Friday, April 01, 2011

More On Groupon

I wrote this initial post regarding Groupon early in March. From a marketing perspective, I observed,

"What struck me about this was just how low the barriers to entry may well be in this product/market. I hadn't really given the business a whole lot of thought until I read this piece. Frankly, it just seems to be a tactic- couponing- that no business can afford to do too much of, without suffering serious pricing policy challenges for the long term. There's something about teaching customers to expect discounts that becomes corrosive over time."

My subsequent joining of the service didn't result in any particularly positive added information or experiences.

It was then with some relish I read another Wall Street Journal article last week reinforcing my observations about Groupon in that first linked post.

Specifically, the piece more fully divulged the deal economics. It was worse than I'd imagined. A typical Groupon deal has the retailer giving customers a half-price deal, from which Groupon then receives half of the actual revenue. That means the retailer is giving a 75% discount off of list price for the Groupon customers.

Furthermore, many of the anecdotes related in the article portrayed the couponing services, not necessarily Groupon, as offering deals with fine print or overlooked details which cost the retailers dearly.

Finally, in the last story in the Journal piece, a retailer contrasted her experience with two different online networking-related couponing services. In one, the customers were very narrowly chosen and proved to be repeat customers. In the other, a horde of discount-seeking buyers took the deal, with very few returning for full price products.

About the same time as the article appeared, there was a rash of stories reported on CNBC of various institutional investors and pundits worrying that another internet business bubble is building. Twitter and Groupon are among the businesses cited as having valuations that seem unsubstantiated by long term profitability dynamics.

Groupon and its ilk just aren't businesses which I see as capable of delivering long term consistently superior shareholder returns, when they are public. There seem too few barriers to entry, too little in the way of proprietary, defensible competitive advantages, and an evolving sense by many customers, i.e., retail merchants, that what these services provide is, in the end, not really all that different than conventional couponing, and not necessarily loyal, full-price customers, either.

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