How Groupon Can Save Itself

For a brief moment in the sun, Groupon seemed like it could do no wrong. It was the fastest growing company ever, and soared from zero to billions in valuation seemingly overnight. And now its stock is hurling back to earth, leaving many people (investors, clients, users, etc.) wondering just what went wrong.

There’s going to be a ton of speculation about just what caused the downfall of this fascinating company. To save you the trouble of reading all of the speculation, I’ll just tell you in this brief article what they did wrong and, as a bonus, what they can still do to fix things.

It’s actually pretty simple. When any business operates by putting more focus on getting new customers than on retaining existing customers, it’s going to pay the price of constant churn. I wrote a post for Fast Company on this very topic just over a week ago.

Groupon’s core philosophy and operating premise is based on this inequality between acquisition and retention, and the businesses who use Groupon to promote themselves are finding themselves in worlds of hurt because of it.

Of course, you can only hurt your clients for so long before you begin to suffer as well. Groupon’s stock has plummeted a staggering 77% this year. Sites like The Atlantic are starting to ask how the failure of Groupon would impact the Chicago startup scene, simply assuming that there’s no hope left.

I’m not that pessimistic, however. Below you’ll see a simple prescription that, should Groupon act on it, can turn their company around.

The solution is fairly simple and one nearly every startup needs to pay attention to:

Stop neglecting the critical element of customer retention.

Now, I don’t mean retention for Groupon itself. They’ve got that pretty much sewn up and, with an army of sales staff constantly on the phone, they’re pretty reliably able to get companies to buy in to their premise.

No. What I mean by retention is that they need to put as much focus on helping businesses retain their new customers as they do in attracting those new customers.

Before we go on, though, let me be clear: I think Groupon is one of the greatest customer acquisition tools ever created. There has never been anything that’s been so good at bringing customers through the door of just about any business. With somewhere in the neighborhood of 100,000,000 subscribers on their email list, they can drive feet through the doors like crazy.

But as good as it is at driving those feet through the doors, Groupon is absolutely awful at helping those businesses to get those customers to come back. What Groupon’s customers critically need are the tools, knowledge, and training to retain the customers that came in because of the Groupon offer.

Of course it’s easy to say, "Well, that’s not Groupon’s problem. That’s the merchant’s problem. After all, Groupon just promises to get people through the door. What the merchant does is up to them."

And it’s easy to say, "Come on, we all know that most businesses are terrible at keeping customers, and they don’t understand the simple concept of customer value."

It’s even easier to say, "Pfft, why bother? We know that Groupon buyers are cheap; most won’t ever return and almost none of them will spend more than the face value of their offer when they do come in."

And you know what? To some extent that is true.

In fact, a study conducted at Rice University, shows most of these things to be true. For example:

"Our findings also uncovered a number of red flags regarding the industry as a whole: (1) the relatively low percentages of deal users spending beyond the deal value (35.9%) and returning for a full-price purchase (19.9%) are symptomatic of a structural weakness in the daily deal business model."

But you know what? I don’t blame the merchants.

Now certainly, Groupon cannot ultimately be responsible for retention and repeat buying for every business that uses it. But that doesn’t mean that it can’t provide tools that make those behaviors exponentially more likely.

Maybe it’s the lack of these tools that contribute to the fact that over a third of Groupon’s customers were dissatisfied with their results.

Earlier this year, Groupon announced plans to shake up its customer retention plan. I actually got excited when I read the headlines.

"Finally! It’s about time!" I thought.

But once again they completely missed the boat. Their new "retention-based focus" was all about them—and not about their customers.

Just this past week, Groupon demonstrated its lack of understanding of what its clients truly need by unveiling a new piece of hardware for its merchants to process credit cards at a slight discount. "We’re going to charge you 1.8% to run your customer’s credit cards through our fancy iPhone gizmo when you’re running a Groupon offer—which you’ve also agreed to monumentally discount. In addition, you’ve also agreed to give us up to half of what’s left over."

Huh?

I have clients that have run Groupons. These are clients who’ve worked with me for years and have come to develop the same type of retention-based thinking that I have.

Once we’ve got someone, why would we let them go? Why discriminate and call them cheap before they get in the door? Instead, what if we trust the systems we’ve put in place to actually work? Why not use the tool to welcome new customers, but also do our best to ensure we retain them?

