The dark side of Groupon

Groupon, a U.S. "deal of the day" site that provides coupons to consumers for local businesses is getting tons of buzz, the vast majority very positive. The company is growing very fast – revenues were $713 million in 2010, up from $30 million in 2009 and early this month they announced plans to raise money in a Groupon public stock listing.

With all the hype, I wanted to provide some observations on the dark sides of Groupon for potential advertisers, customers, and investors to consider.

What is Groupon?

According to the site: Groupon negotiates huge discounts—usually 50-90% off—with popular businesses. They send the deals to thousands of subscribers in a free daily email, and send the businesses a ton of new customers. Consumers print the voucher or bring it up on their mobile device, then present it at the business to get the deal.

What are the benefits?

There are many positives – consumers get good deals and businesses get new people in the door. Sounds like a win – win and for most people it probably is. I like the real-time aspect of Groupon: You have to get the coupon that day or you lose the opportunity.

The dark sides of Groupon for businesses:

• You may turn off your best customers. Many long time customers who pay full price hate when some newbie gets a great deal. How would you like it if you've got a favorite restaurant that you frequent and all of sudden there are a dozen people in there for the first time paying half of what you do. Maybe it's just a pet peeve, but I get so pissed off at companies like the mobile phone providers who happily give new subscribers the best rate when loyal customers pay full price. Or the magazines with the tear out cards offering new subscribers a year for $9.99 while I pay $29.99 for the same thing and have been subscribing for a decade.
• You are attracting people who are eager for a large discount and may not be willing to continue your service at full price after the deal is done. Sure, you'll likely get some new long-term customers and that's great. But you'll also get plenty of deal sluts who will leave you after the one night stand.
• If you frequently advertise steep discounts on Groupon and via other outlets and advertising methods, you risk training your customers to never pay full price. When was the last time you paid the Y-fare for a plane ride? Where I live clothing retailer JoS. A. Bank seems to always be running a sale so they’ve got to continually discount because their customers expect it.

The dark sides of Groupon for consumers:

• "It's another Groupon on table 4." At some businesses, employees don’t treat coupon-bearing customers like "real customers." For example, a hairdresser might fear he won’t get a tip calculated on the full price of the treatment, but only on the discounted amount. So for this reason sometimes the Groupon customer might have an inferior experience by using the voucher. Here is someone describing just that at a restaurant: Why I won't be using Groupon again. A consumer perspective. Note: the Groupon Promise says: If your Groupon experience ever lets you down, let us know and we'll refund your purchase. Period.
• Buying the coupon and not using it has been reported to be a common occurrence. A consumer gets excited about a deal, buys the coupon, but either forgets about it or doesn't have time to take advantage of the offer. The problem is so widespread tat there are even secondary markets that have popped up for people to sell their surplus vouchers.

The dark sides of Groupon for investors:

• Yes, Groupon is growing very quickly and will likely to continue to do so. But my guess is that most advertisers are new to Groupon and that fuels revenue growth. Unlike other advertising outlets (such as Google AdWords) my sense is that Groupon will not have as much repeat business as a percentage of revenue. My thinking is that businesses can only offer a 50% off coupon (say for a helicopter lesson near Omaha) once or maybe a few times at most, so most business cannot be counted on by Groupon for recurring revenue. Investors need to feel confident that Groupon can sell new customers far into the future, but how many greenfield businesses are there?

What do you think?

Have you used Groupon as a consumer? Or has your business advertised on Groupon? What was your experience?

Will you buy the stock at the IPO?

Comments

[Randy Marks]

Daily Deal sites are the most expensive form of advertising you can do. They come into your business, slash your prices, massively disrupt your existing customers, then they take half your money and make you wait for your share, and the bargain hunters rarely come back. Other than that it's a great deal.

We operate a large network of health, beauty and wellness practitioners. They know the "Daily Deal" sites are debasing the pricing norms of millions of personal service practitioners.

Here is a White Paper entitled. Should A Health, Beauty Or Wellness Practitioner Do Groupon? http://scr.bi/jfX9GH Short Answer: Only if you enjoy being a host for a parasite.

[David Meerman Scott]

Randy - thanks for jumping in with your experience with health, beauty and wellness practitioners. I enjoyed your paper.

