Why root for Groupon?
medium.com
medium.com
I don't understand why people are so down on advertising that guarantees foot traffic when most/all other advertising is a total crap-shoot.
And I say the above as someone that has bought physical products through Groupon a couple times.
If you pay too little (not just get a discount or other small favor, but actually pay too little) then you are compromising your own experience and actually getting less value than the people paying full price.
So it's no surprise that such people are ultimately less satisfied. The primary benefit they are getting out of it is the chance to tell their friends how low of a price they got.
OTOH, the businesses that offered the discounts were essentially commodities in the scheme. They created the value via their discounts that Groupon then sold to customers. Few cared about the businesses, as people were not buying the underlying service or product from those businesses.
Instead, the product was the discount itself, which they were buying from Groupon.
Groupon rep comes in and sweet talks you or your manager into running a 50% discount but frames it as one or those $20 for $40 arrangements so it doesn't hurt so much for you to sign the contract.
Now Groupon isn't going to go to all the effort here without getting a taste themselves, right? They take 50% of your 50% so you'll get about a quarter. That's not exactly great economics to always take a loss when food costs are 30%.
But fine. All advertising costs money. And this Groupon thing definitely drives foot traffic, right? That's genuinely impressive and it WORKS...the problem is that it's the wrong kind of foot traffic.
Problem 1: Bargain-hunters. These are the coupon-cutters and very "high-maintenance/low-margin" type of customers. You don't want a lot of them, if any. You'll only see them again if you offer the same or "better" deal. Groupon will drive them to you by the busload b/c they're living on Groupon and it also makes it incredibly easy for them to just kind of coast from Groupon to Groupon. Groupon subverts the whole idea of a coupon-- coupons are supposed to be price discrimination. People with $$$ (in theory) don't bother with coupons because it's not worth their time. Groupon isn't a coupons. Coupons are supposed to be annoying/hard to use by design. No intention to paint with a broad bush, but most of the time these "bargain-hunter" people will look to spend EXACTLY $20 and not a penny more. They want to feel like they're getting their "deal." They also tend to complain the most, are the most demanding, and also for extra credit they're not good tippers. So your poor, overwhelmed/overworked staff dealing with a tsunami of new customers crowding the shop have now got to service customers who are never coming back and your staff won't get tipped out a lot if at all. Ouch!
Problem 2: Cannibalism. Imagine you have a great restaurant concept. You manage to survive w/ razor-thin margins, cut-throat competition, the great peanut/truffle shortage or whatever latest crisis. You also have a bunch of real "fans" who like your stuff and you might even call them regulars. They know about Groupon now too. So your regulars get on Groupon and instead of paying full freight they now are coming in for a discount. It's generally not a good thing when existing customers pay less without buying more-- thanks for the advertising Groupon! These people already like you and they now are paying less or worst case they become bargain-hunters themselves and stop coming altogether.
Bottom line: Almost fundamentally the thing didn't make sense. It had a "holy cow!" effect on restauranteurs because it absolutely did drive foot traffic (Groupon I think was the fastest-growing firm IN HUMAN HISTORY-- google it.) For diners, it seemed like the perfect crime: You can go out to eat but pay half and still get a full meal. The story/hypothesis was if you can get people in the door w/ a discount that they'll be so enamored with whatever you're making that they can't resist and will come back later. Other concepts figured maybe get them in the door and try to upsell them on extras.
Let's be VERY optimistic and say that phenomena was real and people looking for a discount came back to the restaurant. That is a handful of new customers. You still have the fundamental economic shakiness of the concept, the bargain-hunter/cannibalization issue, and the operational stress for decidedly "not-that-great" of a payoff.
It's a really impressive concept but probably not a great idea for most businesses. Perhaps it's a fit for multiple teeth whitening sessions or a service (manicures or something?) but for anything else it was a loser bet.
This is exactly what was saw running a similar £20 for £40 deal. For weeks ou order list was full of orders with a value of exactly £0, which in grocery delivery is particularly frustrating since typically guide prices will vary a bit, so we'd get customers calling up to moan about have been bill 57p because their steak was a little larger than usual. Eventually we just stopped billing anything below a threshold because the customer support and transaction costs just increased the loses being made.
