Tuesday, June 7, 2011

What's the deal with GROUPON?

Groupon uses these annoying ads to catch your eye, which should be a first tip-off that something is not right here....

Groupon recently made headlines by turning down an offer from Google to buy it out.  Google may look back at this and breathe a sigh of relief.  What is Groupon and how does it work?  Is it a good deal for you, the consumer?  What about business owners?

The basic idea is that a business owner in one city offers a one-day deal.  If enough people "sign up" for it, everyone gets the deal, otherwise no dice.  This is the first odd thing about the marketing.  Why should it matter if everyone signs up or not?  It is an artificial indicia slapped into the mix to distract the consumer.  "Gee, if enough people sign up, we all get the deal!" which really means nothing, as if a retailer is going to offer a discount, it will offer a discount, regardless of volume.

Groupon then takes a hefty chunk of the bargain - up to 50%, which means the retailer is offering a discount and then paying Groupon half of the proceeds.  This does not bode well for retailers or the future of Groupon, or its wild profits.  Why?  To begin with, some retailers, apparently not realizing the nature of the deal, have nearly bankrupted themselves offering good prices on goods, not realizing that 50% needs to be paid to Groupon.  You can be sure they won't make that mistake twice!

Second, if you have to pay over 50% of the proceeds to Groupon, then in order to break even, the retailer has to have a 100% markup on the item or service in question.  This means, by definition, that the "deals" offered can't be all that great, unless the retailer is losing money on each unit sold.  And again, how long can retailers lose money on items like this - particularly in large volumes.  Without having to pay Groupon 50%, they could offer lower prices.

In fact, there is a huge incentive for a retailer to say to a customer, "Hey, if you buy this WITHOUT the Groupon, I'll let you have another 10% off!" as he would save more money this way.   How Groupon polices this deal would be interesting to see.

And as a marketing model, the barriers to entry are very low and the incentives to undercut Groupon are great.   A competitor could offer retailers the same sort of deal, but asking only 40% of the cut, and take away a lot of Groupon's business.  And then another competitor could offer 30% and so on, until it becomes a very marginal business very quickly.

Groupon is growing quickly and generating a lot of cash quickly only because there is no competition in this segment at the present time.  Without some sort of business-method Patent (good luck with that!) there is no way to keep others out of the marketplace.  And if a competitor could ask retailers for 40% or 30% instead of 50%, retailers could offer better deals on a competing site, which means competition for Groupon.

So Groupon is getting a lot of press for being the "fastest growing" Internet business this-and-that, but as a sustainable model, I just don't see it being a long-term major player.  It may survive, but once the competition gets in on the deal, it will be marginalized.

For example, I just noticed this company advertising on Facebook for "Daily Deal!" - sound familiar?  Or how about "Living Social" which was just profiled on NPR and has the exact same business model as Groupon?  And the "Living Social" interview was disturbing - the company has all the hallmarks of the "dot com" bubble of the 1990's, from their "burn rate" to their pursuit of market share over profits.

Like I said, it doesn't take but a little HTML coding, a domain name, some internet ads on facebook, and a few retailers to sign up and BAM - you've made your own Groupon site.  How hard is that?

Like I said, Google will be glad it walked away from this deal, and Groupon will wish it took the six billion.  I suspect that these type of "deal a day" sites may be a fad, in that retailers will realize quickly that they do not generate sustained traffic, but rather just one-time money-losing deals for them.  How long can a business survive by offering something at a huge discount, and then pay 50% of the costs to Groupon or some other site?

While an interesting marketing gimmick, I am not sure this is sustainable for most retailers, nor the future of couponing.

And if Groupon does an IPO, well, I would walk away from the stock.  As a "one trick" pony, Groupon has no space to move into, if competitors take over their existing market model.  And as first to market, it will likely not be the market winner.   Remember the "dot com" debacle!

In the meantime, are these good deals for you, the consumer?  It depends.  If you go out and buy Vomit Cookies because you "got a good deal on the coupon" but had no previous intention to buy these cookies, then no, you did not get a good deal.  You are merely shopping - buying things presented to you as a "bargain" and then impulse purchasing them based on the perceived bargain - and not on a previous desire or need unrelated to the bargain presented.

You wolf down a mouthful of Vomit Cookies and are 1000 calories over your dietary limit for the day and $5 poorer - but you did not get some sort of deal or come out "ahead" here.

So you will likely end up buying a lot of crap that you did not intend to buy, which by definition is wasting money, even if you are getting a "deal" on the price.  And the arresting eye-catching ads should be a first tip-off that this is not a good deal for you, the consumer.  Anything that uses Pavlovian response ads should immediately raise your hackles.

