03 December 2010

Why Groupon sucks (for businesses)

For the ones out of Earth (or at least out of the net), Groupon is a website that offers local deals for a limited amount of time if a minimum number of people buy it. Example: a burguer restaurant offering 60% of if 100 people buy the discount. There are loads of websites just like Groupon, but this was the first (or the first to become really popular, I am not sure).

While this is cool for customers, it sucks for (most) businesses.

It sucks because if you need to cut prices to get customers, your value proposition is probably not great. There is always someone who can make things cheaper. This leads to the race to the bottom, as very well explained by Seth Godin - a spiral of death.

For most business, the effect of Groupon is: 1 - lots of people come, 2 - you get less profit this time because you sell cheaper than normally, and 3 - they never come back (unless there is a new Groupon offer).

There are only 2 business types that can benefit from Groupon:

Walmart like giants that have enough buck to back their business model of selling cheap stuff to loads of people. (But anyway, if you are a Walmart like giant you don’t need Groupon).

The 2nd type is if your product/service is so awesome (yet maybe unknown/untried) that people would come back to buy more (subscription based definitely is a plus). World of Warcraft, the addictive subscription based online game, is this kind of business (and they used promotions much before Groupon anyway). This businesses of the 2nd type are just like drugs: you give a good deal today, so the customer will pay more later for the same product.

For all the rest of businesses (including you, cheap and unremarkable burger restaurant), Groupon is just a waste of profit masked as a nice cash inflow.

Update: a quote from an article in HBR:
In my study sample of 150 businesses that ran Groupon promotions between June 2009 and August 2010, 42% said they would not run a Groupon promotion again. Their main reasons were that a significant proportion of Groupon redeemers are extremely price sensitive, barely spending beyond a discounted product's face value. Not surprisingly, repeat-purchase rates at full price were also low — just 13% — for these businesses.


  1. It would be a much more impressive article if you could spell....

  2. So, 58% of the businesses WOULD do Groupon again? Sounds like the majority likes the results. AND if 100% of the businesses that used Groupon saw a 13% return rate of customers that paid FULL PRICE, that's damn impressive. And what's not quantifiable is how many of the new customers told others about the business, thus increasing their name recognition and possibly their future bottom line.

  3. Whatever suits your needs, but might be that this 13% of recurring full price paying customers are exactly in those business I mentioned that it makes sense to use Groupon.

    And if you compare the 58% of business satisfied with Groupon and the 13% of customers coming back to pay full price, you can pretty much see that there is an analytical mistake from a lot of business to stay with Groupon.

    But that's my opinion, every one is entitled one.

  4. 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 (http://www.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.

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