We had no problem offering discounts to regulars. I don't know many businesses that consider that a problem.
The difference is that Groupon never acted in good faith.
I'm sure there is a pun to be made about startup burn-rates in there :-)
Here it goes:
* Groupon attracts bargain hunters that never come back. It can't be compared to other forms of advertising because the customer you get as a result of a Groupon is less valuable than customers you get from other forms of advertising.
* Groupon cannibalizes sales from customers that would have otherwise paid full price.
* In summary, why should I believe that Groupon is a good form of advertising for small businesses when compared to the other options?
* Whatever the answer, why should I take the word of this corporation over the many small business owners who have reported poor experiences?
Let me know if I missed anything and I'll add it.
Andrew
Since you're trying to capture it in one place, there is a comment hidden down with ctiticism that you did not capture in your list, here it goes:
"unclebucknasty 3 hours ago
That and the fact that those customers were Groupon's customers, not the businesses'. Their loyalty was to Groupon and the never-ending stream of discounts they provided. OTOH, the businesses that offered the discounts were essentially commodities in the scheme. They created the value via their discounts that Groupon then sold to customers. Few cared about the businesses, as people were not buying the underlying service or product from those businesses. Instead, the product was the discount itself, which they were buying from Groupon."
That might be just word semantics that I'm missing, but I think there is a major distinction.
Groupon's core selling proposition to businesses is that it will bring them people who can be cultivated into loyal, long-term customers. However, it's something of a fallacy because those customers are loyal primarily to Groupon. In fact, Groupon is actually a hyper-competitor to its business customers.
It's not just semantics or an issue of bargain-hunting. The model itself actively works against the core promise it offers to businesses.
BTW, while I'm not much of a Groupon fan, as a fellow-CEO whose tried something new and taken a lot of flack for it, I'll offer a little unsolicited advice: Don't let 'em get you down.
Is there truth in this allegation?
The other place they can potentially make a ton of money is people who buy a coupon but never redeem it. In that case the supplier never sees any of the money, Groupon keep the lot effectively making 100% commission.
In your article, you say, "as a small local business owner, I can’t imagine a lower risk, more cost effective, or higher impact way than having Groupon send a one-time offer to 500k people in the Bay Area about Detour, with a few thousand of them buying it for half off." I think that sounds great. It's like posting a flyer on the bulletin board of the local coffee shop but thousands of times more effective. Basically, you want a community megaphone that you get for a day.
The problem is that once everyone is listening to that megaphone, power dynamics come into play. If I own that megaphone and can only let one person use it each day, I'm going to be picky. I'm going to want 50% of the revenue generated and at least half off so the conversion rate is high. That's driving down what the small business is taking in to 25% of list price or less. I'm going to want to give the megaphone to someone that has no limit on the number sold so that I'm not limiting my revenue which is 50% of the take. I'm going to want to give the megaphone to people who are already popular rather than someone more quirky or with more limited appeal. Target wants the megaphone? Yea, I'm sure people don't know Target exists and. . .well, lots of people will want money off at Target and I'm getting a 50% cut. While we're at it, rather than someone from the community, let's get a pro at the megaphone so the conversion rate will be better.
Ultimately, I just don't think that really works as a profitable, growing company simply because of the power dynamics. When it's new and quirky, it's this weird community megaphone. As you try to scale that up, it just doesn't feel that way. It feels like a company that gained access to people's inboxes as a funky, friendly thing that's now trying to squeeze revenue.
And the problem is that it's hard to scale a daily deal. You can't just send your list 100 emails every day. There's a limit on the number of conversions a small business wants. There's a limit on the number of days in a year. There's a limit on how high you can push conversion rates via writers and such. That somewhat necessitates a pivot if your expectations for revenue growth are high.
I think there are other valid criticisms, but this is what left me lethargic about Groupon. Groupon wanted to scale and daily deals just don't scale nicely. Either you have to start eschewing local coffee shops for the Gap or milk higher commissions or steeper discounts (for higher conversion rates) or more than one deal a day or something. And I think that's where the power dynamic comes into play and people hate power dynamics.
