Recently on my Social Media Facebook page (follow Contiguity.co 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.