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Is the Groupon Bubble about to Burst?

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Editor’s note: The following is a guest post by Mark Armitage, Director of Marketing Communications for Socialshopping.com

By anyone’s standards, the $950m in investment recently procured by Groupon is a staggering figure. Already, some are questioning the wisdom of Groupon’s backers and whether they can really justify such a show of financial faith.

But what does this mean for retailers of different sizes and ultimately their customers? And is the Groupon model sustainable in the long term?

Founded as an offshoot of online community site ThePoint.com, Groupon’s first daily deal in October 2008 was famously a half-price deal for a pizza restaurant located in its office building in Chicago. Since then, Groupon’s business has mushroomed and it now offers its estimated 50 million registered users daily deals on everything from theater tickers to spa treatments in more than 250 cities worldwide.

It’s not hard to see the appeal from a consumer’s point of view. Discounts of up to 90% on a range of fun activities in your city represents great value in its own right, plus there’s the element of surprise in that you never know what is going to be on offer from day to day – it’s an urbanite’s wet dream.

However, this success has its downsides: According to The Wall Street Journal, demand for Groupon’s services is such that it has to reject 7 out of 8 pitches from local businesses, many of which then turn to the growing number of competitors offering clones of the Groupon model.

There are also more fundamental problems from some retailers’ perspectives.  Although Groupon’s model guarantees them a certain number of customers per deal, meaning that the retailers can theoretically influence the likely profit margin, many businesses will still make the mistake of overestimating the value of the customers they are likely to get from them. The proportion of customers procured from Groupon who are likely to make a return visit/repeat purchase may be dramatically lower than average meaning that, especially when you also factor in the significant cut of the revenue that the retailers have to pay to Groupon,  they could actually make a significant loss on the deal. It’s the same logic which has led many online retailers to shun voucher code sites which they see as catering only to bargain hunters as opposed to potentially loyal customers.

Depending on the type of business, some retailers may also experience difficulties in handling the extra demand which a Groupon promotion may generate, which in turn can lead to dissatisfactory customer experiences. For example, if a hair salon is suddenly inundated with several times more customers than it is used to, it may have problems keeping waiting times down and also maintaining the same standard of service.   A couple of real-life examples of this have led to negative publicity both for Groupon and for the business which the coupon was for. First there was the nationwide GAP promotion in the US in August of 2010 which led to Groupon’s site crashing and a host of customer complaints, although it has to be said that enough customers persevered to generate Groupon an $11m cut from the deal. Then on Monday of this week, Groupon CEO Andrew Mason issued an apology to Japanese customers for problems with a deal for a traditional new year’s meal delivery service. Of the 500 meals sold, many arrived late or, as Mason himself admitted in his subtitled video uploaded onto YouTube, “in terrible condition.”

Another criticism which has been leveled at Groupon-type sites by retailers is that they breed a “don’t buy culture” amongst consumers. Customers who use coupon sites regularly may become so accustomed to getting everything at a discount price that they start to believe that all prices should be negotiable. Their perception of a brand’s value then becomes diluted and they become non-loyal shoppers whose primary interest is in price.

So what do these negative factors combined mean for the future of Groupon and the retail landscape as a whole? It would be foolish of me to say that the Groupon model is going to die out anytime soon; if the aforementioned figures about Groupon  having to decline offers are to be believed, they will have no shortage of local businesses continuing to solicit their services for the foreseeable future.

However, it is likely that there will be a backlash from some retailers who may then consider alternative solutions to bring customers into their businesses. For savvy business owners or those which have had a negative experience with Groupon or one of their competitors previously, the price of actually delivering a coupon will become a sensitive issue;  rather than paying the 40-50% of coupon face value which Groupon charges, they may seek smaller platforms which charge less or even nothing at all.  Even if the alternative platform does not have the same reach as Groupon, retailers may be willing to compromise this in exchange for a better profit margin and a more predictable flow of customers.