As you said, "If I was working my ass off to build a tech startup and I saw [Groupon] come along and get huge, I’d be like, fuck that. It’s the tech startup equivalent of camping in an undetectable corner in an FPS and sniping people — it feels like cheating." It feels like Groupon was this quirky, funky email promoting one small, local business a day whose profit incentives push it away from being what it started out as. It feels like cheating because it went from that quirky megaphone to something else - something that would gain the revenue needed for a billion dollar valuation. Pizza deals don't drive multi-billion dollar valuations. But it's past 4am here on the east coast so this might be totally incoherent.
Really love hearing your insights on all this stuff!
They're looking to take advantage of whatever deals (consumer advantage) are available and so the value-proposition offered by a Groupon campaign was way-overvalued by both Groupon and the businesses who bought into it.
Groupon (and others like it) represent should be one small part of a larger marketing initiative. It can give you the opportunity to get in front of customers you wouldn't otherwise get in your store/buy your service/etc. But capitalizing on that first impression is where many small business fail. With a clever bit of follow-on marketing, I think you can get it to pay off.
For example, for those that come in with the Groupon, offer another coupon for the next visit... don't make the deal so sweet perhaps, or make it a bring-your-friends sort of deal (2 for 1, etc). You train them to come back and think of you while at the same time train them to start accepting your regular pricing.
Naturally this depends on your business... if it's wedding photography, you probably don't go down the Groupon type path to begin with. But if it's say, a dining establishment... this sort of thing could work.
Of course. Many small business owners are simply not good business people when it gets right down to it. The small bookseller who loves and knows literature inside and out may not know how to market that business, find opportunities and niches, nor appreciate the financial pros/cons of any given decision. I think that's the biggest issue of all. They're the types likely to sign up for Groupon a get the initial visit, but never capitalize on that.
A staged proposition as you have outlined seems far more prudent.
I don't know if Groupon would have been such a hit with different discount structures. The "half off, a quarter to Groupon" was compelling to customers and easy to understand. I'm trying to envision "1/3 off and 10% to Groupon" or whatever.
This was the bitchy-voice Groupon sales rep phoning me direct when I used a different coupon service in Japan. I asked whether she was talking about the same Groupon of "Great Osechi Ryori Disaster and CEO's Fake Apology of 2011"-fame and it shut her up real quick.
So many things wrong with this company, failure couldn't have happened to a more deserving bunch of people.
I'd love to know whether Mason and Lefkofsky ever genuinely believed they had created a viable company or whether they knew they were riding an unsustainable growth hack.
Wish I bookmarked that one.
The discussion of Groupon usually ends up in „they don't add value“ vs „they add value“ but without actual data it seems easy to find explanations for both sides.
Also it's worth pointing out that the value proposition for different types of businesses is wildly different. As you can imagine for an info product, Groupon is just like doing an affiliate deal with virtually no downside, for a high margin item like a spa it's excellent, and for something with very high unit costs, like a meal at a restaurant, the merchant has to be a lot more judicious about creating Groupons.
I'm blown away by all the hate, though. Maybe it comes down to how good / aggressive the sales team is. From a merchant's perspective, Groupon should be treated like marketing. You don't spend so much money on Adwords that unit economics are bad without some plan to create repeat purchases on the back end. Why would promotional discounts be different?
There are several differences between Groupon's model and standard discounting/advertising. The spirit of these can primarily be summed up as "most advertising services don't compete directly on price with the clients for whom they are supposedly advertising."
Groupon's product was its discounts, which it sourced from local merchants, then sold to its own customers. The businesses were not so much customers, but suppliers. However, the businesses paid Groupon for the benefit of supplying the product (the discount), and yet competed directly with Groupon when Groupon sold discounts for the restaurant across the street the following week.
Now, here I have discounted deeply and taken a loss, however, I cannot compete with Groupon in my efforts to retain any new customers and recoup those losses. This is because Groupon encourages a certain customer mindset, based on demand for deep discounts. This is a demand which Groupon alone can endlessly satisfy because no individual competitor could sustain such losses. However, the aggregate loss of those businesses is the very source of Groupon's profit.