[Eric Johnson]

I've only used one Groupon so far, for a local sushi restaurant. It was a lunch time deal and I went in with a friend who did not have a Groupon. Though the place was dead, we had to deal with long waits in between visits from our server - a huge pet peeve of mine as a former server myself. I don't know if it was simply bad service or our server's expectation of a small tip, but it certainly turned me off from wanting to go back there for lunch again. I'd say that's bad for the consumer AND the business.

Personally, I always tip on the full price, but your article will certainly make me think twice about buying another restaurant Groupon.

[CMasi]

I do think there are businesses that can make Groupon work, but only those who don't increase their costs by adding another person. (It does not cost more to add a person to a yoga class, for example.) My personal experience with Groupon has been unfavorable. I bought a yoga groupon and the classes were so crowded I would never go back. The massage practitioner I saw (through groupon) was getting paid $13 for the massage I bought for $29. She sold over 500 one hour massages, and was hoping for lots of no-shows.

Personally, I don't see how Groupon will maintain growth over the long term. Eventually, every small business out there will have been burned and will either opt out, or try to do their own discounting programs.

[Liz Fodor Medeiros]

I purchased a Groupon deal with a local nail place and was all excited to schedule my first appointment. Unfortunately for me, this was a very popular coupon and it's almost impossible to get an appointment. I think they wish I would just give up and forget I ever bought the coupon...
On the other hand, my husband and I used Groupon to discover restaurants in our area and for the ones we liked, we are regulars now.
And as a side note, I think it's rude not to tip on the full amount of the service.

[David Meerman Scott]

Eric, Cmasi, and Liz -- thanks so much for sharing your stories here. Businesses that acheive a "success" with Groupon by selling lots of vouchers then have to deliver.

But like you said Liz -- there is certainly a good side to Groupon and similar services because you can discover a restaurant that you might not have taken a chance on either way.

Thanks again for adding to the discussion.

[Al Pittampalli]

In a frenzied race to conquer the globe and beat competitors like Living Social, Groupon is really underserving businesses. Groupon used to be about fun new things in your city, exposing consumers to new things, but now it's become an efficient marketplace where consumers go to buy services at discount that they were going to buy anyway. Groupon needs to return to it's core fundamentals of simplicity (one deal per day, etc.), or they're going to experience a HUGE backlash soon.

[Jake LaCaze]

Recently I read an article that made points along the same lines that Randy Marks made. A cafe owner complained that people rarely spent more than the value of the coupon (after all, it's a cafe; if you get a free cup of coffee, you're not very likely to turn around and pay for another cup), she had lines all the way to the door, which annoyed her usual customers, and most of the people who used the coupon were deal hunters who were unlikely to come back to her store since it was more of a neighborhood place.

I recently made my first Groupon purchase and I felt that I was very much behind the times. But since buying the coupon, I've seen a few articles that bring up another side of Groupon, and I'm all for hearing both sides. I especially liked the point about being profiled and getting crappy service because people are afraid that you won't tip well. I have no doubt that this is a very real issue and if you want good service, you should be prepared to pay for it. I pride myself on being a good tipper and would be upset if I were to have such an experience. Until reading this article, I thought that Groupon was undoubtedly a winning situation for the customer.

[Stan Dubin]

Good points, David. I think underlying this issue is a basic premise of promotion: get folks into the shop and do your best to keep them coming back. If you need to spiff your best customers so they're not offended by newbies getting a deal, do so. If you're stupid enough to treat your groupon customers with a degrade of service, then, well, you're just stupid.

But bringing a healthy influx of customers (new and old) into your place of business is an opportunity to please them and get them returning and referring. Do it judiciously and just about everyone should win.

[Mike Byrne - Local SEO]

David,

I see Groupon as a vehicle for exposing new customers to a business. As an ongoing strategy, it seems like a losing proposition for the reasons you stated. I've seen surveys where only about 40% of advertisers say they will use Groupon for a second time, even though 60% said they made money from the offer. Something strange there.

Also, it appears Google is hiring a new sales force for local sales. It's expected Google Offers will be a big part of their efforts.

It's an interesting market.

[David Meerman Scott]

Thanks for sharing your story, Jake.

Good point Stan -- If you are a business using Groupon, you need to do it as a strategy and train staff accordingly.