If the perception that the demographic of customers generated by Groupon-type sites is undesirable continues to grow, this may be another reason for retailers to shun such sites and also lead them to the question: – what do customers outside of Groupon’s core clientele actually want, and how can they as a business reach out to them?

One way in which a large number of online retailers are beginning to attempt to tackle this question is by adding Facebook integration to their own sites. This allows users to register for a shopping account using their Facebook account and in return gives the retailers access to their profile data. Interpreted correctly, this can then enable them to offer deals specifically targeted at these users. Whilst this may work for some larger businesses, though, for smaller or local businesses it may seem a lot of work with no guarantee of success.

Ultimately, what many retailers really want is the opportunity to communicate with their existing and potential customers directly. This is where not just Facebook and Twitter but a new generation of tailored platforms which combine social networking elements with interactive features specific to shopping  may start to come in. Such solutions would allow the retailers to control the way that their brand is represented and to interact directly with shoppers.  And if they can also do so without charging commissions which are tantamount to the retailer jeopardizing their profit margins – or even offer the service for free – this may hold the key to a more sustainable business model for retailers of all sizes.

Mark Armitage is Director of Marketing Communications for Socialshopping.com, a new online shopping network and community which brings together thousands of shopping fans looking for the best tips and bargains both online and whether they love.

Socialshopping offers an open technology platform which allows consumers and shops alike to create pages and share information about their favorite brands and products. For more information, visit http://www.socialshopping.com.

Mark Armitage

Mark Armitage is Director of Marketing Communications for Socialshopping.com, a new online shopping network and community which brings together thousands of shopping fans looking for the best tips and bargains both online and whether they love. Socialshopping offers an open technology platform which allows consumers and shops alike to create pages and share information about their favorite brands and products.
  • Mark Dawson

    “disabled being put to work”

    Why exactly wouldn’t disabled people work? you think we all want to sit watching Jeremy Kyle all day? I find your article offensive and disgusting.

  • Icilocalinfo

    Very good points – the bubble is due to burst

  • Midwest Deals

    Less then 10% of Americans use daily deals. No where near a bubble in my opinion!

  • http://boyanjosic.com boyanjosic

    Great article Mark!

  • TJ Ogroske

    Great Article! Sometimes it does make sense for a business to step out and risk a little to get ahead. This should be a good platform for small (barely making it) companies to get people in the doors, and give them a chance to prove themselves. This may also be a good platform for large businesses who know how to handle the extra business, but need an edge. Earlier this week Living Social did an Amazon deal, I would be willing to bet this may drive traffic that wouldn't shop with them otherwise. Giving them a change to further distance themselves as a leader.
    Groupon won't go away any time soon.

  • TerryMowery

    There are legitimate problems with the DD business model. We can whitewash them as DD in Texas wants to or talk like adults.
    The discounts and profit spreads have to come down for the average local merchant to participate. There may not be enough profit then for the DD sites to continue.
    Our plans are to include a DD section on our website with 100 merchants offering a 25% discount with 5% going to us and the local school, church or charity. That will provide a increase in traffic without killing their business.

  • Ktfraser

    I own a sporting goods retail business. There is not one product in my store that will work with a Groupon Deal. There is no way I can give the customer a 50% discount and then split the proceeds with Groupon 30-50%. For an item with a $10 retail price, the customer pays $5, and Groupon gets $2.50-$3.50. I end up with $2.50 to $1.50 after discounts and Groupon fees. If I pay $5 for this item, I lose $2.50-$3.50 (exactly the Groupon Fees). The question is, are new customer acquisitions worth it?

  • Doug

    Mark, great article. As a small business owner myself I often have the burden of breaking the bad news to an overly eager fellow business owner that wants to run a Groupon ad. I simply tell them that the advantage is heavily unilateral in favor of Groupon and the cost of acquisition seems a too high for my liking. Especially with restaurants that have notoriously low profit margins, yet I still see many local restaurants running deals daily. Anyway I wrote an article on the same topic http://cerebraltwitch.wordpres…/
    Check it out.

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