A Shopper’s Take: What Retailers Can Learn From Groupon’s Shortcomings

Posted: December 21, 2010 by FMstereo in Business Models, e-commerce

Posted By: Stephanie Reese in The eMarketer Blog

Groupon’s quick success has spawned dozens of copycat daily deal sites, but will these sites continue to flourish? Only if marketers become savvier to the new breed of consumer in today’s digital world.

From a consumer point of view, the problems with the Groupon model are these:

Problem #1: Deals aren’t targeted enough. Groupon subscribers are offered great local deals, but “local” doesn’t always equal “relevant.” A recent visit displayed discounts on everything from jewelry to indie film club subscriptions to colon hydrotherapy sessions. (And let’s face it, some things, like sushi and Botox, just shouldn’t be purchased at a discounted price.)

Niche deal sites—like Plum District for moms and Scoutmob for hipsters—seek to solve this problem, though right off the bat they’re limited by scale.

Although it spurned Google’s acquisition offer, Groupon is taking a page from Google’s do-it-yourself ad-placement playbook in the next iteration it is rolling out. Groupon Stores will allow local merchants to set up deals for themselves without going through a Groupon salesperson. Customers will have the option to follow stores they like, and be alerted to new deals as they’re posted, which if used will make the process more customizable and the ads—potentially—more relevant.

Problem #2: Merchants lose control. Do marketers really need Groupon to blast their own deeply discounted offers (especially when they’re being charged a commission to do so)? Furthermore, wouldn’t they prefer to have control over the deal than cede it to a third party?

Gap, for example, has received lots of buzz as Groupon’s first national partner. While most observers saw the Gap deal as a success, Augustine Fou, chief digital officer at Omnicom’s Healthcare Consultancy Group, said in a Mashable post that the Gap effort “is a prime example of when NOT to use Groupon.” He said that the more press Gap got the more money they lost, estimating that the retailer was out at least $7.5 million from the campaign. Unless that money is considered part of an advertising budget, it’s a dingy deal for big-name national stores.

Once large retailers figure out how to do it, there’s nothing to stop them from hosting their own daily deals. Neiman Marcus, for example, has already followed in flash sales site Gilt Groupe’s footsteps by launching its own branded “Midday Dash” sales. Local retailers with smaller marketing muscles, on the other hand, might find a one-time Groupon run worthwhile for drawing in new customers.

Problem #3: It goes against consumers’ natural instincts. What’s amazing about Groupon is that in a world where consumers have become accustomed to instant gratification, they’ve managed to get people to pay for goods and services they might not cash in on for months—or (as was the case with a spray tan I purchased on a whim) for goods they’ll never remember to use.

Although merchants benefit from this arrangement because they don’t actually pay for marketing until they get a customer in the door, how many times can we expect consumers to take a gamble with their money?

To make their offers more enticing for customers, some deal-of-the-day sites have shied away from the group-buying model. Instead of promising retailers a certain return, they give subscribers a passcode that will get them a discount at the time of check out, or when the restaurant bill is paid.

My favorite example of this kind is BlackboardEats, which sends coupon codes to users for 30% off to a pretty fantastic range of restaurants. No payment up front, no buyer’s remorse and a friendly reminder of the specials you’ve acquired.

Plus, BlackboardEats only features restaurants selected by their staff of experienced food editors, giving it a more exclusive feel. Wonderful for diners—not so wonderful for restaurants when the discounts cut into their slim profit margins (although BlackboardEats, unlike Groupon, doesn’t charge restaurants a fee to participate).

Problem #4: Whether merchants will see return customers is questionable. The success of Groupon tells us that consumers are willing to try new products and brands, but these types of deal sites don’t necessarily encourage brand loyalty. After a consumer has received a great deal on flowers from one vendor, will they return to that same vendor, or look for a great deal on flowers from a vendor of seemingly equal quality?

According to Crain’s New York Business, some restaurateurs are convinced daily deal sites don’t work in their favor. “A lot of them are like mosquitoes on your back,” said Tracy Nieporent, a partner in Myriad Restaurant Group. “They suck your blood and give you a little sting, and they all perceive us as a way to make money.”

And it isn’t only restaurant businesses that are displeased. In fact, in a study done by Rice University, 40% of merchants said they wouldn’t run a Groupon deal again. (However, Groupon CEO Andrew Masonmaintains that 97% of participants want to be featured on the site again.)

For merchants whose goal is simply to bring in large numbers of new customers, Groupon-like deals work well. Scott Bankey, co-owner of the New York restaurant Nolita House can vouch for this. His “Buy $20 dollars worth of food for $10” deal with Groupon exceeded his expectations. His restaurant saw increased exposure through voucher-holders who brought friends, and he got to pocket the money from voucher-holders who didn’t show up at all, he told Crain’s.

Will Bankey participate again? Maybe, but he’s already begun running his own $10-for-$20 promotions, so what’s the point?

Problem #5: Groupon cheapens brands. Even if a consumer does become a fan of a product after purchasing it from a daily deal site, how willing will they be to pay full price for the jeans or gym membership the next time around? As Crain’s points out, Groupon feeds this kind of deal addiction, and as a result consumers will be unlikely to go where they can’t get a good deal.

That is, unless a brand has maintained prestige by never offering mass deep discounts in the first place.

The opportunity for marketers. As consumers become accustomed to never paying full price, merchants and retailers will need to react, without cheapening their brands in the mean time. Maintaining exceptional quality and providing great customer service will always help develop true brand advocates.

But smart brands that want to compete with Groupon will pay more attention to their returning clientele, and offer these best customers more generous and exclusive rewards. “You want first shot at deeply discounted unsold inventory? It’s all yours. A new coupon with every purchase? Here, have two. By the way, have you heard about our friends and family sale? Just keep the tweets coming, please.”

The bottom line: Consumers will always love a good deal. But they’ll also fall harder for their favorite brands when their loyalty is rewarded with great, exclusive deals.


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