The heart of Groupon’s business model for their clients is not direct profitable commerce (it is only profitable upfront for Groupon). As many understand Groupon is not an ecommerce business. The business proposition that Groupon offers its clients is lead generation.
A very, very small percentage of Groupon clients make money when they generate all those sales. The business model here is aggressive acquisition through an engine that generates a huge amount of “hot” leads with credit cards ready. The challenge is to convert a workable percentage of those ‘lost leader” buyers into profitable customers and have a metric that covers the upfront investment.
There is a reason that the majority of their customers are small, local businesses. They do not have the upfront capital necessary to use more traditional acquisition models, and more importantly they are less sophisticated in the modeling abilities used to determine life-time value of a customer…. especially a customer acquired through aggressive discounting. So for now the growth is miraculous since so many are jumping on the bandwagon with Groupon recommended discounts that cannot possible end up profitable for those making the offers.
If Groupon’s strategy is to grab the real estate now, and worry about how to evolve the model so that the businesses making the offers can truly benefit, then let’s wait and see how that is accomplished before final judgement is passed.
I am not saying that Groupon will not survive, and they certainly have a business model, although their sales for the year seem to be grossly overstated in many circles. I simply believe passing up what was offered by Google showed tremendous hubris and that I believe they will come to regret the decision… even if they never voice that regret or remain successful.
As I said before, I (for a short while) tried to come up with a “deal” that would be Groupon-able, AND benefit my business AND my employees (payroll).
The only reason I briefly thought of a Groupon was to bring in new clients – I KNEW my technicians and practitioners were among the best around, and figured we’d snag some repeat business.
I then studied the trends, and felt it was a completely different audience that I was not necessarily interested in. I spend money on marketing, but my main source of referrals come from the doctors I work with, and the happy and cared for clients that walk out my door.
For my therapeutic spa environment, it was not a good match.
I also want to state again? I am a Groupon customer and use it frequently. The purchases I have made? Businesses I patronize anyway.
This is a great read, Ted.
Ted, thanks for sharing this. I’ve often wondered about this. There is a local small business in Phoenix that I know that said the long-term effects of the groupon were nil. And when he tried to run the 2nd groupon as part of the deal he was contracted with they wouldn’t do it because he wouldn’t pay more money.
Now that there are more daily deal sites, I think it’s going to be fewer ‘good deals’.
This is a great post, but I do believe there is a missed angle. My business is virtual and over 90% of my clients I do most of my communication via email and fax with a few phone calls. This allows me to provide much, much lower prices than my storefront counterparts with the same (if not better customer service) and the same time and knowledge.
I first approached Groupon about putting together a deal for my “employer”. Groupon first turned it down because it wasn’t enough of of a discount even though it was 50% off and it was possible to get a better deal with a different coupon. I was unable to get my superiors to agree to a larger offer.
I, then, approached Groupon about putting something together for my website to generate additional clients. My overhead is much lower which allows me to offer lower prices, this means that the retail price of my offer would be the same as my competitors, but I could offer a “deal” of 50-75% off retail prices and still make a decent profit.
Many of my products are once a year, or one time only type of purchases. Basically, its not something you purchase everyday or even every week. So, the Groupon model was very attractive. The answer from Groupon was my brand wasn’t well known enough to put on their site. I couldn’t get them to approve it as a ‘side deal’ instead of a featured deal.
I have also reached out to Living Social via their email response form and was even able to secure an actual email address from a local rep. Guess what? Not even a no thank you from Living Social.
I completely understand these types of sites have to look out for their own business and revenue, but if they are trying to help small businesses, then why are so many deals from small businesses getting turned down? Especially, considering each email has one featured deal and 3-5 side deals. Giving each recipient of an email multiple businesses to patronize.
I believe Groupon may regret turning down Google, especially after the Super Bowl ads and other less than positive reviews as of late.
works in tourism Ted. Come to think about it…..it works for me as a guest and as a host in a tourism area, I have returned…..paying retail price before with travelers in tow