Groupon Kitty says this deal is too good to be true

This is kinda of a crazy statement, at least to a lot of people I talk to, but I'm not sure Groupon is a long term viable business. I don't have much real data to support this statement, but I think Groupon will be gone in a couple years. Basically, for me it all comes down to if the deal is too good to be true, it probably is.

First, I totally get that consumers love Groupon. It's because Groupon allows consumers to buy things below the cost of the supplier. It's a really good deal. It's like when the clerk rings up the $150 shoes for $50. As a consumer, I love it! But as the business owner the pair of shoes cost me $60 and that's before I pay employees, rent, etc. So, while I could certainly have an endless supply of people who would buy the shoes below my cost it's not really a sustainable business transaction.

Interestingly, I get a lot push back from devoted Groupon disciples. People that love deals, really love Groupon. First they really want to believe that the deal is good for the consumer business that is working with Groupon. Maybe, but Groupon takes half the value of the transaction as payment. So of that $20 worth of goods that the consumer pays $10 for only $5 goes to the business. Few consumer businesses can approach 75% margin so I think it's pretty safe to say that on the surface the actual transaction is bad deal for the business in terms of the stated transaction. The value to the business has to be somewhere else.

So the question about Groupon sustainability really comes down to the possible motivations to sell things at a loss.

The way I think about it, Groupon has a few possible value vectors back to the business..

1. The, you'll be back theory: I will sell you a product where I lose money because you will come into my business, discover it, and come back again.
2. The, you'll bring a friend theory: I will sell you a product where I lose money because you will bring someone else into my business and they will come back.
3. The, I'll sell you more stuff theory: I will sell you a product where I lose money because I am confident that you will buy more goods at the same time, or bring others in that will and create a positive margin on the entire transaction.
4. The, I have your email address now theory: I will sell you a product where I lose money so I can have your email address and market to you later. Most of you will not unsubscribe so it's a good deal for me.

In my mind you have to believe one of these things to engage with Groupon as a business. The problem is so few businesses have the ability to measure any of these things. I agree they should be able to measure same customer sales, or the efficacy of lead generation activities, but I think the vast majority of them simply guess.

So this leads me to the sustainability thing. In a world where no one is really measuring the success of these efforts to generate customers, or convert to larger sales – isn't Groupon really just selling hope to business owners?

It seems to me that we are in the heat of the "try it out phase" where businesses have decided that in world where their lead generation activities generally don't work that well, Groupon gets people in the doors. But, eventually they will figure out if it really works long term for them or not. My bet is that it doesn't work for most businesses.

What do you think?

Comments

[Tim]

I think you're right that it will be hard for businesses to evaluate the ROI of Groupon marketing. But there are essentially no marketing methods for real-world businesses that offer the concrete ROI analysis that is possible in online marketing; the latter is an aberration in the history of advertising and marketing.

And even experience over time is challenging, as there are so many other variables changing; repeatability is a mirage in the real world.

http://boss.blogs.nytimes.com/2010/11/23/doing-the-math-on-a-groupon-deal/ is the best article I've seen from the perspective of a business owner evaluating Groupon.

The bottom line is, I think, that uncertainty is huge in businesses like this, and the only way to be safe is to have an operating margin larger than your uncertainty. Such businesses are hard to come by, and frequently lose when matched against competitors who are willing to roll the dice with lower margins.

Like so many other things, it's likely that the surviving & thriving businesses we see are the lucky ones, not necessarily the smartest ones.

[lilylee86]

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[groupon script]

That is an awesome explanation on what is Groupon is all about. A lot of people does not know this and they are fixed into believing that Groupon is all about deals.

[Rustin]

Totally agree. I think businesses are actually using Groupon as a "short-term loan". The promise of instant cash up front is too much to pass up. They get the needed cash, even though it is 25% of what they would usually charge, then they are paying it back for months to come. Seems like a pretty expensive loan to me.

[rando]

I'm intrigued by these setups where part of a business sacrifices so that another part can prosper. It is like in casinos, where the bar gives free drinks and the restaurant serves cheap meals to keep people gambling--how do they evaluate that the deal is working and correlate the numbers from the two sides? How do you set a price when the goal is not profit but to help another operation?