost of product and cost of money to pay for which is paid to a third party. Groupon does not appear to appreciate this cost as they ask for 50% of that cost.

Let’s do the numbers. If the Retail Price is $100.00, the Groupon Price is $50 and the merchant should receive less than 25%, can’t forget the taxes.  The seller will receive about $18.00; State taxes will get about $7.00 and Groupon $25 for staging the event. So for every $100 item sold for $50 to groupon buyers, the seller gets $18.00 and Groupon $25.00 for sending out e-mails and advertising on the Internet.

If a merchant were to do a 50% Off sale, the merchant would collect the money immediately, collect 50% and control the number of units to be sold, offer other sales promotions and pay the sale advertising cost 30 days later. From a business perspective this makes a lot more sense then doing a groupon.

Now, if the seller is selling services and there are no true upfront costs to deal with, this makes it easier to play with the numbers and make it work to have a breakeven groupon. The cost and resale of services are usually calculated based on labor, expertise and materials if required. Service costs are more flexible as the service provider can adjust the amount of time he allocates to get the job done. The Product Sellers are now doing the same, as they have to inflate the product price to make a groupon work.

If this is true, then where is the buyer benefit of buying a Groupon?

If we use the same calculations as above, one can see why it makes more sense to do a groupon for services then products. So when you see a services groupon for $25,000 worth of IT Consulting B2B services, the buyer now has to ask what is missing if the price is reduced from $25,000 to $12,500. Nothing is for free - Caveat Emptor (Buyer Beware?) 

Groupon’s business model is creating a new kind of buyer – the 50% Off Groupon Whore. This buyer will never have loyalty to any merchant, just to 50% Off Groupons. What merchant wants or needs this kind of buyer as part of their clientele or business model. A business has to make money to stay in business and it is not possible for this to happen if they are required to sell everything at 50% Off groupon style. The merchants are already reacting and inflating the prices to ensure there is enough profit in a groupon to remain in business. If this were the next step, why would a buyer buy a groupon? It doesn't make any sense. The merchant inflates the price to be discounted so Groupon can sell the groupons online and make a profit. Sounds like a Ponzi scheme to me.

Unfortunately this is what the groupon business model is forcing businesses to do today. Groupon is definitely the leader in the world of groupons and are making the bulk of the revenues. They will do an IPO before the end of 2011. The investors have paid for their early stock and are just waiting so they can cash out. Then the groupon business model will crash and morph into another social buying business model that is more of a true Win-Win for the buyer, the merchant and the advertiser.

Groupon is a cheap form of advertising. Nobody is forcing you to make no money, just make a special offer. 

It is also fast becoming apparent that people will favour businesses who don't charge higher prices merely for profitability's sake. I don't think it destroys profitability at all. 

Why not make a discount scheme pat of your social media and customer loyalty program instead of using a service like Groupon? That way you win in both instances..

Francois IS right. Groupon is just another way to put small businesses out of business. Never compete on price and as consumers we MUST stop making cheapest the way we decide where to spend our money because that behavior is what sent our jobs overseas, shut down our manufacturing facilities and put our neighborhood businesses OUT of business. 

If we want to have a decent standard of living we have to start seeing the connection between how we spend our money and how we make it. We MUST be willing to pay a reasonable price for what we buy. We MUST stop shopping at big box stores especially Wal-Mart and buy from local small businesses instead. If most Americans were not "employees" and ran their own businesses I would not have to be explaining to them why if you don't buy products and services and eat at your independent neighborhood restaurants they go under.

Time to wake up before they are all closed and we have to start completely from scratch!

I disagree that businesses are being destroyed because of Groupon.  Groupon is an innovative promotion channel.  If businesses are stupid to treat Groupon as THE promotion channel for customer acquisition and retention, they do not have a viable business model and it perhaps is best if they cease to exist.

