The dark side of Groupon

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Groupon logo 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?