I’ve seen some incredible results with this approach. Of course, it relies on having effective processes and tools to foster retention from the first visit through the customer lifecycle, which is the area where Groupon falls flat on its face, and where most business owners who use Groupons have, sadly, little training or experience.

And really, this is the crux of the issue. Most businesses don’t know how to implement a retention strategy. Most businesses don’t understand the lifetime value of a customer. Most businesses don’t understand the power of building their list and working that list.

Such a missed opportunity.

You can be sure that Groupon understands these things. When its users haven’t used the Groupons they’ve bought, they’ll get emails reminding them to go use them. This helps to ensure they’ll continue buying new ones, and remain viable customers for Groupon. And you can be sure that once a business offers a Groupon, it will be receiving a whole lot of contact and communication from Groupon to get them to be a repeat user.

The problem occurs because Groupon didn’t pass this understanding along to the businesses that were using their services. In effect, Groupon shouted, "Hey, we want to help you grow!" But it left its customers hanging when it came to real growth, which is measured more in retention than in new customer acquisition.

How To Save Groupon

So what can Groupon do to save itself, and actually become the valuable service that it has long promised to be?

Step 1: Provide the Education

When a local restaurant client of my company decided to run a Groupon, the waitstaff were immediately appalled at the idea. "There goes all our tips," were the first comments we heard. The very first step, for us, was to educate the waitstaff about customer relationships, customer experience, and customer lifetime value. A true retention system starts long before the first sale is made. In a corporate setting, it starts when the receptionist answers the phone, and not after the sale is made.

A little blurb about "tipping fairly" does nothing for the people behind in the trenches. They’ve been burned too many times. We had to come up with new ways to ensure that wasn’t the case.

Don’t be fooled in believing that your staff buys into the notion that "a customer is a customer is a customer." Your staff views the person with the coupon much differently than the guy who paid full price and still tipped 25%. We recognized quickly how important the mindset shift would be. We held training sessions. We incentivized the waitstaff to help us build the client database.

Simple stuff.

Step 2: Provide The Support

Your customers don’t need a credit card processing gizmo. Who are we kidding? Be realistic about who you are and what value you provide. The only tools you should provide are the ones that support the growth of your most valuable asset.

New products and new services are essential; they’re one of the main ways for a business to grow. But adding new products and new services should come ONLY when you’ve got the basics worked out. Groupon missed an incredible opportunity to provide the tools and support its clients needed to grow.

A restaurant, for example, could have used something as simple as a mailing list manager. Heck, if you want to give them gizmos, give them something to help with name capture. Put an iPad at the front door of every restaurant. Teach them about loyalty programs. Teach them about customer relationships. Teach them about follow-up and frequency of communication.

At an even more basic level, simply provide them with a list of the name, mailing address, phone number, and email address of everybody who bought the Groupon, and who redeemed it. That way, businesses have a fair shot at engaging these customers after the first sale.

Step 3: End The Hunger Games

Slow the focus on growth, and focus on value.

I recently spent a day with my mentor, Alan Weiss, at his home in Rhode Island. He said something that I've been thinking about a lot lately: "To do great business, you need to do one single thing well—Improve the client’s condition. That’s it. How is the client better off once they've done business with you?"

Where’s the value when I’m presented with three different "70% off brow waxing" offers in an eight-day period? Groupon’s merchants end up competing with each other in a never-ending race to the bottom.

Groupon's merchants find themselves fighting against each other for a piece of the market. On the other side, the customer is never given a chance to pick a new "favorite." Everyone is just another discount.

Alas, the client’s condition is not improved.

Now What?

I’m sure this all sounds almost too simple, but the best businesses are built on these simple ideas. Groupon grew so large on the simple premise that, "We’ll put more people through your door than you know what to do with."

Contrast that with Groupon’s current trajectory…continuing to offer businesses the dubious honor of having more and more customers pile in to take advantage of a discount and then never return. It’s nothing short of a ticking time bomb destined to explode.

Groupon, I’m begging you: Show your clients how to grow. Don’t take the cash and run. It worked for a while, but has cost you dearly in the end.