Interesting conversation, but I agree that the train has not only one stations, but many stations. Social commerce is here to stay and the value for Groupon, or any of the many other social coupons, is especially high for products, events or services just getting off the ground. Instead of giving away a chunk of tickets, why not sell them this way, and gain visibility, social presence and word of mouth marketing? For an indepently produced show that wants to get people in the seats, coupons can make the difference and help to establish a buzz that will positively impact future shows.

 

Wow - the title is such a gross generalisation, not to mention misleading even in the way it references the Utpal Dkolakia’s study. Using Groupon is really executing a marketing campaign, and not necessarily make a profit on the coupon-based transations.  The study revealed that 66% of respondents found the coupons/ campaign - the chart on page 6 of the study provides a good summary, instead of Francois saying "32% of companies said that the Groupon campaign was unprofitable with only 25% of redeemers buying additional products beyond the ones offered through the coupon and only 15% of coupon users coming back." without qualifying that the 25% and the 15% is within the 32% of unprofitable customers... so it is actually 8% and 4.7% of the total respondents... and that just points out the obvious, because why would anyone want to run an unprofitable venture again?

It is as irresponsible as saying "marketing does not work" - it really depends on the objective and approach/ execution.  Groupon and similar sites primary intention is to promote its business to new customers who may be willing to try a service at an attractive price, and impressed enough to be a repeat customer at the regular price.  Coupons are not meant to be run on a 'sustained' basis, nor to deliberately cannibalise existing customers, even though it happens.  Compare that with supermarket discounts - they have loss-leading specials every week - so should they not run these 'promotions' and these promotions are 'bad for business'?

Francois also confuses what 'customer loyalty' means.  Competing on commoditised pricing, or marketing to price-sensitive 'cherry pickers' is not what customer loyalty is about.

Francois, all good points. Small business owners will often do the old "knee-jerk" because they need people in the door.  And what's the quickest way?  Slash prices and get the word out.  So seats might be filled; product purchased at a discounted rate, but there's no loyalty; no emotional connection; no reason for these patrons to return.  It's like the Summerlicious and Winterlicious restaurant programs - they get people in the door because of discounted meals, but the customers rarely come back (other than if they're already loyal customers) and it's rare that they'll refer their friends.

Unless the business owner creates some elevated experience around the Groupon discount...unless he/she leaves the consumer with a lasting positive memory...a real reason to return, there's no long-term value created by Groupon.   However, a close friend of mine who owns an upscale restaurant in Toronto, looks at Groupon as cheap advertising, and a way to fill seats when they would otherwise be empty.  He thinks Groupon is great for his business.  Now, he's also working on elevating the customer experience in the restaurant, so I'm sure that over time he'll be increasing loyalty.  I'd hate to see a business rely solely on Groupon as a turnaround vehicle - it's simply a short term revenue generator.

I wonder if Francois has a vested interest in 'canning' Groupon? Far too much over-analyzing guys - it's simple! Social Networking is here to stay so why not use this platform to advertise? Mind you, I'm in Australia & not North America (a dangerous country for all of us!) We don't "tip" anybody here - we don't need to! Staff are paid appropriately.

I can imagine a Groupon for "75% off 9mm Smith & Wesson" would do very well in North America.

Hey Francois, North America is just one little country on this earth - why not do some real research & look at Social networking advertising across the globe? ... But maybe that's asking too much!

Wow - great to see all those comments, and so many people who disagree.

I am glad to hear that Groupon seems to work for some of you. But in my book differentiating on the basis of price is truly a lost proposition in the long run. People will not buy from you unless you discount and so you destroy the profits in your market not just for you but for everyone else. I stand by my statement.

See further for more detailed responses to the great comments. I look forward to continue this discussion.

@Jerry - I hear your argument but have to disagree. I think many people (their business results would indicate that to be the truth, even if you would not do it) pay a premium for commodity products on Amazon, Best Buy and Newegg just to name a few because they have a differentiated offering. I know I do.

@Michael Green -- I would make the same argument as with Jerry. Or you might want to listen to the interview I did with Eran Barak from Thomson Reuters (http://bit.ly/dPRyex), and why they would not compete on price in what is essentially a commodity business

@Shane -- that is the point, coupons are addictive, and you need more over time to get the same satisfaction - that seems like a long term losing proposition for the couponer.