In short, Groupon was actually a hyper-competitor to the businesses it was supposedly serving.
> My current company, Detour, is for all intents and purposes at its current stage, a small local business. We sell walking tours of San Francisco. To be successful, we have to do the exact same things other local travel companies do.
That description brought to mind exactly the startup SideTour, which Groupon bought out in 2013:
http://techcrunch.com/2013/09/18/groupon-buys-sidetour-to-ad...
Sidetour did more than walking tours...I only used it once, to go on an excellent tour of the now-defunct 5Pointz in New York...and according to the TechCrunch write-up, the point of Groupon buying out SideTour was to include the kind of things that Detour purportedly does:
> A little over a week after Groupon announced the acquisition of hotel booking service Blink, today comes one more purchase that moves Groupon further yet out of the realm of daily deals. Groupon has bought SideTour, a marketplace where people can book places for small-scale, bespoke activities, and post their own events, too.
(I'm a satisfied customer of Detour.)
Daily deals cannot scale and Andrew knows this better than anyone. When you're small you can price daily deals in a way that works for SMBs and your bottom line. But when you're huge, you only have 365 deals per year and the price you need to charge is out of reach for small businesses. You have effectively equaled the reach of a traditional media company.
You could probably make a pretty good living off something like that, especially if you can scale it to several local areas.
Groupon started out as one deal a day. We had a massive waiting list from merchants - 9 months, at one point.
With so much merchant demand and Groupon only running one deal a day, clones started to appear. Instead of waiting to be featured on Groupon, merchants ran with the clones.
Most customers didn't really care whether they bought from Groupon or its clones. So we realized what in effect was happening was that the model was moving to a marketplace... just one that was distributed across multiple sites.
We decided if the inventory was going to exist, it would be better on Groupon than spread across a zillion clones, so we moved to a marketplace model.
In other words it was mostly competition in a fairly commoditized space, and not scalability issues, that drove us to the marketplace.
That's not to say that scalability wouldn't have been a challenge with a daily deal model, but there are things you can do. A lot of the needs in the space actually balance out nicely. Some merchants want 20k customers, others want 20. Most merchants prefer new customers, some are indifferent. Both customers and merchants want category diversity so Groupon remains interesting and non-cannibalistic. In theory you can get all those things with smart segmentation and personalization. We experimented with that in the transition to marketplace but ultimately went ahead with moving to the "many deals" (which in the short term, is exactly what customers want) to stay ahead in the brutal competition for marketshare. Hard to say whether I'd do that part differently today... if we'd been less focused on maintaining marketshare NYTimes might have just written the obituary for Groupon instead of Livingsocial.
Once competition fragmented the market and businesses realized that 50% off coupons attracted bargain hunters rather than loyal customers, there wasn't any going back.
I love this. You are the founder of a big company known for being predatory, and you're recognizing that big companies are predatory.
Used well I think Groupon let's a business really put themselves on the line: we're willing to probably lose money on customers because we think those customers will learn the value of what we provide by experiencing that value. That's a risky proposition, but a fair one. Used that way, yes, I think it's good Groupon exists.
As a consumer, I've discovered tons of new restaurants and services through Groupon.
As a merchant, I ran several groupons and they kicked butt. Of course you need reasonable expectations about margin and repeat customers.
As a partner, I've referred dozens of brands to Groupon Goods, who are easy to working with, pay their bills on time and pay MORE than traditional retail channels, because there zero loss/spoilage.
I can't speak to sales tactics but my experience was virtually 100% positive.
Cognitive dissonance is a powerful thing. I can get why he wants to look in the mirror and say, "No, I really did do something worthwhile. Really, really!" And it's great that his wife is trying to buck him up.
But trying to convince the rest of the world? Via rambling, need-an-editor Medium posts? Where he helpfully analogizes Groupon to a drug that turns people into shuffling, addicted zombies and destroys their lives?
It's just sad.
I agree that local business is a great market to serve, which is why I think Groupon is especially repulsive. In his race to cash out, he caused enormous pain to an enormous number of local businesses. Whether he did that willfully or negligently I have no idea, but either way his attempt to chipper his way out of Groupon's history is sad.