Jan 28 2011
Here’s my latest post on the White Horse Blog.
At the dawn of 2011, the hottest trend in social marketing is the “daily deal” Web site, of which Groupon is the poster child. I’m not restricting my ire to Groupon alone here, but since they are the best known, you can take every instance of “Groupon” in this post to mean “any daily-deal Web site.”
Groupon is terrible for small business.
The siren call from Groupon is seductive to the business—no up-front payments for customer acquisition! Affluent, educated, female demographics! Fill your seats or appointment book for months!
But the costs are substantial. Groupon itself is very clear that daily deals are not a money-maker. They are a loss leader, and business should plan to lose money on the offer. The question, of course, is how much does customer acquisition cost in other channels, and how does that compare to the net cost to the business for running a Groupon?
But, most small businesses will have an extremely difficult time creating an apples-to-apples cost comparison. On The New York Times’ “You’re the Boss” blog, Jay Goltz runs through the customer acquisition cost calculations in some detail. It’s incredibly complicated, and fraught with the potential for faulty assumptions.
And herein lies the first huge problem for businesses that use Groupon: it’s not a level playing field. Groupon is a data-driven Web company that has tested and optimized thousands of deals. They know what will make them the most money, what the right tipping point is to guarantee that they will make money, and they have no reason to ever limit the number of deals that are sold.
A small business, on the other hand, has almost no information, and almost no negotiating power. Groupon’s contracts lock in businesses for 12 full months, preventing them from using another daily deal Web site. Groupon starts their negotiations at a 0/100 split (meaning Groupon keeps all of the revenue from each sale).
But, the bigger danger that Groupon brings up is the dreaded Groupon customer. Groupon touts the highly desirable demo of their audience, but the reality is that they rent you their list for 24 hours, and you have no control over who sees your deal.
Groupon offers low lifetime-value customers. By and large, Groupon’s customers have been trained to surf the deal, and have every reason to be loyal to Groupon—and no reason to be loyal to you. Groupon customers know that there’s no reason to go back to the spa that they tried because the next Groupon spa deal is just around the corner. Why would they be loyal to a business, when Groupon works so aggressively, and so successfully, to commoditize every merchant that works with it? Groupon’s pithy writing does not reflect any brand identity of the merchant.
Groupon uses the structure of a daily deal to reinforce that there will always be another great deal—maybe even better than the last one. So, Groupon subscribers become like rats, checking their email for a food pellet. When a really great deal comes along, they get a rush of dopamine just from buying it. In this way, getting the discount becomes a critical part of the buying experience.
Basically, Groupon trains customers to become like a swarm of locusts. They descend in droves to redeem their loss-leading coupons, then flit off to eviscerate the next business. Today a spa, tomorrow a wine bar; over the weekend, a restaurant, next week a sailing class; next month a yoga studio.
Because local businesses are highly fragmented, both in terms of industry and geography, it’s difficult for them to compare notes or band together to counteract this influence.
Besides, the science of discounting says that the price the consumer pays at the first interaction creates a price ceiling that it’s hard to claw back from.
Finally, the overwhelming locust swarm can easily turn off existing customers. If every new long-term customer is offset by an old customer feeling like a chump for missing a deal, and not able to get the service they are used to, Groupon could mean the business sees no net gain in customers at all.
Of course, all of these factors mean that we’re in a crazy, group-buying bubble. The recession has caused small businesses to be willing to steeply discount, and the newness of social networks has allowed Groupon and its ilk to grow quickly.
Expect to see more moderate deals in the months to come, and “deal fatigue.” There are already daily deal aggregators, like Yipit, that cull through the 500-some Groupon clones. And, a secondary market for deep discount sites, such as Dealigee has arisen.
If we have learned anything over the past ten years, it’s that all bubbles burst. And, the quicker the rise, the quicker the fall.
What’s your take on the Groupon model?