Mike - I don't imagine there can be much repeat business because companies don't want to be seen as continually discounting. Makes sense that Groupon will be selling locally to get new businesses into the scheme.

[Tomas Jansma]

Hi David,

First: The deals I get offered from Groupon in The Netherlands do not appeal to me most of the time, discounts for wellness treatments, all you can eat ice cream for...etc. It's sometimes feels like businesses are doing a last desperate attempt to draw in (new) customers.

Second: Like pointed out before it's a difficult balance between seducing new customers to come and not to offend existing customers. It has to much a taste of short term benefits and not with long term engagement.

Wouldn't it be nice if regular customers were aloud to give away these benefits to 'friends' and get rewarded with long term discount or a special present or deal.
I'm not a marketing man this is just how it 'feels'

Here's a poll I made some time ago about Groupon: How do you experience Groupon? http://t.co/kGsdmk6

[Anna]

Two things:

1. it does make others - ie those not using it - rethink their prices and hopefully become more competitive.

2. will I buy shares? Yes, but... sell fairly quickly before the dip.

Anna

[David Meerman Scott]

Tomas - many thanks for giving us an idea of what's going on with Groupon in the Netherlands.

Anna - Good luck with your investment. It will be interesting to see what the stock does.

[K Thornton]

As with all things, there are always positives and negatives. I like that this article highlights both.

I've done some work with group buy sites, and have heard other concerns about running deals. For example:

-Deals that don't perform, or don't tip - most group buying sites will display "past deals" and we've heard concerns from merchants about having their past deal displayed if the deal didn't tip, or, if it had very few buyers.

-Perception of the value of their products or services if they offer a very deep discount - Most group buy sites will encourage merchants to be as aggressive as possible with their discount (no less than 50% off, etc...) Some merchants have expressed concern that if they are offering deep discounts on their products or services, it de-values what they offer at full price.

-Wait times for your deal to run - Some merchants are concerned with how long it will be before their deal runs. With the high volume of businesses, and many in the same industries, merchants might find that they are on a long "waiting" list before their deal actually runs. This can be a competitive advantage for emerging group buy sites as they can get deals up and running quicker than Groupon.

Here is my personal opinion from a consumer and merchant perspective on group buying:

Offering a discount through Groupon, LivingSocial, DealFind, Red Flags Deal of the Day, etc... can be a great way to drive new business, however, as with any other marketing strategy it needs to be done right.

Businesses who provide poor service to customers who come in with a voucher shouldn't have run a deal in the first place. If your staff treat customers poorly because they are concerned about how much of a tip they'll get if the customer comes in with a coupon in hand, you probably have the wrong staff. Any customer, coupon or no coupon can leave a poor tip. How would you / your staff treat a new customer who walks in without a coupon?

If you're a consumer, and you've received poor service from a business because you came in with a coupon, then they haven't earned your repeat business.

In terms of concerns about existing customers being upset because new customers are walking in with a discount - I haven't seen many group buys that specify NEW customers only. Existing customers are given equal opportunity to get the same discount, if they subscribe to group buy sites.

For businesses exploring the idea of running a deal through one of these sites, ensure you do it right. Offer an attractive deal, be competitive but mindful of the discount you're offering, and ensure your staff are aware of the deal, and set expectations of service levels - maybe include a short survey, or customer feedback form for customers who have come in for the first time through from purchasing a deal so you can measure the propensity for repeat business, etc...get creative with how you can turn these new customers into repeat business.

For consumers who are purchasing deals, if you're concerned about product / service quality, take a few minutes to research the business before buying the deal. Some of these sites include customer feedback and links to the businesses website. Do the same due diligence you would if you were looking for a provider of that product or service without a deal.

What I'm curious to see is just how long group buy sites will be around for ... eventually, when "everyone is doing it" it will be far less enticing for businesses, and for consumers who are seeing the same kind of deals, etc...

[Michael Benidt]

Hi David, Here's a PC Mag article by Sarah Jacobsson Purewal that couldn't agree with you more - http://tinyurl.com/DarkGroupon

And then there's personal privacy. When it comes to sites like this, as has been pointed out many times, it's good to remember that you are not the customer. The stores are the customers and you are the product being sold. Gives me a bit of a shiver. :)

[David Meerman Scott]

K Thornron -- Wow. Many thanks for this detailed analysis! I learned a lot from you. I appreciate you taking the time.

