Social Commerce Platform Overview: Groupon – Lucrative or Loss-Leader?

According to Wikipedia, Groupon – a portmanteau derived from “group coupon” – is a daily deal website that features heavily discounted gift certificates usable at local or national companies. The principle is simple, retailers sell in bulk to customers who club together to get wholesale prices (aka group-buy) and the business exchanges margin for volume.

Deals can be offered as deep as 70 to 80 percent off regular prices – with Groupon taking its own cut – and Groupon works with retail, restaurant, hotel, travel, leisure and entertainment chains, as well as independent local merchants – such as dental practices, beauty institutes and spas. In order for a deal to become ‘active’, a certain number of coupons have to be purchased, which is where the idea of ‘group couponing’ comes in.

Essentially, a huge email marketing platform with over 115 million subscribers, customers receive daily emails of Groupon deals on offer, and are rewarded for spreading the word to their friends via Facebook, Twitter and email. To vie for a deal, subscribers enter their name and billing information, but won’t be charged unless enough people sign up that day for the Groupon to be activated.  Whether Groupon counts as true social commerce, whatever that is, as opposed to a traditional email marketing and sales platform, is a moot point.

Background Information

Groupon was founded by then 28 year old Andrew Mason and launched in November 2008 in Chicago, but spread quickly to other major cities such as Boston, New York City and Toronto. Currently, Groupon serves more than 174 markets in North America and has expanded operations overseas to 43 countries across Europe, Asia and South America. Forbes even called Groupon the “fastest growing company ever.”

The company filed for an IPO in June in hopes of raising $510 million. According to Reuters, share prices could escalate above the current range of $16 to $18 a share due to strong demand, which would lead to a valuation of more than $12 billion dollars.

Groupon has spawned an entire industry built around its business model. Copycats have popped up everywhere, including the second largest player in the industry, Living Social,  as well as a host of less well-known sites such as Seize the Deal and Bargain Bee. Even in smaller markets it’s not unusual to see half a dozen different competitors.

Controversy Surrounds Business Value

The value of Groupon to brands and retailers has been called into question, as has its own business model.  Deal sites may be giving way to ‘deal fatigue’; “The novelty of online coupons is wearing off. Some merchants are complaining that they are losing money — and customers– on the deals. And competitors are swarming the marketplace,” stated Business Insider.  Forrester analyst Sucharita Mulpuru went so far as to call it “disaster” and a “shill that’s going to be exposed pretty soon.”

Most of the controversy stems from what I believe to be a misunderstanding of the business proposition. Simply stated, Groupon and its clones offer a unique advertising opportunity. But that’s all it is, advertising.

However, many merchants  – particularly of the small independent variety – see it as a way to gather a quick influx of cash and new customers, not realizing that it’s actually going to cost them money in the short-term. Some businesses have even put themselves at risk by not factoring in the net loss from offering such a high discount, not limiting the number of deals being offered to something manageable, or not taking into consideration the percentage that Groupon takes on top of that – as much as 50 percent of net proceeds.

While these sites promise a raft of new customers – and many deliver on that promise – businesses, especially smaller ones, are not well prepared to do the necessary follow-up to ensure customer retention over the long-term. Also, from a merchant’s standpoint, there is the law of diminishing returns. The first deal may work well, but the second, third and so forth may pull fewer prospects. Add to that the negative effective such deals can have on the image of a brand. Not everyone wants to be thought of as a “discounter.” Wal-mart, they are not.

With so much at stake, why use sites like Groupon, Living Social and others? Murat Goker, CEO of fashion clothing brand APART Style, said in an interview with ecommerce site Practical eCommerce that the idea is “not one of profitability, but is a way to influence the customer to buy the larger voucher value so that APART Style products would take a larger chunk of a customer’s closet.”

That’s the key. Use the coupons as a loss leader to encourage larger purchases. However, many merchants complain that customers who come into the store with coupons in hand spend little more than the cost of the deal itself. It’s a risky proposition and businesses need to be prepared for the inevitable consequences that come as a result of a successful campaign.

Large Brands Using Groupon

Such controversy has not stymied the use of Groupon by large brands. The list is extensive and includes such recognizable names as: Gap, TGI Friday’s, Dunkin’ Donuts, Outback, 1800 Flowers, Discover, Sears, National Football League, and Cirque Du Soleil.

In August 2001, Gap ran a nationwide deal offering $50 worth of apparel for $25. It was the largest such campaign in Groupon’s brief history. By the close of the day, some 441,000 Groupons had been sold for a total of $11 million.

Groupon By the Numbers

Groupon’s financials are very impressive:

• 115 million subscribers as of June 30, 2011;
• In Q1 2011, Groupon earned $644.7 million in revenue;
• Revenue rose 36 percent to $878 million in the second quarter;
• Groupon had 56,781 merchants as customers by the end of Q1 2011;
• The company sold 28.1 million Groupons in Q1 2011;
• In Q1 2011, Groupon reported a $117 million operating loss.

Why Use Groupon

With all the controversy surrounding the business model, CMOs may be ask why bother. There are several reasons:

1. New customers are guaranteed. The numbers above speak for themselves. Since a minimum number of people are required to purchase the deal before it goes live, new customers are guaranteed.
2. No out of pocket costs. Groupon makes its money by taking a portion of each deal – up to 50 percent of net proceeds – so there are no up-front costs to the merchant.
3. Large awareness of deal. Groupon has millions of subscribers in cities across North American and even the world. Email blasts are distributed each day, so consumers are made aware of a deal just by checking their inbox.
4. Opportunities for email acquisition. Part of the benefit to using Groupon is the opportunity for a brand to grow its email database, which can lead to follow-up marketing opportunities.
5. Excitement is generated. Due to the fact deals only last for 24 hours (in most cases), the “limited-time offer” status creates a sense of excitement and anticipation that results in action being taken quickly.

As indicated previously, there are many sites similar to Groupon, but what may make it the preferable option is its sheer enormity of size in terms of subscribers. Not only that, the brand has prominent name recognition (What Google is to search, Groupon is to daily-deal sites.). And, unlike many of its competitors, Groupon is normally only found in major population centers.

Groupon Advertising Options

Groupon’s tour de force is its classic daily deal option, but there is a new offering called Groupon Now, which allows merchants to schedule deals to run whenever they feel the need. It gives brands the opportunity to set up their own store, similar in scope to a Facebook Page, and be in full control of when deals are offered.

Sample Screenshots

Conclusion

Even though my view of Groupon’s business model may be somewhat jaded, I do not wish to throw the baby out with the bathwater. After all, what form of advertising does not come with risk? Such risk is not only the purview of brands either. In spite of expansive growth, an IPO and huge name recognition, there is a chance the business model itself could implode.

Caveat emptor!