Groupon, Sure. But Is It Sustainable?

The rapid rise of the “social commerce,” “group buying” or “social couponing” (whatever you want to call it) is sort of amazing to me. One interesting question that comes up in my mind is: Will the model that these sites offer start to “bleed” into other areas of local? Perhaps a better way to frame it is the following: will these types of sites put pressure on more traditional ad models being sold and promoted by other local sales channels, including TV, radio, print — even other online?

They’re not selling leads or clicks or even calls; they’re selling customers (albeit at a massive discount so margins disappear for the SMB in some cases). There are also others in the market like RedBeacon and HelpHive, among a few others, that are taking a commission on work actually performed. These sorts of models make “advertiser” acquisition much easier: “customers not clicks.” How widespread might this become? That’s a question I’m mulling over.

Lost Remote recently  highlighted an interview with Groupon CEO Andrew Mason in which he discussed how successful a Groupon promotion was for one particular business:

“[W]e recently featured helicopter lessons in Boston and sold 2,600 in four hours. To put that in perspective, this fellow has been in business since 1985 and in the quarter century leading up to his Groupon he had acquired a total of 5,000 customers.”

On the other hand here’s a recent article from the SF Chronicle about how one local business was overwhelmed by the demand Groupon delivered:

When Philz Coffee Inc. offered half-price $20 gift cards to users of the Groupon.com coupon site, the San Francisco chain of coffee shops figured it would get a few hundred takers. It got more than 2,000.

“I nowhere near projected the amount of people that showed up,” said Philz President Jacob Jaber, who doesn’t expect to offer that kind of deal again. “We ran out of gift cards, and we just weren’t prepared for it.”

Philz Coffee’s Jaber decided his company is established enough to rely on word-of-mouth marketing. Most of Groupon users that pounced on the gift-card offer were already Philz customers, so it didn’t provide too much benefit, he said . . .

Too much demand and many buyers were already customers . . .

There’s little SMB education or “best practices” right now on how/when to use these sites and how to “acquire” new customers who take advantage of these offers. Over time I would also imagine there will also be mechanisms for managing offers to existing customers or weeding them out entirely.

I’m also starting to see Groupon ads on marquee sites, such as this ad appearing on NYTimes.com:

Yesterday I asked LivingSocial CEO and Co-founder Tim O’Shaughnessy to pick some winners in the segment (beyond LivingSocial). He said that Groupon would clearly be one because of its scale and momentum. Then he saw Gilt Groupe as another very interesting player. He also said he thought one of the larger European companies would move into the US and become successful.

I’ve had the debate recently with several people about whether the group buying model is sustainable. Right now these sites offer new business but I’m sure they’ll expand into CRM or loyalty programs over time as well. I suspect the model is sustainable although it will need to evolve somewhat over time — and some of the flaws identified above will need to be addressed.

I would also assume that Groupon is on a course to go public. But there are plenty of smaller companies that cannot and so there will be consolidation and/or M&A opportunities for traditional publishers (YP, newspapers) and others (e.g., IAC) that want to get into the game.

Facebook is also lurking here as a potentially major player. Right now Facebook really doesn’t have a product to sell to SMBs (notwithstanding Facebook Ads). This would be one that would also be extremely appealing to consumers; it’s a natural in a way.

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22 Responses to “Groupon, Sure. But Is It Sustainable?”

  1. Harold says at

    Interesting post Greg. In response to your mentioning the business margins, I actually came across a Harvard Business Blog discussing that Helicopter Groupon discount, and the effect it had on the business. Here is the link:

    http://blogs.law.harvard.edu/philg/2010/03/19/groupon-marketing-results/

  2. Greg Sterling says at

    Interesting thanks . . .

  3. Malcolm Lewis says at

    Seems most effective for building awareness for new businesses, or those that have heretofore done a bad job of promoting themselves (eg the helicopter biz). Sounds like Groupon’s customers should cap leads generated through a Groupon campaign (though I imagine Groupon will impose some minimums). Very interesting space. In hindsight, it’s amazing that it didn’t emerge sooner. Kudos to Groupon and others for leading the way.

  4. Greg Sterling says at

    It did about 10 years or more ago with Mercata and other sites; however the model wasn’t quite right and the public wasn’t ready – nor were the local merchants. Timing is everything.

  5. Chad Burgess says at

    It is interesting with all the 2nd tier sites cropping up. One I have used as a buyer is http://www.scoopst.com/ after I ran into the founders in NYC – really nice guys that were in my class at Georgetown, but never knew. My experience with them was great (again though as a user).

    As the space get’s more crowded the battle for SMBs that are actually willing to partake in such acquisition strategies will be fierce.

    What do you think of aggregators i.e. Yipit http://yipit.com/?

  6. Chad Burgess says at

    Looks like Greg wrote about Yipit previously:

    http://gesterling.wordpress.com/2010/02/24/yipit-group-buying-and-smbs/

  7. Greg Sterling says at

    Yep. There’s also TheDealMap and 8Coupons trying to aggregate coupons . . .

  8. Chad Burgess says at

    Yes, I just checked out TheDealMap. I don’t like their (new?) site – too complex with that heat map.

  9. Pat says at

    Not sustainable. Barriers to entry are too little, & now anyone (including nespapers) can participate. Long-term, SMBs will keep a greater share (Groupon & Living Social currently keep 38%).

    Existing publishers obviously have a leg up b/c they don’t have to spend $20-$25 to acquire each additional double-opt-in email.

  10. Greg Sterling says at

    Pat:

    Yes everyone’s doing it. I agree: lots of noise in the segment and that margins will come down over time because of competition. Not so sure you can easily dismiss Groupon however.

