What's the big deal?

Before it was cool to bash Facebook's profitability, Groupon was the hip tech company everyone loved to hate, given its questionable revenue base and easily replicated business model.

Groupon's stock is less than half what it was worth when it made its IPO in November, and despite a recent rally, its prospects remain shaky in this amateur anaylst's opinion. I need look no further than my own inbox, which is daily filled with no less than five deal-of-the-day emails of one variety or another, including Groupon. Recently I used a Groupon to buy a membership to Angie's List, which triggered a subscription to Angie's List own daily deal emails. Among Groupon's other competitors in my inbox: Amazon (offering local deals), Living Social, and the Pittsburgh Post-Gazette's version.

I've purchased deals from Groupon and Living Social, and my experience with one was not substantially different from the other. And therein lies the rub: My satisfaction as a consumer with a daily deal depends almost entirely on the business for which I am purchasing the deal. For example if I buy a Groupon for a restaurant, my experience is determined by the restaurant, just as it would be if I had decided to eat there on a whim. My wife and I had a fantastic experience after using a Groupon to book a room at the Omni Bedford Springs Resort. Our reaction was "We can't wait to come back here and stay again" not "We can't wait to buy another Groupon."

In other words, from what I've gathered, there is no real brand experience offered by any of the major daily deal players, which means that there is no reason for me to choose one over another -- save for the sole variable, which business being promoted in that day's deal. That would seem to be an incentive for companies like Groupon and Living Social to try to strike exclusive arrangements with the businesses that have offered the most popular deals. And that is an incentive for Groupon and the like to steward the businesses that participate, offering them best-practice advice on how to get deal redeemers to repeat as customers.

The challenge for Groupon, and Living Social for that matter, is that they are known only for one thing -- offering daily deals. If they can't differentiate they service they offer from their competitors, than the default reputations of those competitors -- Amazon, Angie's List, your local newspaper -- may just be what sways consumers to purchase those deals instead.

Dr. Groupon and Mr. Hyde

Today we have two different portraits of how Groupon does business: on the one hand, the daily deal pioneer takes pains to ensure its customers -- the people who actually purchase Groupons -- have an engaging and pleasan experience.

On the other hand are the merchants who participate in offering deals who complain that they don't get payment from Groupon fast enough, and that the company uses their money to keep its cash flow going.

The question I ponder upon reading these contrasting accounts is, who are Groupon's real customers: the consumers who buy up the deals they offer, or the businesses that partner with Groupon to provide those deals?

I've discussed before the dynamic between the media, their audience, and their advertisers. As the reader of a newspaper, I am not the true customer: I'm the product whose attention the paper sells to its advertisers, who bear the true cost of publishing the paper. (For the most part, what I pay for a subscription is nominal compared to the cost of production.)

This isn't a perfect analogy for Groupon, since the consumer actually does fork over the cash that pays Groupon's bills. But the merchants are customers, too, because they forgo a large portion of the profits on each sale in exchange for Groupon presumably expanding their businesses' own pool of customers. I don't have any first-hand knowledge, but most accounts I've read indicate that Groupon doesn't do a great job of ensuring that this group of customers -- without whom Groupon would not have a business model -- have a good experience, and want to sign on for more.

Maybe Groupon needs to spend less time on the cheeky prose, and more time on old-fashioned relationship building with the people who have made them what they are.*



*a largely overvalued, unprofitable Internet company.

Let's make a deal

The hits just keep on coming for Groupon, the latest being a study which finds that it and other daily deal sites drag down the reputation of businesses that participate. But assuming such a cause-and-effect relationship does indeed exist, my gut tells me that it's not merely the association with Groupon or Living Social that is damaging the reputation of businesses that offer such deals, but their association with one another.

Let me offer an example. A few weeks ago, Groupon in Pittsburgh offered a deal for a car wash, $5 for a $10 car wash. Now that's a low-rent offer. It may be 50 percent off, but it doesn't seem like much of a bargain since you are only saving $5. And how hard is it to get a good deal on a car wash? I still get those Valu Paks in the mail, and there's usually half a dozen car wash coupons in each one. Not to mention the deals that gas stations offer for on car washes for a fill-up. A car wash, as often as not, is an impulse buy.

So if you are a business owner that is considering whether to offer a deal through Groupon or one of its competitor, is that the kind of business you want to be associated with? And what impression does it leave on consumers? It taints the other deals that Groupon offers.

I realize that this may be a flaw inherent with Groupon's business model. You need to offer a volume of deals that appeal to a wide variety of customers. But if I'm a potential investor, my assumption when I see a deal like the car wash offer is that Groupon must have incredibly low margins, or that they are running out of businesses that want to participate.

Which brings me to another popular criticism of Groupon, which is that Groupon purchasers are one-and-done customers for the businesses that participate. Now some businesses are smart and specifically target past Groupon redeemers, sometimes with less costly incentives for them to patronize the business again in the future. If I worked at Groupon, I'd want to collect these best practices and present them as suggestions to merchants considering the program for the first time. In other words, it is Groupon's best interest to help participating businesses convert daily deal users into steady customers. In fact, it may be the only way that Groupon can make a go of it.  

MASSolutions: Online Daily Deals Bad for Business

Interesting post below. I think the challenge -- and I'm being Captain Obvious here -- which businesses that participate in a daily deal service face is converting first-time customers into regulars. I've heard that Phipps Conservancy in Pittsburgh offered visitors using Groupon a discount on memberships. My wife and I went to Omni Bedford Springs on a Groupon, and they treated us so well that we will happily return and pay full price. It's certainly a risk that not every business can afford to take.

MASSolutions: Online Daily Deals Bad for Business: "The TechCrunch article Why I Want Google Offers and the Entire Daily Deals Business to Die is worth the read for entrepreneurs and business..."