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.
- 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. - 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. - 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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Couldn’t agree with you more, retail needs to get back to the basics of selling.”Sell the sizzle not the steak”. Groupon or Grooster are not the solution to success be it long term or short term success.
You calculations are a bit out if Groupon take 30% and your margins are normally 50% then you are left with a paltry 20%, for what, a short term gain and customer confusion on your pricing.
Great post. Successful businesses differentiate on something that is a unique strength and valuable to the market – those that think that they can be successful by constantly lowering prices are confused, misguided and not long for this world.
thanks for the heads up francois. thought groupon was a bit more profitable.
[...] With the creation of these sites, I believe that, far from creating client loyalty, we are teaching that clients can use this site to always get the best deal on any product they want to purchase at any time. In my opinion, it is really bad for business to use these sites and Emergence Marketing agrees. [...]
I could not agree with this analysis more. I blogged about this extensively last week, after a conversation with a Groupon sales guy. (You can find it at http://www.aneclecticmind.com/2011/03/18/why-groupon-is-bad-for-business-and-consumers/ if you’re interested.)
The ONLY way Groupon can be profitable for a business is if margins are over 300%. Mine aren’t. I’d lose about $100 on each sale; Groupon would earn about $75. Who wins?
I think it’s important that business owners just say NO to Groupon and stop this 50% off insanity before it destroys more small businesses and markets. Spread the word.
This seems like a case of selective “proof.” Coupons are created to get people into your business and it’s then your job to make people want to come back. If most companies are not getting people to come back, that’s not necessarily the fault of the coupon. Maybe everyone that used the coupon didn’t like what they got, even at coupon prices. Without a survey from coupon users, there is absolutely no way to decipher this data accurately. Furthermore, what about the 15% of coupon users that did return? How much did they spend? Did it cover the amount of money that wasn’t earned during the coupon promotion? How many times did those customers return? Coupons aren’t supposed to make EVERYBODY make return visits to your business. They’re supposed to get people in the door who might never have come in without the coupon. This is a poorly researched article.
KB: The truth is, not all business models work well with deep discount coupons. My business sells a very expensive item that’s likely to be purchased just once. If I sell it at a loss, how does that benefit me? If people know that I offer deep discounts — because they’ve seen a Groupon for my company — what makes you think they’ll ever come back and pay full price?
We’re not talking $20 vs. $10 here. We’re talking $500 vs. $250 here. I’d lose $100 on every Groupon sale and likely NOT get any new customers at full price. Obviously, this wouldn’t work for me.
It’s up to the business owner to DO THE MATH. Don’t count on repeat customers that you might never see again. If you can break even on a Groupon deal in a business that COULD see repeat customers, maybe it IS worth a try. But to believe the line that Groupon sales people keep using — “Risk free advertising” — is idiotic to the extreme.
This is a very interesting subject. Do loss leaders like Groupon work to bring in new business? I would think so – even if most people don’t buy more products, there will be some people who really like the product and service and will be back for more.
Groupon will likely fail for business that sell commodities like gas, dollar items, cheap fast food and mediocre services but business that offer high quality services that will require additional visits may do very well.
Why not discount the price of a meal or haircut on the first visit so that members will find out how good it is and then pay full prices on subsequent purchases?
Like you, I don’t agree with the term “social buying”. It’s not. It’s just group buying – and let’s leave it at that.
Interesting perspective and stats. I know of one photographer who offered a Groupon deal for prospective customers, related to two hour photography tours and lessons. Purchases far exceeded her expectation, to the point where she had to hire help to lead the tours. Certainly a risk to quality of customer service.
The only people making money off this coupon scam is Groupon and Google Adsense.
Every time a company has grown that fast and the only product was a coupon marketed by telemarketers a crook was behind all of it. Think ENRON!
[...] Why Groupon is bad for your business (and mine) Mar 10, 2011 … The ONLY way Groupon can be profitable for a business is if margins are over 300 %. Mine aren't. … [...]
I recently booked a client who came to me after being put on a 2 year wait list to redeem her Groupon with another local photographer. Unfortunately, I think the local photographer who booked herself silly with Groupon is getting a lot of bad publicity and word of mouth out of the deal (and that is in addition to working herself silly for not a lot of profits).
[...] 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.” Read why on EmergenceMarketing.com. [...]
These daily deals have hurt my business of 13 years. No wants to pay more than $30 for a massage. My business has thrived on regular customers. I still have regulars, but it’s impossible to get new clients and keep them. My yoga studio is closing this month and my massage business is on the outs too. I used to get $65-$100 for a massage. Now, $15-20 and people SUCK at tipping.