    Site is well funded (and is/was profitable I believe). Also there’s an emerging consumer brand.

    Why didn’t newspapers win in local? They should have given their brands and content. But they failed to execute. Same could prove true here.

  11. Pat Lazure says at

    It is fair to say that newspapers have had a difficult time executing, but with companies such as Analog Analytics (which we first learned about from your post: http://gesterling.wordpress.com/2010/03/09/analog-analytics-helps-publishers-challenge-groupon/ ), third-parties are taking the heavy lifting out of the equation.

    I do believe that Groupon will continue to be a major player, but IMHO I foresee massive fall-out amongst the second and third-tier sites.

  12. Greg Sterling says at

    Hey Pat . . . I hope they’re helpful.

  13. Becky Thompson says at

    As a dental office we did a Groupon with a $69 New Patient offer(exam, xrays, cleaning) knowing that we would not make any $$ on the initial visit but hoped to keep them in the practice for future cleanings or restorative work. We also had a cap on the offer of 200. 3 months after the offer we have seen 46 of the 97 sold and had additional production of $2416. We are tracking it and we have email addresses for future contact. We also had an ugly online Hate campaign(Google, Yahoo, Yelp) by one of the Groupon recipients that had some perio needs and didn’t read the fine print of the Groupon. His groupon has be refunded and hopefully the hate is over. Won’t know the true ROI until we see how many come in for another “full price” dental cleaning. Most of the new patients didn’t want to hear that they needed any additional work and were just in it for the deal. I have talked to at least 5 other Groupon business and None of them would do it again even though it brought in a lot of traffic. Perhaps the reason why Groupon’s % of businesses that would do it again is so high is because they ask you to fill out the survey just days after your campaign when the excitement is high. I also had several problems with the Groupon method of business before my campaign started and after it had happened. They can’t tell you when your campaign is going to run even after you gave the final ok 30 days prior and they responded in a forum to the Hate campaign dude saying I had just contacted them…. even though I contacted Groupon as soon as I realized the Hate campaign was going on which was several weeks prior. Hate campaign dude didn’t return any of my phone calls so he obviously didn’t want to resolve the issue. So, as a business and as a dentist, I would not use Groupon again.

  14. Greg Sterling says at

    Becky:

    Thanks for your feedback on the experience. Very interesting. So Groupon did give you the buyers’ email addresses then?

  15. Hearst’s SF Chron into the Groupon Zone says at

    […] previous post on Groupon received a lot of comments. Among the most interesting was one from a dental office that had used […]

  16. SamuelR says at

    Groupon may work for some companies, but it definitely did not work for ours. In our business, all reservations and purchases have to be made online, so we can track sales at a very precise level. We also track trouble tickets and phone calls from customers.

    On average, we have a 43% return rate for customers, and only 3% of customers need to place a phone call or file a trouble ticket. With groupon customers, we had a 14% return rate and a whopping 27% who needed special assistance.

    In the end, Groupon was a disaster for our company. I expect more companies would feel the same if they tracked their customers as closely as we do.

  17. Greg Sterling says at

    SamuelR: Thanks for your comments. What was the margin that Groupon asked from you? 50%?

  18. SamuelR says at

    Yes, the margin was 50%.

  19. Tabitha Walters says at

    Hi Greg,
    A small restaurant chain in Atlanta ran a deal offering $25 in food for $10. The campaign produced approximately 3,000 Groupon sales. When asked about the success of the campaign, the General Manager revealed that Groupon’s fee was 50% of coupon sales, or $15,000 for a one day campaign.
    When asked about Groupon’s claim to “bring tons of new customers to your door” the GM replied that the vast majority of Groupons sold were to current customers that purchased multiple coupons. He bristled at the thought of running another campaign.
    The only way that businesses can benefit from this type of campaign is if they have a system in place to stay plugged in to the Grouponites. http:buyalongwithus.com offers a marketing system that does just that. And with no out of pocket cost to the business.

  20. Greg Sterling says at

    Thanks Tabitha for this “case study.” I’m always interested to hear directly about these SMB owner experiences. 

  21. Is Groupon Good for Dentists? « 972.781.8861 says at

    […] use Groupon again.” That’s a quote from a comment by Debbie Thompson on Screenwerk.com’s post “Groupon, Sure. But Is It Sustainable?” Becky goes on to explain her office’s experience with Groupon, their ROI, and what she’s heard […]

  22. modern dental practice marketing » Blog Archive » Is Groupon Good for Dentists? says at

    […] use Groupon again.” That’s a quote from a comment by Debbie Thompson on Screenwerk.com’s post “Groupon, Sure. But Is It Sustainable?” Becky goes on to explain her office’s experience with Groupon, their ROI, and what she’s heard […]

  23. Dentist in Newton says at

    I don’t think the model is sustainable. apart from the low barriers to entry, Groupon’s take is just too high and easily competed away – 45%, 40%, 35%. Any percentage is profitable, since all the social mediator is doing is posting a page on its website, pretty much.

    Apart from all that, I think soon enough businesses will realize how small their own margins are, and, accordingly, how much work is involved in just covering the 75% discount. For example, if a business has a 15% profit margin and Groupon triples its weekly demand, to make up for the 60% margin loss (25% take vs 85% breakeven), it will take it 3 x 4 = 12 weeks just to recover the discount. Of course, staff will be overworked, ungrateful, and existing customers upset at having overpaid.

  24. Greg Sterling says at

    Logic suggests that the margins won’t survive over time. The model survives but it will necessarily evolve and in many cases become more merchant friendly

  25. Kris A says at

    I agree with greg, the margins will not work out

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