Since Google’s rejected offer of $6 billion dollars to buy deal of the day website Groupon, there’s been a lot of discussion of just what Groupon and the hundreds of similar services mean to online commerce and small business.
Groupon’s CEO, Andrew Mason, even went as far as to declare his organisation the “saviour of small business” on the Charlie Rose show.
John Battelle, founder of The Industry Standard and co-founding editor of Wired, examines Groupon’s business model on his Searchblog and concludes it will be the small business platform for the mobile Internet just as Google are to the web and Yellow Pages were to the telephone.
The problem with these ideas is scale. If every small business had the capacity and wanted to be on Groupon, the service simply couldn’t cope and the model breaks down.
In my area there are, according to the Yellow Pages, 115 hairdressers in my district. Even if Groupon were able to geographically target me to my neighbourhood, they’d need a third of the year just to cover hair stylists which is tough luck for the lawn mowing services, plumbers, patisseries and other small businesses that may also want to advertise on Groupon.
Which takes us to customer motivation, when I’m looking for a haircut, hedge clipping, cleared drain or chocolate gateaux I’m not particular driven by finding a bargain – if I do that’s great – but it’s not my motivation to buy.
Groupon, and the other deal of the day sites, are driven by customers looking for discounts, and the key to business survival – particularly in retail – is not to depend on discounts to drive your business. So business models that rely on discount hungry customers, or cashflow desperate merchants, are always going to be limited.
Groupon is a great business and it may well turn out to be worth $6 billion or even $36 billion. The barriers to entry are not so low as anyone who thinks executing an idea like this is “easy” doesn’t understand the work involved in building a local sales team like those of Groupon or Yellow Pages.
It could well be that Google wanted to buy Groupon simply for that sales team. The failure of Google to properly execute on their terrific local search product has baffled me for some time and the only explanation I can put down to it is what Silicon Alley Insider’s Ron Burk attributes to Cash Cow Disease, where companies like Google and Microsoft find themselves paralysed by the rivers of cash flowing into their businesses.
Deal of the day sites have an important role to play for businesses looking at demand management or clearing inventory and Groupon is a good business just like Clipper Magazine or Shop-A-Dockets, but to claim they are going to be the next great revolution for small business is giving too much importance to these channels.
There’s no doubt though that small businesses will be the big winner when we get local search on the web right. When we get it right we’ll probably see the hyperlocalisation model for the media start to take off as well. So it could save two industries.
Groupon though is not the small business messiah we’re looking for.
Hi Paul,
thanks for your reply.
I think a revolution is taking place and has taken place in this space of social consumption. This can be reflected in the # of imitation websites which is the highest form of flattery for Groupon.
‘Me too’ services usually flock to where the revenue is so there’s definitely something there as evidenced in Groupon’s astronomical growth rates. Is Groupon a saviour for small businesses? Maybe we should be asking the small businesses.
I think one of the important issues when dealing with sites like Groupon for small businesses is in the area of logistics. Groupon is a mammoth and with their size and reach, they can potentially put small businesses out of business.
If small business don’t get their sums right by not capping their offers within an agreed time frame to fulfill orders, their uncapped discounted offers will eat into their margins quite significantly in profit and time.
For now, I think Groupon is closer than many to being the “saviour of small business”. The real saviour IMHO of small business are their core “20 per centres”. Those clients that provide 80% of their profit.
Unless small businesses have regular features on Groupon, a one-off campaign is a short term marketing tactic when done well will spike their sales, grow their database and improve their branding efforts. So the potential saviour for businesses as a whole, could be the ‘business model’ of Groupon and not Groupon itself. In this way, business controls the ‘deal’ and the terms of business.
What do you think?
Thanks Paul!!
Regards,
Mahei
Great article Paul. I am also cynical about the rather grandiose claims that have been made. While Groupon (and the clones) have undoubtedly hit a chord with thrifty shoppers (and that’s most of us at the moment), the sheer avalanche of competitors now means shoppers are likely to be inundated with offers. How does a shopper currently decide which service(s) to sign up for ?Many email in-boxes are already pretty cluttered.
Further, small retailers have to do their sums carefully, to ensure they do not damage their own cashflow – paying for goods at a full margin and then substantially diluting their gross margins with the offer. There have been a few cases of players getting burnt in this way, especially service providers.
Unless the offers become increasingly tailored, they run a risk of becoming wallpaper, in my humble opinion.
Groupon advertising is sooo bad for businesses! It might even be lethal to some small business owners. I wrote an article about Groupon advertising. If you want, you can read it on my website.