Thoughts on Groupon

Groupon’s tremendous success in the local market has really gotten me thinking.  I think about it because five years ago we had a project to build a coalition of local merchants and it failed.

Why is Groupon so successful?  They effectively removed the barriers to getting local merchants to spend marketing dollars.

Top Barrier:        Getting local merchants to spend money.

Solution:             They turned this one on its head!!  They are going to give you money.   GENIUS

Work Barrier:     Local Merchant has to do work to execute promotion

Solution:            They do all the work, copywriting, layout, offer content, etc.

People Barrier:  You need to get a sizable group of consumers

Solution:            Make it so it’s a group, and leverage off the last promotion for the next

Sales Barrier:      You really have to go out and reach local merchants they don’t buy on their own

Solution:             Have a direct sales staff

They executed flawlessly on all of these and then raised a ton of money to replicate.  BAM!! Groupon is the fastest company to a $5 Billion valuation ever.  Well done!  It’s like Clipper Magazine, ValPack, and the Entertainment Book hopped up on uppers and steroids.

However there are things I don’t understand:

The merchant only gets 25% of the offer, Groupon gets 25%.  The hard part is delivering the service, building the site is relatively easy.  For an example think of Newspapers Classifieds and Craigslist.  Sky high margins are a blessing and a curse, if somebody can come in and replicate you, prices drive to zero.  In this case the merchant takes zero to negative gross margin (loses money on each Groupon sold) and Groupon takes probably 90% margins.  I’m all for making money, but long term, history has shown these things even out.  Internet time makes long term measured in months.

I don’t really understand why merchants would do this long term.  Once or twice….I get it and maybe that’s all they need to sustain their momentum.  I will say this, what we found in our experience with local merchants was that:

20% of merchants understand their value proposition, deliver a unique experience, know what they are doing, and when it comes to marketing will tell you straight off to screw off, they know what they are doing, and think their other small competitors are idiots.  They are right.  Example: awesome local restaurant that always has a wait list.

60% of merchants fumble along, they do ok, they are small businesses because that is what they should be.  They rely on the fact that they are local for business, they are unremarkable, they’ll listen, and they’ll try something once if they think it can bring them money.  Top third of these guys are just solid business, bottom third are close to moving into the last quintile.  Think of a local pub that plates up food from Sysco.

20% are truly idiots.  They are desperate.   They’ll do anything for sales, even if long term it drives them into the ground….they know they’re going there anyway, they have nothing to lose.

I tend to think the mix of the merchants is participating are falling into the bottom of the quintiles, think of the salon offers.

However, there are some really smart, cool businesses that are using Groupon.  I cannot deny that fact, and that brings me to the last piece I don’t understand. If you have high margins as a local business you are delivering a unique experience to people that are not price sensitive.  If you are delivering a unique experience the last thing you want to do is clog up your system to downgrade the experience, and get people that are inherently cheap, they just don’t convert.  Its what restaurant owners would tell me what happened when they gave a BOGO in Clipper Magazine.  Great, we filled the place with people that ordered only the BOGO, only wanted water, and tipped on the price of one meal.

Let me take one example.  I am going to pick on one of the smartest guys, whose blog I read: Philip Greenspun.  Let me first say he is much smarter than me.

He did a Groupon selling a helicopter lesson for $69 instead of $225.  He had 2600 people buy.  He said he had a bunch of other people call and ask for the $69 price and all refused the $225 price.

I’m sorry but as somebody that completed instrument rated fixed wing pilot rating (much cheaper than rotor) for pleasure to be able to afford to complete training, $225 represents the amount of money your maid finds in your pocket lint.  I specifically am excluding somebody who wants to pursue an aviation career because they are going to find you.

At $35 he is definitely losing money just spinning the rotors.  Let’s say only 1300 complete the course (and that should say something there, when breakage is over 20% you can’t keep filling the funnel at the top) how many are going to continue?  I have to think less than a handful……that is a man year worth of labor at least that is going for free (luckily instructors want to build time more than get paid)along with losing money on every flight.

I would be providing a free course to groups that could afford it.  Have it as an experience for the group.  Groups I would suggest would be EO (CEO’s), Bar (lawyers), Doctor’s (do it through their drug reps), and I’d try and get wealth managers to bring out their clientele.

Last thought:  Almost all the reactions you hear from merchants are that it was great, awesome.  You can find some that say it really sucked, but most say it was a great experience.  So how do I reconcile this piece of information?  First I would say the most objective study is this one from Rice: http://www.ruf.rice.edu/~dholakia/Groupon%20Effectiveness%20Study,%20Sep%2028%202010.pdf

Forty percent say they would not do it again.  They are a subscription (repeat business is key) business, you have to keep the funnel full, that is right on the line of failure.  Eighty percent and above, you are going to do well.  Sixty percent and below you are in trouble.  In between is the middle ground.  Secondly, I would say there is some bias to say things are going well.  An analogy would be asking people at a trade show how it is going.   Even if it is the worst show ever, a total vendor fest, no company publicly says it sucks for fear it shows a weakness.  Everybody else is saying its great, you must think it sucks because you suck.

Update:

I talked with my wife who is a Nurse Practioner and did some estatian (boxtox, facials, peels, etc) on the side.  She thought this would be a great service.  It solved some major pain points for her.  The two pain points were having a full schedule and getting people to pay upfront.  A big problem for her was having a thin schedule and then having people no show.  The result was her waiting around for a full day doing nothing only to serve a few patients.

If she had 500 people buy a Groupon and she could schedule 40 people a day, and not care if you no-showed because she already had your money.  She would gladly do that rather than count on 10 full paying people to show up.

Interesting take which shows there always are un-thought of use cases.   She said the materials costs were minimal, and she would rather be working than sitting.  She wouldn’t care if her friend Susie brought in 10 people with the Groupon Coupon…10 new people to get to know her.  She thought the half off coupon meant people would understand they had to pay upfront and lose if they did a no show.  When people pay full price they expect to come in whenever they wanted.  She said if she retailed less than $100 for a facial people would think it was a crappy one, when in reality the marginal cost was 50 cents.  Sure, she would only get half of the half off special, but as she put it, Groupon did all the promotions, all the billings, and was the one that could be blamed for the terms and conditions (especially the pre-payment)

Update to the update:

For the special case companies have sprung up, most notably www.lifebooker.com which handles the salon case.  Also there literally thousands of competitors and the 50% of the 50% reportedly has gone down drastically.  As I said internet time is measured in months.

  • http://www.aaronklein.com/ Aaron Klein

    Excellent analysis. You covered all of the ground I was pondering about Groupon and then some…

    Ultimately the killer asset is now relationships with local businesses…but they need some other products to offer through that channel. If they don’t want to get those products by being acquired, fine – but I doubt this can be the end of the line.

  • Anonymous

    Thanks for the reply….see my update. It is interesting that for one use case: businesses where you need a full schedule and where customers can no-show, it seems to be a good case.

  • Anonymous

    Another interesting point is that the relationships with local businesses was not built with technology it was built by a staff of 3,000.

    So in an intersting twist one could argue that it is not a technology business as much as a sales channel business.

  • http://www.aaronklein.com/ Aaron Klein

    Yep. Groupon is definitely useful and the use case your wife laid out is a good one. It will work better for low-marginal cost businesses than it will for restaurants, etc.

    Google clearly wanted the 3,000 salespeople times X local business relationships to sell other products through that channel (place pages, maps placement, etc.).

    It may not be a pure tech play but if the 3,000 salespeople (hard to replicate) is what makes it a defensible model than kudos to them on $10 billion or wherever they think they’re going.