Ding Dong, Daily Deals Are Dead
slate.com
slate.com
* Large marketing overhead * Large direct salesforce overhead * Daily deal hunters don't become regular customers * Merchants take a loss on the deals
Merchants take a loss on the deals because Groupon takes a 50% cut after convincing them to reduce prices. Groupon takes a 50% cut partly because they have large "sales costs" in creating each deal.
Direct sales and outbound marketing was initially required because it was a new concept that required educating the market. Now that everyone and their grandma knows about Groupon, I wonder if companies can adopt a new model without such heavy marketing and sales overhead, and try to make the numbers work so that both the merchant and the daily deal company makes a profit on each "deal".
I think the market has established that using daily deals as a "loss leader" for merchants to gain more repeat customers generally does not work because of the clientele the deals attract. But what if the Groupon2.0 business structures the deal such that the deal is offered on a high-margin product that the merchant already carries, takes a smaller cut (say, 20-30%), and offers a "lower margins but higher volume" deal to the merchants?
If savvy merchants evolve such that they proactively seek such companies, or if Groupon2.0 style companies can use low cost electronic marketing methods, something more sustainable may be attainable.
I do like to support companies and stores that do a good job, but there's the simple fact that in my head I think that the intrinsic value of this service is somehow less after the Groupon style deal.
Briefly, a small auto shop offered a $30 oil change for $10 via Groupon. The owner expected to get about 90 takers. He got 2277. He had to hire more staff and buy a second car lift to deal with them all. It took months, and he lost money on the oil changes--but about half of them became regular customers and that made up for the loss and put him overall way ahead.
They also profile a restaurant whose experience (with Living Social) was not good. Their deal was disastrous.
If you compare the two deals, and the nature of the two businesses and the psychology of their typical customers, it makes sense that the auto shop worked out well and the restaurant did not.
In addition to the deal hunters that are in their customer base, there are many addicted to this type of purchases. I have quite a lot of anectodal evidence for such behavior, and if you ask around, you'll find many more.
1) The model is promising for some businesses, but a lot of them end up being one-time customers because the results are so poor. The most sustainable customers are those with high margins and high sales costs - a big market, to be sure, but enough to justify a multi-billion dollar company? I'm not sure.
2) I would be more worried about competition at the local level, which has smaller barriers to entry. Lots of companies (newspapers, tv stations, etc) have existing sales infrastructure for a region and can compete aggressively with Groupon. Add to that a handful of well-funded, competent competitors, and it is easy to see how Groupon's margins could continue to be squeezed.
Is Groupon going to be around for a long time? Probably, but I doubt it will be as a multi-billion dollar company with good growth prospects.
Groupon essentially invented payday loans for businesses. The two largest payday loan companies in the US at one point had valuations near Groupons too, until the slow moving legal system eventually caught up to them.
Deal hunters will go anywhere there is a deal. Groupon just moved "going out of business" and "lost our warehouse, all inventory must go!" sales to the internet.
Someone out there believes in arbitrage so strongly that they believe they can make money for themselves while lowering prices for consumers and creating long-term benefits for business owners. Although I've unsubscribed from Groupon and haven't been excited by some other companies' recent efforts in the daily deal space, I would actually celebrate a successful and ethical daily deal company.
Services, well that's a different story.
i think companies like scoutmob, tiktok, and pirq are doing a good job in trying to find new sustainable models that are beneficial for both the merchants and the consumers.
disclosure: i work for tiktok.