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Why Groupon is bad for your business (and mine)

Groupon, the so-called social buying site (even though there is very little social going on outside of the manipulation of basic human behaviors like their reaction to a situation where there is sense of scarcity) and the fastest growing company in history, is bad for your business.

It’s bad for your business for a number of reasons.

  1. It destroys the profitability within your market
    Coupons trigger people’s pleasure side of their brain, that is the site that gets addicted to things and that requires more over time in order to get the same satisfaction.  So if you run a 50% off campaign in your local area or in your industry it will be very hard for anyone in your sector to come back to the pricing levels that you used to get. In effect you destroy profitability not just for you, but for all involved. If you don’t believe that, check out Utpal Dkolakia’s recent study on Groupon. 32% of companies said that the Groupon campaign was unprofitable with only 25% of redeemers buying additional products beyond the ones offered through the coupon and only 15% of coupon users coming back.
  2. Over time discounts will affect service levels and customer satisfaction
    Even if you can withstand a one time coupon offer where you only get 25% of what you normally get, sustained couponing has to affect your profitability and  thus your service levels. With decreasing service levels, customer satisfaction will go down and you will lose not only the unprofitable coupon users, but all your clients.
  3. You destroy all customer loyalty
    It is a well documented fact that coupons destroy customer loyalty.  It is the one differentiator that can easily be copied by others. So if you shift your business to one where the differentiator is price (or coupons), you destroy customer loyalty – not just for you but for all parties in your market.

Instead of focusing on discounts and coupons companies should focus their efforts on longer lasting competitive differentiators like service levels, or uniqueness of their offering.

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