The problem with Groupon
I read a blog post recently which points out one of the many flaws in Groupons model. This time for the B2B customer using the platform and its mass impact on the SME marketplace. I suggest you read it before you do this as I speak directly to it and its author..
I think it’s good to look under the bonnet of such a runaway successes. Its consumer proposition is fairly clear but people are right to ask what is the true value for advertisers?
Before I respond I will make clear I am not an economist but I do have experience in high-churn promotion lead industries which is usually a race to the bottom that you describe. However I think that experience does and doesn’t apply in the context of your example and Groupon generally.
Race to the Bottom
There is only a race-to-the-bottom if there is no / to little product differentiation. Then all you have erosion of price in the market place.
Many do make money there at the bottom. You only have to look at insurance and specifically car insurance here in the UK to see how much money has to be spent in the acquisition phase and the annoying lengths they go to be front-of-mind.
However insurance companies are big and very good at math. Your average SME isn’t.
Apply this to local SMEs and I think despite minor erosion price may be the primary deciding factor in the first phase of the purchase life-cycle but will factor less in repeat high-street behaviour where decisions are often more complex including environment, staff, proximity etc.
The best comparable form of online marketing that can shed some light here is affiliate marketing.
In markets where affiliate marketing & CPA (Cost Per Acquisition) play a big factor, if you didn’t know your projected ratio of customer types by; life-value, churn / drop-off rate and true CPA you would find out 6 months later you had actually made a loss from your promotion. Paying too much for too little.
Why because a small savvy few would game the system by deal hunting with no intention to be a repeat customer. These will almost definitely be the early adopters of Groupon. If it makes it more mainstream this effect will diminish with more repeat / less savvy customers. The odds should play out.
Good predictive modelling, math and daily tracking would help you optimise your ROI. HOWEVER I don’t think Groupon will be helping you figure out what happened next.
Even if they wanted to they couldn’t because they can’t serve every SME with an account manager. Google haven’t even got close to this after all these years. AND a self-service dashboard is only relevant to a small number of tech savvy SMEs not the masses.
As you point out they could see noticeably more people through the door but less money in the till at the end of the month. They could sadly assume this to be part of a wider macro-trend, probably economic, or worse for Groupon simply writing it off as a failure. Both would be missing the point.
Missing Factor in your Math
What’s missing in the formula on this blog and in Groupon’s model as a whole is retention and its measurability. Groupon is just one part of the mix and in isolation won’t do itself nor its customers justice.
Here you cover just the one-off basket value but actually the only way you could see the true ROI is by understanding life-value of a customer.
This would allow you to understand the ratio and value of passing trade (who may be gaming the Groupon system) and returning customers allow you to adjust your promotions accordingly.
So this is actually where the Groupon’s business model and importantly valuation ($25 Billion IPO) falls apart along with Four Square and others. Most SMEs and especially independent high-street shops, bars and restaurants can’t and won’t ever do the math here.
For Groupon or any other SME focused B2B model you must be able to develop a service to allow customise to get real and visible value to come anywhere close to realising the valuations flying around at the moment.
Actually I think the targeting of Groupon promotions is rubbish but let’s assume they get it right. To use it well is complex and needs some hand-holding. Second the value actually resides in the gap between promotion acquisition, loyalty and retention.