@Carl Ruzycki -- thanks for the extended comment. I guess that it might make sense if you discount a small part of a bigger offering to get people in the door (e.g., cocktail at 50% if you have dinner or something), but it's still couponing (=price differentiation = no loyalty)

@Donovan Bank -- couponing is not the same as advertising. They are both a waste of money in a market where 60-80% of all buying decisions are being made without anyone from the company or any content from the company being used, but they are different.

@Gail Gardner -- amen Gail, I agree with you.

@Vinay Iyer -- I only agree partly with your argument. While some companies should not be around because they do not have a good offering, this is a different argument alltogether.

@Lisa Tranks -- I would not call Groupon Social Commerce, there is very little social in the whole thing. It is coupon offering with a twist -- they add scarcity to the mix, which will always cause humans to do crazy things :)

@Ian Leong -- while the post was not intended to provide a balanced review of the research by Utpal Dholakia, I agree that I should have at least mentioned the positive effects. To say that the post is as irresponsibe as saying that marketing does not work is interesting. Sometimes, and increasingly so, marketing actually does not work, but that is a different argument alltogether - one that Fred Wilson does pretty well in his post here - http://www.avc.com/a_vc/2011/02/marketing.html. I think I know a thing or two about customer loyalty and I can tell you that those that buy because of price or coupons are a) your least loyal customers and b) your least profitable customers. But hey, if some businesses can serve those unwanted customers, maybe there is a silver lining for others that compete on real value.

@Mark Orlan -- you make some good points. Again, maybe it's discounting part of the dinner experience to get people in the door...but what if you were to do a loyalty program instead, or a refer a friend program (bring two friends and you eat for free, or better yet - you will become part of our elite club with a free gourmet dinner party once a month)  - don't you think that would have a better effect? Also remember that another human 1.0 thing is that we like status (e.g., become member of the gourmet elite). Oh and we also evaluate things in either a market or a social framework...market is where the coupons are at (http://bit.ly/8akSNy).

@Justin Aldridge -- I usually disclose all affiliations I have with companies that I write about or with companies that are in the same space. So no need to wonder about where my interest lays. We do research on how companies leverage social media and communities as part of their business every year with Deloitte, and that study is actually global in nature and the last version did include an Australian component - it's called the Tribalization of Business Study and it led to the publication of the Hyper-Social Organization (http://amzn.to/9vvHfu). 

Thanks all!

Great post for instilling a conversation.  And there are some good comments here.

To reiterate a few and speak to the success I've had with a Groupon type campaign:  If a busisness has the right service mix, a groupon deal can be perfect for expanding market awareness and ultimately business.

I've used this for a personalized service firm (a catagory Groupon does less with) where we were able to create a specific service for the offering, a 'taste' of the overall package.  The objective was to get as many folks in the door for this tasting - and we were willing to practiacally give it away.  Desired end results:  Once they've had an hour with a personal consultant, they realize the value of the services and purchase a full package.

So, while Groupon may be driving down the value of cupcakes, I believe:

  • There is great opportunity when you can differentiate services to offer a teaser that does not cannibalize ongoing business
  • This is all about service that cannot be replicated – once the customer has tried YOU, they chose to return (and the deal introduces customers to that)
  • The ‘return’ and referral rates , or extension of services, even before a Groupon type deal, will ultimately define success - so you can use that as a gage to enter the arena or not

Best - Eric

Do you really need Groupon and similar sites to take up to 50% of the revenue from you on top of the deal you are already offerring. I run a hotel and I guarantee if I went out onto the street or put a sign in the window that said 75% off this week only I would fill rooms. No need to give Groupon anything. If I kept this as a strategy I would have no money to keep the business running. Just go out onto the street and tell people "Hey would you like this product we both know is worth $100 for $25" you will be selling all day and face to face.

