Deemed “the fastest-growing company ever” by Forbes, Groupon’s business model is deceptively simple. Using catchy copy deployed via email and social networks, the company promotes discounts on goods and services from local merchants. These deals usually expire in 24 hours, and require a minimum number of buyers to take hold.
Last December, Groupon reportedly rebuffed Google’s $6-billion buyout offer, earning headlines and some headshakes around the world. In June, the company filed its long awaited S-1 with the Securities and Exchange Commission, signaling its desire to become a publicly-traded company. Its IPO is being valued at $20 billion.
With promises of new repeat customers and increased sales, businesses have flocked to Groupon in droves. But in the aftermath of cars washed, teeth whitened, and yoga classes taught, some merchants have questioned whether they’re getting the raw end of the daily deal.
Back in February, online marketing consultant John Kurien wrote a think piece for Sparksheet predicting that Groupon and its host of competitors were a game-changing opportunity for online retailers. In the piece, Kurien outlines three ways that marketers could leverage these social commerce sites.
In light of all that’s happened since, we decided it was time to check back in and see how Groupon’s partner merchants are faring in these three areas.
Acquiring new customers
In a recent interview with Vanity Fair, Groupon CEO Andrew Mason stressed that it is not the deal itself that benefits merchants; rather, it’s the customer acquisitions from the deal that make it lucrative. In other words, the onus lies on the merchant to engage its new customers, whether it’s through Facebook, Twitter, or plain old email address acquisition.
As part of his ‘anti-Groupon’ series for TechCrunch, guest contributor Rocky Agrawal spotlights Posies Café owner Jessie from Portland, Ore., who nearly bankrupted her business by running a Groupon deal.
In an interview with Agrawal, Jessie acknowledged that aside from running a bad deal (her $13 deal was more than twice her average sale of $5), she also did little to convert her new patrons into regulars.
Agrawal argues that Jessie’s story exemplifies the flaws inherent in Groupon’s merchant information pipeline.
On the flipside, American Apparel praised Groupon’s ability to court new customers. After selling more than 130,000 discounted gift cards via Groupon, the retail giant reportedly signed up roughly 25 percent of new customers to its email list, generating nearly $1 million in surplus revenue.
Once a business has courted a new customer with a discount, Kurien suggests, chances are they will spend more than the amount of the coupon
Restaurant owner Carey Friedman of Grandpa Eddie’s BBQ in Richmond, Virginia, supports this claim. Friedman even went so far as to write a post for TechCrunch on just how positive his Groupon experience was.
Not only did Grandpa Eddie’s Groupon customers spend an average of $12 more than the coupon, but 70 percent of them were new customers. Even better is that 800 of these new customers returned to the restaurant after they had already claimed the coupon.
While this experience was overwhelmingly positive, this New York Times article suggests that running a restaurant deal is still a crapshoot.
Aside from restaurants, businesses of all types have experienced the highs and lows of running a deal. Whatever the business, merchants must have enough sense to navigate Groupon’s terms and methodically calibrate a deal so that it is difficult for customers to spend just the value of the coupon.
To that end, Groupon champion Bob McKeon credits a strong understanding of Groupon’s terms to the success of his photo printing business. If a merchant is unwilling or unable to discount his or her product by 75 percent, he says, running a deal is not the right move.
One of the most enticing aspects of social commerce is the social aspect. After scoring a deal, many people’s first inclination is to share it with friends, either through email or social media. This brings a viral aspect to the deal, and means that no matter how many people sign up, businesses will earn a good deal of exposure.
Harvard professor Benjamin G. Edelman, one of the authors of To Groupon or Not to Groupon: The Profitability of Deep Discounts, names the free publicity factor as one of Groupon’s greatest strengths.
In his TechCrunch post, restaurateur Friedman also points out that his barbecue joint gained new customers from the exposure alone. These were people who didn’t necessarily buy the deal, but who saw the brand name – either on Groupon itself or through social networks – and figured they’d give it a try.
Café owner Michele Casadei Massari also acknowledges the promotional benefits of a Groupon deal, pointing out perhaps its biggest attribute – it’s free.
“Groupon gave us a massive marketing campaign that a small business like ours would never be able to afford,” Massari mentioned in the New York Times piece.
So what does the future hold for Groupon, its subscribers, its merchants and its eventual shareholders?
Considering its ever-mounting number of competitors, it remains to be seen whether people will tire of being constantly bombarded with deal-mails or, conversely, whether Groupon and the like will breed a society of ultra-dealmongers. That is, those consumers who wait only for deals to buy, consequently eroding prices.
One thing’s for sure is that the cacophony of nay-sayers is growing louder and more difficult to ignore in light of the IPO, leaving many critics wondering whether Groupon will regret spurning Google’s billions when it had the chance.