Will Groupon make the changes it needs to survive? Can Groupon save itself before it’s too late? I can’t wait to see.

—Noah Fleming is a strategic marketing consultant specializing in entrepreneurial growth, community building, client loyalty, and customer retention. Since 2005, Noah has worked with over 500 entrepreneurs and business owners. Follow him on Twitter @noahfleming.

A special thanks to my friend and colleague, Shawn Veltman, for his wisdom and expertise with this article.

[Image: Flickr user Evan Leeson]

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14 Comments

  • Brooks Lambert

    A key point missing from this post is a Forester Study that reported that 71% of Daily Deal purchases are from existing customers, meaning that businesses are paying a commission on top of the required discount just to get their customers back in the door. To me that seems like it's sucking local dollars out of the community with little upside. Everyone loves a deal, and we all want to feel special. There's got to be a better way for SMBs to engage their customers directly without giving away the store and cutting out the big commissions.

  • Noah Fleming

    Thanks Brooks. I appreciate you pointing me towards the Forester Study. 
    There are better ways.

  • MikeO

    Constant Contact's SaveLocal deal tool is based entirely on the premise that customer loyalty and retention are the true lasting levers to acquiring your next best customer.  Oh, and it's way more affordable and flexible for merchants.

  • Isabel Smith

    I'm gagging on groupon -- I can't get off their e-mailing list -- I have tried!

  • Patlim74

    sorry. but a bunch of theories.

    groupon had a great idea that they acted upon. an idea that was not unique and could be duplicated easily. they grew too fast and they sucked at fuilfilling their promises to customers. thus no customer loyalty. no different from 1001 other startups and companies going through fast growth.

  • Of course you can. I totally agree that companies that are rapidly expanding can concurrently build customer loyalty. In fact, when Groupon was in its early explosive growth phase, it had access to a lot of financial resources and talents that could help it grow fast AND build a loyal customer base. It's never too late. While it has been about two years since this article was written, I still think that your suggestions that Groupon could turn the game around by partnering with companies to retain customer are still valid today.

  • hedgehottie

    Groupon should  explore partnership with customer retention and digital marketing giant GMB Direct (gmbdirect.com) who last year successfully launched XVIO -(xvio.com) specializing in daily deal structure for the business owner.  They offer total support and resources, including, design, call center, supplementary target marketing, and more to help the small business maximize the daily deal by enhancing the presentation and supporting the massive inflow.  Livingsocial had recently moved in to this arena but are they spreading thin? In my opinion these sites should focus on building up rather than out, where others are already specialist. ;)

  • Troydloop

    I'm a business owner who has successfully used groupon and HAVE MOVED ON.
    I truly hope Mr. Mason and crew have read Mr. Flemings articles...he's bang on!
    Maybe Mr. Fleming should be Groupon's next best deal.

  • Stan Bradbury

    Amen - the answer to their problems is painfully obvious. I have been trying to get Groupon to implement an opt-in marketing platform for two years and heard nothing but crickets.  Executives who have passed on the idea include: David Katz, David Jesse, Bo Hurd, Nick Cioffi, Jeff Holden, Mihi Shah, Fabio Sisinni, Gene Alston and Michael Shim.  Not at all surprising they are going down in flames.

  • Alan Greenwald

    Great article and solution to Groupon's dilemma. Groupon has been leapfrogging their Daily Deals since the viral buying spree of Online Discounts began. Groupon has been very lucky  due to the economy, social networking rave, with the power of the Internet is why Groupon took off like a rocket. The angel investors of course made the dream reality for Groupon. I think Groupon has a big uphill battle sustaining as the Daily Deal frenzy trend will eventually fade and settle into oblivion. Groupon must redefine which will not be easy if he doesn't sink first.

  • Mktg Science Group

    Education is the key. Businesses need to understand that using Groupon is like fishing with a large net - when most businesses are used to using a rod & reel.

  • Great analogy, Mktg Science Group. I'd argue that Groupon play a crucial role in the early customer acquisition phase. I have yet to see another company that's able to successfully bring in as many customers as a Groupon deal. The main issue that some Groupon merchants face is their inability to follow up with their customers after running the promotion. That's when other companies - potentially startups - will need to come in, and create a platform that assists Groupon merchants with customer retention strategy formulation and implementation.