Why Groupon’s Deal Sucks for Groupon – The Achilles Heel of Margin


Sifting through the huzzah and the social hollerbaloo about Groupon’s IPO, I realize a simple fact. Everyone is trying to explain why Daily Deals are bad for merchants and consumers, which might be true.

Any performance marketer with any experience will know that Daily Deals suck for Groupon because of their margins, and that is the real weakness here. It is why this company can’t even make it up in volume, to follow the old retail lie. The model is broken…

Just reading Groupon is Effectively Insolvent, and you see that the burn rate here is driven by $290 million in payments due to merchants, which are paid every 60 days.

Take that off the board and Groupon becomes profitable, but instead you have a model that is trying to act like Google – charging businesses 20-25%, but faced with a much more limited, less scalable market than clicks, and way more support and sales issues.

Here’s why Groupon’s Deals Don’t Work For Groupon

1. Deals Draw People Who Are Loyal to Price, not the Business

This is the obvious one, and why I hate all those small businesses complaining.  The deals/rewards/coupon space is notorious for being filled with people who know how to game the system, who are loyal only to the recent deal, and are not there to be long term customers.

You can turn Deals into a decent lead generator, if you know what that means. Deals drive traffic that really hasn’t paid, because you are comping the first visit. If you cannot turn that into a repeat visit, and do that when they are there, not later, you are toast.

Contrary to popular belief, this is not just driven by the recession. Deals always work in any economy because people want the illusion that they are saving money.  That’s why most successful Deals have been the result of discounting a very high “retail” price that no sane person will pay, and that practice is being limited.

So now you have the true Deal, which drives crap traffic. It does not drive quality, except maybe for spas and hair salons so far. And that’s just the way Deals go, have gone, and will go, it’s the nature of the beast.

2. Groupon Deals draw businesses who believe that these will all be new customers, and ignore the Deal reality.

They really think people will just come in, love them, and on their own accord, come back again and again. Then a bunch of their same customers come in for a Deal and they complain.

Best of all, they talk themselves into getting paid 60 days later from Groupon for that Deal, for their 25%! Why don’t they apply that to the discount they give the customer, ie take nothing and apply what they would get paid to what the customer pays for the Deal?

That would cut a 50% deal into 25% (and hold on, because this 25% is what really makes the deal suck for Groupon).

Why don’t these businesses gather email addresses, encourage visitors to refer friends via social and mobile, and have a sales process to take that expensive initial customer and convert them to long term? Because they think people will just do it themselves, and they just don’t get it.

Getting some check 60 days later is just dumb; costs come immediately and at some point, if Groupon keeps burning through money, that is the first payment that will be delayed…

Building in a conversion process is key here, though honestly in the end a Groupon Deal probably costs as much as placing ads and driving traffic. Advertising is a tough game, and that’s what a Groupon Deal is…an ad, not a delivery of an excellent customer.

And if I hear one more person quote that anecdotal Rice University study saying that 40% plus of businesses won’t use Groupon, look at the number of businesses in the study; 150.  It’s not statistically significant by a long shot, and used far too often by lazy journalists.

I can easily get small businesses to complain about any form of advertising, and until someone does an exhaustive study, this is just evidence of lack of understanding of advertising in general.

Most small businesses do not understand nor use advertising appropriately and they all complain. Bank on it.

3. Deals Win When You Don’t Use Them, and There’s Not Enough Leakage:

Groupon's Deal gets customers to flock, and that's the only one who wins.

Groupon's Deals Work for The Customer Only

 

After all, there are only so many deals, and in this business model the leakage – defined as those who buy Groupons and do not use them – only at 15-30% according to estimates I’ve read.

For offline coupons, that percentage is often more like 75%, and even at least 50% for companies that make money. The fact that they are being redeemed leads to the problem, because the deals business works (just like rewards and coupons) because we don’t tend to use them.

Deals are really virtual currency, and when you turn it into real currency, the system falls apart. To stop this, Groupon has to create a deal that works for itself as well as the merchants, and judging from the lack of confidence among it’s executives, I don’t get the sense that it is doing that.

Unfortunately people are really using this Groupon Deal and that’s part of what is killing them.

4. Groupon Needs to Earn 50%, not 25%: The Payment to Merchants Is What Ruins this for Groupon AND the Merchant

The simple performance marketing secret is, you need to earn enough margin to pay for your business. And unless you have a high tech company that can get away with making 25% per sale with a digital business, you have a problem. And Groupon drives real traffic to the real world, which brings real world costs into play.

Groupon has a sales force, has support issues with merchants, customer support, and cost for building their email list. They have to build technology and infrastructure to go mobile.

The 25% they earn is a joke, and should be 50%; the other 50% goes to the customer.  Look at it now and the $290 million they owe merchants is what keeps them from being profitable, plain and simple.

No they cannot turn the model around, but it is flawed, and that flaw will kill them. It doesn’t scale, in fact it gets worst as the Ponzi scheme of payments will fall apart.

Again this is not new for performance marketers, who have seen these kinds of companies come and go over the past 15 years.

The Bad Deal Meltdown Model;

Postpone Payment And Run Away When It

Finally Becomes Due

(Or Go IPO to Delay the Inevitable)

Groupon reminds me of alot of performance marketing companies I have know over the years, with a seemingly good deal and people making money.

Then all of a sudden, they drop off the map, don’t pay their affiliate partners, and everyone suddenly hates them. Given that $290 million of the $520 million liability Groupon holds is payment to merchants, it just strikes me that the problem with Groupon isn’t daily deals, or that it’s driven by email (which all 2.0ers love to hate and don’t understand it’s transactional power), or that customers are loyal to deals, not to the business they visit.

Anyone in the coupons/deals/rewards space knows the loyalty is only to the next deal, the next advantage, and that usually a bunch of smaller companies build the client base, and bigger companies use these to distribute their deals.

In trying to be a BIG Deal company, they are running into the lack of scalability in that business. You don’t get to billions by paying other people to send customers to themselves, unless you earn a bigger piece of the pie for connecting the two.

Groupon’s upcoming IPO has set up a storm of attacks on its business model, for good reason. It’s losing money, it’s founders took out money when they got a funding round (and I mean alot of money), and no one knows if this model just won’t be replicated by Amazon, Google, or someone else, because deals are not exactly rocket science.

Forget all of this and look at the fundamental flaw; the deal sucks for Groupon, because it pays itself only 25%. It’s not likely to change that and doesn’t have the financial coffers to fund the questionable acquisition.

I love that Groupon has succeeded, through old school email, and I shudder to think what will happen when they cannot pay their merchants. I’ve heard it in affiliate marketing, and I can hear it here…

If the check does not get sent, you are not a business. Playing the 60 day float is keeping Groupon afloat, but will an IPO really fund this losing model?

If I was a Groupon merchant, the words “the check is in the mail” would scare me, more than the lousy customers who come and go.