Michael - What are the privacy issues you are referring to? I'm not aware of that aspect...

[Keith at KendallPress]

K Thornron got a lot of it right. I've got a couple of Groupons and former providers who haven't earned our repeat business. Missed opportunities for everyone.

Groupon - no thanks. we'll pass

[Otra empresa es posible]

Ithink is important for the company that sells having a good customer plan. Groupon is a good tool to attract customers if you have the possibility to develop them after the groupon campaign. So it's important that the relation with the customer does not finish with the voucher redemption.

[Ashley]

I've been reading one of David's books and as a 26 yr old with my first job with a "marketing" title it's really transforming. There's a couple things I would like to point out about Groupon. 1. I should have seen this coming. I worked in sales at a radio station where deals like this were becoming the trend. One place started it and everyone copied it. Every station I know of now implements a deal service and now I see TV stations doing it too. Also everyone has the not so clever name of dining deals or something like that. You'll notice now. What I've noticed about these deals is that they sell where there is some buzz in the community about the place (restaurant or massage place) or if they are somewhat known for good products or services. If the restaurant is bad or not known the deal flops and both companies the advertiser and the service provider flop. For offering the "deals" after a while, I agree with what has been said already, the caliber of businesses and products will decline, because many businesses will try it and owners will think it didn't "work". Yes, it works for some, but I will remember the one sweet small business restaurant owner who after doing the program twice told me, "I lost my shirt." 2. It may also continue to decline, because one of the thoughts I gained from David's book: Is it about the customer???? Yes, we get deals if we subscribe, but I've seen nothing come to me from Living Social that I would want to buy. Yes, I would love a weekend trip to Cape May during the summer, but it's out of my price range even with a discount. Sometimes, the prices still aren't worth the deals either. I don't want 4 car washes. I want one at less than what I would normally spend at a business I would normally go to. Perhaps, if they can target their emailed audiences better with surveys or more questions about their lifestyles when signing up which would improve the performance of their efforts. It will be interesting to see how this pans out, in the meantime, it will be marketing lessons learned for all of us (as a business owner or in marketing) as we obeserve.

Thanks for reading.

[David Meerman Scott]

Hi there Ashley -- many thanks for this interesting comment. Your backgrounds and experience is ideal for understanding what's going on with services like Groupon.

[Pepe Fanjul]

Well it has lot of content which is worth to read..thanks for posting it..Groupon is a good tool to attract customers if you have the possibility to develop them after the groupon campaign. So it's important that the relation with the customer does not finish with the voucher redemption.

[fitness workout programs]

I don't imagine there can be much repeat business because companies don't want to be seen as continually discounting. Makes sense that Groupon will be selling locally to get new businesses into the scheme.

[World Financial Group Inc.]

Groupon has recently bought the Indian deal-of-the-day website SoSasta.com and will be re-branding it soon as well.The Groupon acquisitions of uBuyiBuy launched services under the Groupon name in Hong Kong, Singapore, the Philippines and Taiwan. Groupon also acquired GroupsMore.com in Malaysia to expand its business there.

[Brandi S. Nave Attorney]

Every station I know of now implements a deal service and now I see TV stations doing it too. Also everyone has the not so clever name of dining deals or something like that. You'll notice now. What I've noticed about these deals is that they sell where there is some buzz in the community about the place or if they are somewhat known for good products or services.

[Courtkeen]

I'm way behind on joining this discussion, but I found this article and it's comments extremely interesting. After reading them it leaves me with a thought about our mindset in the first place. It seems like most consumers nowadays are just out for a deal, a sale, and are placing way less value on receiving excellent services. Long-lasting, loyal relationships between businesses and their customers is way undervalued these days. We all just want the deal. Deal is king. It's getting annoying. I hope it swings the other direction a little bit soon. This whole issue certainly inspires me to make smarter purchasing decisions instead of just seeing what's on sale.

[David Meerman Scott]

Courtkeen - I think SOME people are only out for a deal which is why Groupon works. However, people like me are interested in long term relationships. It is difficult for a company to cater to both types of customers.