Groupon’s business value proposition & Robert Kennedy College

Groupon Value Proposition

Recently on my Social Media Facebook page (follow here) a follower posted a question about the value of Groupon to the consumer. I did a little research to see what the value proposition Groupon poses to the client as well as the inherent value they provide to the business. The end result for the consumer and the end result for the business are diametrically opposed, or are they? Since I have finished up my MBA Financial Management Module at Robert Kennedy College, the administrators for the University of Cumbria in England, I will do an assessment of the business proposition.

First, we need to understand Groupon’s business plan. The plan is fairly simple. The Value proposition from Groupon is to contract with a local business to offer a discounted deal, advertise the offer to the public, collect the money from the public, cut a check to the business for their portion and let business begin. The offering to the public is a limited time offering with an expiration date.

Customer Perspective: The perceived return on investment from the client is high. Groupon expects each business to offer a 50% off deal to the consumer who will purchase the certificate. The value of the money spent provides a perceived high Net Present Value. I have actually purchased one such certificate to a local restaurant, I will tell you my perspective later.

Business Perspective: The 50% off Groupon encourages the business to sponsor is only a small part of the sacrifice each business makes to contract with Groupon. Of the remaining revenue of 50%, the business only receives 50% of the revenue. Example if the certificate’s face value is $100, the certificate is sold to the customer at $50. Groupon receives $25 for their services and the business receives $25 of revenue for a sacrifice of $100. A financial loss in this situation is completely inevitable, the hope is for the loss to remain isolated and the customer will thoroughly enjoy the services and will return as loyal customers paying full price.

Results: The financial results

are not hard to predict. Groupon advertises an unbelievable deal, consumers snatch up as many certificates at a reduced rate as they can and the business is overwhelmed with negative ROI. I spoke with one business owner who owns a local salon and spa and he shared with me the negative impact of the experience which I will list below:

  • Negative cash flow – not hard to predict
  • Overwhelmed with new customers, he sold 1100 certificates before he cut off sales
  • Some customers purchased more than 1 certificate each
  • The time frame to honor the certificates was unrealistic
  • The certificate holders rudely overwhelmed the loyal customers who were paying full price
  • Staff could not keep up with the demands of the certificate holders and the full price paying clients cowered under the pressure – some loyal customers left all togetehr
  • Demand temporarily outweighed supply in all areas of business
  • To make up for negative ROI, Staff was asked to reduce their commissions when tending certificate holders
  • The reduced commissions, lowered the incentive of the staff to perform at peak levels
  • Certificate holders, for the most part, did not turn into loyal customers

ROI: In the end the business did not reach the results they were seeking nor did the consumer experience the level of satisfaction they perceived they had purchased.

My personal experience with Groupon was average, but not something I would like to repeat. I purchased a certificate to a new local restaurant which I had wanted to try for some time. When we arrived and shared our intention to use a certificated the entire experience took a noticeable turn. The service level dropped and the quality of the food was subpar. We never returned. Shortly after, the restaurant closed.

So, which businesses really use Groupon? Some good and healthy businesses will use Groupon to stimulate business, but the question is why? Why would a business sacrifice 75% plus of their revenue, sacrifice relationships with good paying customers and sacrifice staff moral for a quick gamble on exposure? I cannot see established businesses with a loyal clientele entertaining Groupon more than one time. The lighting speed with which the certificate holders arrive at your business can overwhelm any preparation. In my perception the businesses attracted to Groupon would be new businesses looking for exposure or businesses poorly managed needing quick revenue. I cannot see a healthy business who consistently performs in the market place making the value proposition Groupon has to offer a good part of a profitable business. I am willing to be proven wrong if you have the data.

In the end, you get what you pay for. Groupon offers a significant perceived value to the consumer and the holy grail of new loyal customers to business, but reality betrays perception and fails to achieve either.

2 thoughts on “Groupon’s business value proposition & Robert Kennedy College

  1. That’s a very interesting take on the Groupon model. For a business owner who is considering running a traditional advertisement, Groupon is a very effective alternative to traditional print/radio adds. But it must be thought of as pay-per-performance advertising. If they don’t have an advertising budget, or are struggling to pay bills, this is no more a smart option than running an add in Style for $3,000. The difference is that the business only pays (aka takes a loss) if their add is effective (vouchers are purchased). Thus, there is less risk than a print/radio advertisement. Also, being promoted by Groupon increases website traffic (during the promotion) by an average of 40%. Similar to traditional advertising, if you take the right approach, it can be very effective.

    • Brooke,
      Thanks so much for your contribution to this conversation. I find that you made some valid points. One great point is the Groupon style selling proposition and the potential benefits that should arise from the execution of the plan. All very interesting. However, I think there are several realities faced when you contract with a Groupon style service.
      Reality #1: Will the volume of certificates allow the business to adequately serve the customer?
      Reality #2: Will the business be able to convert the certificate holder into a loyal customer and receive the benefits of a long term relationship?
      In the non-scientific study I performed observing 3 separate experiences, one of which was my own, the value to the business was not apparent and the end perceived value to the consumer was not evident either.
      I don’t argue the number of hits on a website, the excitement or the potential. As a consumer, who who wouldn’t want a product or service for 1/2 off? In listening to your pitch, I will concede how there may be value in the proposition if a business were to be able to execute correctly. In all fairness, the three businesses I observed did show signs of flaws in their approach to execution. These flaws were magnified by the exponential amount of new customers/certificate holders. Whose fault? We could have MBA students deliver a thesis on this question. No matter what we say if the business owner wishes to take that risk, so be it.
      Keeping it all in perspective, the bottom line is still the same. Businesses simply cannot function without customers or on a negative ROI. The three experiences I used in my non-scientific study all showed negative ROI and the loss of current customers — a double negative.
      Solutions: You seem to be intimately involved with this style of marketing, what are your thoughts on how a business could use Groupon style marketing and retain more customers? I’m listening and ready to learn from successful experiences.

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