My GF just got back from yet another bad Groupon experience. livid. And she insits this is the last time. Groupon simply can't work for service heavy business. Every time I went to something for the similar service in Hong Kong (Valu Up) it was bad. My friend who ran a photog studio realized what a mistake he mad after one event. Businesses simply can't handle the extra customers, provide a good level of service and make any money. And now. rather than build customer loyatly, we're both just annoyed with every business we groupon'd with. For products? Maybe, if you can get your margins right, but I for one am looking forward to the day when Groupon looks up and realizes "oh crap. we should have sold to Google":)

While it is possible to achieve success using an online volume couponing campaign, it is a very, very dangerous tactic for small business. The most dangerous one I have seen in my 15+ years as an Internet marketer. We have just published a  5-part series on couponing with on the ground do's and don't's. You will find it here if you're interested - http://www.406strategies.com/?p=3211

The things that bother me about Groupon etc:

  1. Customers will get to expect discounts as a right
  2. Customers will not return but instead continually seek out the latest deals
  3. Money is being sucked out of the local economy into the pockets of big business (Groupon)
  4. Local small business may be drawn into a war of competition with each otherA tongue-in-cheek (also serious) article about Groupon etc. 

http://www.thedailydross.com/h...

The group buying platform is not sustainable and doesn't create customer loyalty. That's the real problem. 

We're in the process of creating a solution. If you're a business owner and are interested in being in the beta test group or would like to know more please visit PaidPunch.com and throw your name on the list.

Ok a little heads up for all business's thinking of going with groupon

 

1. they take 50% minimum on all deals through your door

2. If on the deal you sell say 1000 deals. YOU dont actually get paid until that person walks through your door, so if only 1 person out of 1000 walks through your door you will only get paid for that 1 person. Groupon keep the other 999 payments.

3. the deal has to be less than 60% on the original price.

 

so your normal deal example £100, groupon price £40 your share £20   Losing £80 hardly good. The only way you make money on this is from upselling. Thats the only way you will make money on any deal with groupon.

 

These are some of the things they never tell you

Groupon is the worst business decision I have ever made.

My contract agreement was a 1/2 off deal and they further discounted the deal with out my permission when the ad ran and it ran for two days! I was told I could stop if I wanted to and I was contracted for one day. They refused to stop my ad.

I decided to suck it up. I was going to take more of a hit in my profits than I was wanting but I would make the best of it! So I just started booking and welcomed the clients into my medical spa even though with overhead and paying the staff I was going to be in the RED. 

The Groupon clients are not the type of clients that frequent our spa. Not all but most do not tip, do not respect outr time and show up late or not at all and they do not spend any more money on products or services. Several have stated that they only get these sort of services when they get groupons. They are addicted to Groupons. In no way is that customer going to return unless they get another Groupon special. They hop from spa to spa for the deals. The eat out when they have a Groupon and refuse to pay regular price! There were maybe 2 out of 56 Groupon clients who were return clients so far.

It actually cost me money and we gained noting. Our schedule got full of Groupon people while regular clients and full priced clients were unable to get in. Moral of my staff is poor. The general attitude is that Groupon clients are a waste of time and so they end up getting treated badly. No one wants to see a Groupon person on their schedule.It is sad but a fact that because Groupon people are not profitable, most likely return clients and we have had a lot of difficulty with many of them that most all Groupon holders are now treated poorly by some of the staff. 

I have nothing to say about the Groupon experience that is positive. Groupon is bad for small business. It really was the worst thing ever for mine. I have damaged my business in so many ways with Groupon. I am beside myself.

Don't do Groupon.

Does anyone have a full terms and conditions with all attachments if there are any. Is the written agreement that merchant gets is the same as on the groupon website. Many companies give their customers or users the short version of their terms and conditions.  But when the issues arise than they pull out the full version. Many banks use such methods and it is really hard to get the full version of the agreements.

It's a harsh world out there. Ever since I became I business owner I learned each of my lessons the hard way. I learned some interesting tricks though just by looking around. I don't use groupons for my business although I was tempted by the idea at some point but I do get inspiration from economic mechanism. I watched closely the baton rouge classifieds and that's what helped.