This has been on my chest for a while and after hosting the developerWorks barcamp tonight on social apps development, mobility and emerging business models, I can't feel easy about the whole GroupON - group based deal craze as a business model.
This post on RedFlagDeals.com, A Canadian community site dedicated to "Deals", outlines it pretty darn well.
The biggest issue here is the underlying stupidity of the whole group-buy fad. Yet another retailer sold way more coupons than they can actually fulfill. The discount means they end up losing money, the volume means they piss off a huge number of potential customers. Result: angry customers, angry retailer. Happy group buy company, for now.
These stupid group buys depend on consumers who enjoy the new and exciting rush of the group buy, and retailers who can be fooled into thinking it is an effective promotional tool. The trouble is, both retailers and customers are realizing the whole thing is a FAIL and the business model relies on finding a dwindling supply of people who still think it's exciting.
Anyone who signed up for these group buy sites a year ago has already stopped reading the emails. It's just not worth it.
I expect Groupon will go public and the founders will cash out for a gajillion dollars before the stupid investing public figure this out.
I've talked to businesses who have utilized the GroupON model to market and promote their services. It works well if you only treat it as a marketing awareness campaign and not count it towards your revenue model. With the exception of GAP which sold over 441,000 coupons sold for a total retail value of $22,050,000, majority of the deals are from small businesses. Unfortunately, not many businesses are large enough to consider it as a marketing tactic with minimal $ returns.
Groupon's clients are small businesses - who want the viral appeal to attract an ongoing stream of revenue from new customers. From market research and personal discussions with the small business owners, I've yet to meet one who has been 100% satisfied with the promotions they ran on the group based deal networks, as they all felt that they lost $ on the promotion.
Reports on the web are indicating the same. The brand experience goes down the drain when I am buying from owner at a loss. According to Robert Ball in his Groupon post on Huffington Post,
For some tips on proper structuring, I suggest you check out the recent study from Professor Utpal Dholakia of Rice University. If offers some ways to structure the deal that helps lower the costs while ensuring a higher customer lifetime value. They include:
- Placing an upper limit on the number of coupons
- Rewarding "relational behaviors", such as a coupon good for multiple visits
- Limiting the coupon to items that are high margin or not as popular
- Limiting or restricting the usage of the coupon during popular or high traffic times
With this being said, these rules only negate the full customer experience and quite honestly, further downplay the the only pitch Groupon has. Businesses want to bring in a customer who becomes their long-term customer. That will not happen until they attract he ideal customer who some how wants to pay the full price based on the unsatisfactory experience.