Why Groupon is Flawed

Groupon: Needs a rethink.

Groupon: Needs a rethink.

Groupon’s stock plunged after news of a poor earnings call. After a 25% plunge, the sacking of Andrew Mason leveled things off a little but questions should be asked of its business model. Groupon is essentially a middle man with a crowd sourcing flavor. Instead of individual companies running their own discounts, they aggregate and bring it to the masses, confirming quantity before the sale is confirmed.

The problem with Groupon is that it doesn’t serve both ends of its client base. It is great for customers but is rather horrible for companies. In fact, if you are a firm, you should never get entangled with the race-to-the-bottom solution that Groupon is offering.

 

 

Product Devaluation

The biggest problem with Groupon is that it drives the value of your product down without you having any control of its presentation. Discounts and offers are legitimate ways to bring interest into what you are selling but it must be handled in a masterful manner. There is an art behind lowering prices in order to gain mind share and expand your customer base. A lot of it deals with packaging.

 

What your business ends up looking like is a store on a fire sale.

 

Proper ways of offering tantalizing discounts include heavily discounting starter products while placing the real money spinners front and center of the marketing push. By doing so, customers get interested in the ad while fully grasping the actual value of the main services you provide. This is what Groupon doesn’t do. Groupon simply tells customers what is cheap on a daily basis. It helps you get your name out there by telling people you are having a great discount going on but there’s where it stops. It doesn’t push your business forward and doesn’t build your brand. What your business ends up looking like is a store on a fire sale.

If you main point of entry to the minds of consumers is that you are cheap, the impression you build of your firm goes down the drain as well. Just take a look at how Groupon advertises the discounts. Even premium companies end up looking like a ragtag bunch in this aggregation service.

70% of this page screams 'Cheap!', 5% pushes the brand.

70% of this page screams ‘Cheap!’, 5% pushes the brand.

Discounts cannot be the main focus of any marketing push. It must be an appetizer and not the main course. It is here that Groupon is doing your company a big disservice. Unless Groupon changes its modulus operandi, you’re better off doing proper marketing on your own.

 

 

Targeting

Many firms do not understand the types of consumers that Groupon reaches to as well. Groupon does not have a target audience. The design and direction of all its marketing collaterals show that they are simply focused on getting the big money savings message to as many people as they can. Without proper targeting, Groupon appeals mostly to the crowd that is focused on deals. You may argue that everyone likes deals but does it help you that your product is being sold to basically anyone that is willing to buy it cheap?

It is important for any business to be very cautious about the people it serves. This affects nearly all operations within the firm whatever industry you may be in. What Groupon does is to mass market a single product from your firm and throw it at anyone on the premise of being of great value. You have no control on which target market you prefer. Maybe you are a firm that provides exquisite personal wellness services such as spas and massages. Does it help to have a marketing lead that goes, “Hey, check out this cheap spa!”? What you end up with is a ton of noise and no real long term customers.

 

What you end up with is a ton of noise and no real long term customers.

 

I have been gifted, via Groupon, a really nice massage. This happened more than a year ago at Cathay. What the firm did after the massage was to have a fifteen minute talk about how I should sign up for a long term personal wellness plan that will cost me over S$500. I told the sales representative flatly. I’m a student. I’m here for a nice one off massage. I cannot afford the long term plans. The lady half sighed and half chuckled saying she has met many like me before giving up and handing me a free glass of lemon tea.

How does pricing a S$366 package at S$18 bring in the right customers?

How does pricing a S$366 package at S$18 bring in the right customers?

This is just one of many examples of the problems with the lack of targeting. It is true that the firm probably did make a short term profit by having a massively increased customer base. However, the downside is that this was a waste of time for the firm. It had to serve many who would never return.

 

 

Poor Form of Discovery

Some people point out that Groupon is great for small firms trying to get some form of publicity. It is argued that when you are that tiny, any form of publicity is good publicity. However, I see it otherwise. Groupon does not help small firms get their name out. It helps small firms sell a single product for lower margins but with an expanded customer base. As mentioned before, whether this is the type of customer base you wish or one that will return is another thing altogether. But there’s more.

 

Groupon readjusts the baseline of your prices.

 

Groupon also readjusts the baseline of your prices. If you are new and a customer has never heard of you before, the price you placed on Groupon is going to be the long term price expected of your products. Unless what you are selling is absolutely addictive  you won’t have much of a chance returning to your original price. Some businesses have found that the spike in customers during a Groupon sale did lead to a fall in customer base after the deal was done. People just do not enjoy seeing prices go up.

Selling via Groupon is very different from having a sale. While a sale has a defined start and end period and clearly looks like a one off, the same cannot be said about Groupon. The consistent bombardment of discounts that Groupon hands out daily removes the feel of a one off sale period. Everyday is a sales day and that low price you provided is the new norm.

 

 

No Barrier To Entry

This point focuses more about Groupon rather than the firms it ‘serves’. Groupon built itself in a model that can so easily be copied. There are a host of other competing sites that do almost exactly the same thing. In fact, some sites look so similar you would have thought that it was a Groupon site with a different colored theme.

With barely any attempt to customize and enrich its user and firm experience, both ends of Groupon’s customer base have many alternatives to head to. This means that Groupon’s own margins are under severe attack. It is sad but fitting that what Groupon is doing to the its partner firms is happening to itself as well.

 

 

Fixing Groupon

It is ironic for me to be rather critical about the Groupon model. After all, as an economist, the intense price competition and better information flows for consumers is almost always a step forward. But you have to look out for more than just the welfare of consumers. Producers are being sacrificed so badly in this model that I find it hard to consider the current Groupon model as one that is beneficial to the economy in the long run.

The new leadership needs to build Groupon with the long run in mind.

Goodbye Andrew: The new leadership needs to build Groupon with the long run in mind.

However, it is not all just doom and gloom for Groupon. There are ways to fix it and make it a viable middleman. The problems I’ve described above can be rectified without the closure of the firm. Groupon needs to find ways to add greater long term value to firms. It needs to balance the needs and objectives of its partners with that of consumers. Better targeting and focusing on longer lasting partnerships are key to this approach. It needs to study user data and track which are the types of buyers that become long term customers. By becoming a better partner, Groupon will be able to position itself as a more valuable middle man as compared to many other alternatives. This will in turn aid its own survival in an open market.

Groupon can right itself by refining its direction and services. Anyone can bring the price down but finding a way to add long term value is something the next CEO must crack.
 

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