Why Groupon And It's Clones Won't Last

Group buying attracts the wrong customer—not only the ones who won't tip, but the ones who won't come back, the ones who can't afford the product at full price, the ones who already know the business and would come anyway but now get half off.

My experience with Groupon is typical. I signed up to try it out, and many offers that didn't interest me got deleted from my email. Then one day I saw the offer I couldn't refuse. I don't eat meat, and don't cook it at home, but when my neighborhood butcher offered a Groupon for $40 worth of beef at $20 I went. I bought dog bones for my two canine housemates.

My behavior made me wonder what the result of the Groupon for the butcher, so I returned for dog bones at the regular price and found out I wasn't alone: many people had gone only for the dog bones. The upside: he now sells more dog bones than human food. The downside? That's the waste part of the cow. He found Groupon useless but enlightening. It sent him the dog bone business that has now driven out the beef business.

One more "meaty" example: Don & Charlie's Ribs in Scottsdale Arizona has an early bird special called "6 before 6" for neighborhood seniors. The restaurant chooses six items from the menu and sells them for half price between 4-6 pm.

Who goes? Seniors who don't drink, tip, or have dessert. I can't eat dinner at 5 PM, can you? But the restaurant has to be open, so for Don & Charlie's, it's a way of filling tables when they have to be staffed anyway. Even if they make less profit it's a good deal. And those seniors go back every week.

Restaurants know the difference between a customer who will never come back and a customer who comes for the bargains Neither is the best customer. but you need the second, and not the first. The first is useful only to get rid of inventory that doesn't move. The second is a way of maximizing the return on a fixed cost (rent, staff, utilities).

I guarantee the group on sales people don't educate the small businessmen on this. But believe me, after one experiment with a Groupon, they figure it out. Not many kinds of businesses can afford a regular practice of offering 50% off. I guarantee the group buying people don't educate the small businessmen on this. But believe me, after one experiment with a Groupon, they figure it out. Not many kinds of businesses can afford a regular practice of Groupon.

I predict that the following will happen:

  1. local businesses will be confronted by a confusing array of group buying "marketing" opportunities
  2. consumers will begin assigning the daily emails to a folder they never check
  3. salespeople on the ground will have a more and more difficult time meeting their goals
  4. the companies will have enormous churn and management/training issues with the sales force
  5. there will be an implosion heard around the world as the mergers and acquisitions happen in an effort to buy market share.

And at that point, the founders of Groupon need to have made their exit. Groupon was a phenomenon of the Recession, not of the Recovery.

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  • Scott @ Internet Exposure

    Excellent article, Francine. I have been thinking a good deal about the deal-hunting mentality, and it's affect on purchasing behavior.

    I'm one of those types that scours the net for deals constantly, and when I come across something that is worthwhile, I usually jump on it - but I always take my time. For example, I needed a tuneup for my bicycle. I got an email from Groupon about a deal - 50% off bike tuneups. It was from a new shop in my area, that's quite out of the way, and one that I'd probably never go to again. But, I bought it, got my bike tuned up for 50% off, and I can't even remember the name of the place.

    Plus, with the market becoming so saturated with Groupon competitors, it's becoming a noisy place to do business, and Groupon is going to have to find a way to differentiate from all the others.

    I'm still in shock that they turned down Google's offer for $6B - hope that doesn't come around to bite them in the tush.

  • bruce crews

    I mostly agree with the article, Francine. At some point the over saturation of daily deals will leave the consumer overwhelmed and moving on to the next, new shiny thing. However, as a casual purchaser of the deals, I will add that I have become loyal to two new restaurants because of these deals. Coupled with the fact that for most deals now a 15 or 18% tip is included, and many of the deals I purchase require an additional couple to tag along, the restaurants are generating a decent return on their promotion.

    You are right though - more foot traffic does not equal success.