In a way, it is like Woot! with its "one deal a day" (now up to four deals a day with allied sites).  If they just happen to have a screaming deal on a re-manufactured (returned) left-handed widget, and you are desperately in need of a left-handed widget, well, boy are you in luck!  Because Woot! has what you want at a price that is....competitive.  Oh, right, not really a screaming bargain.  And it is re-manufactured (returned) merchandise.  And most of the time they are selling stuff you don't need and getting you to impulse buy.  Um, no bargains there, either.

People who love Groupon are usually women and usually SHOPPERS - people who like the process of buying things and view bargain-hunting as a money-saving pastime.  But as I have noted before, again and again, you cannot spend your way to wealth, just as you can not eat your way to thinness.  Buying stuff you don't need on the premise it is a bargain is just making you a little poorer, no matter how attractively priced it was.

And for retailers, as this blog noted, once you go down the discount route, you've basically shot yourself in the foot, as you've advertised exactly how low you are willing to go.  The premise that someone using a "Groupon" at some screaming discount will come back to your store the next week and pay full price, is somewhat flawed.  Bargain-hunters want bargains.  And if they pay $5 for your Vomit Cookies one day, they aren't likely to pay $10 the next.

So while this is yet another twist on Internet advertising and couponing, Groupon is hardly the next Google or even the next Twitter (is that over yet?  Please let me know).  Rather it is a catchy business model that will be quickly copied by others and may end up merely just a fad.

UPDATE:  January 23, 2010:  Two interesting developments have occurred since I wrote this posting.  First, many other companies have jumped into Groupon's "space" including Google, as they realize that this is not a Patented invention and it is an easy model to copy.  Google will be able to "sell" its own service on its search page, and also via Googlemaps, which could kill off Groupon and the others in short order.

A second development was reported on CNN about a new site, "Lifesta" (is spelling really dead?) for people who "bought those Groupon deals" and then realized they totally wasted their money.  What's that?  50% off is no bargain?  Yup.  You see, a lot of people click on things online without thinking whether they really want them.

Again, 50% off on something you don't want or need is no bargain at all.  And offered discounts off "retail pricing" is just shopping not making a strategic purchase.  In other words, the existence of sites like Lifesta confirms that what most people are doing is just impulse-buying something based on a perceived bargain, whether they need it or not.

50% a pile of dogshit is not bargain.  Shopping is not saving money - merely spending it.  Never forget that!

UPDATE:  This article on CNN this morning shows how the Groupon deal works from a merchant point of view.   And as you might expect, the Groupon "copycats" are offering better service and a better split with the merchant.

But getting a $10 coupon for lunch at a pizza shop for $5 is not really a great bargain - and the article points out what cheap sons-of-bitches the customers are.  Frankly, I don't see what merchants fall for this gag - the people cashing in their Groupons are just going to buy what the coupon pays for and then never return ever again.  What's the upside for the merchant?

Being cheap and chintzy and a PITA consumer is NOT what this blog is all about.  And that will be the topic of my next posting.

UPDATE:  June 7, 2011 This article on CNN this morning seems to indicate some woes at Groupon.  CNN seems not to like Groupon - perhaps they own a slice of Living Social?  But as I noted, everyone and their brother is getting in on "DAILY DEALS!!!" even eBay and Wal-Mart.  That does not mean that daily deals are good deals for you!

Again, shopping is a bad economic behavior - it reverses the normal process of buying.  Instead of determining a need for a product and then going out and finding the best product for the best price, shopping presents you with a product and a price (often a "mark down" from a phoney high price) and then convinces you to have a need for it.

And the "need" you discover is usually based on the idea that the item or service is a "bargain" that is "too good to pass up!" - even though 10 minutes prior to being presented with the "bargain" you had no need for the item.

So these "Daily Deals" are largely a fad - and are being copied everywhere to the point where consumers will tire of being bombarded with offers for vomit cookies or pizza slices and just walk away.  And with all this copycat business afoot, Groupon is trying to aggressively expand to out-expand its competitors.  Nice try, but since there is no Patent on this sort of thing, what is to keep other people out of the market?  And what is to keep the consumer locked into using one brand of "Daily Deal" coupon?

Groupon and the whole "new" Social Media "dot com" movement may be headed for trouble.  Most of these companies are losing money, and yet are wildly valued.  And most have no realistic forecasts of making money, either.  Consider this quote from the CNN article:

But Groupon is no Google. Google went public with a 24% operating margin. Groupon is approaching the markets with an operating loss equal to 18% of revenue. And yet, Groupon's IPO could give the company a $30 billion value, higher than Google's when it went public.

Dot Com Bubble, Part Deux, coming right up!