Helen Edwards: The fundamental flaw at the heart of Groupon's business model

Helen Edwards: on Groupon's core problem
Helen Edwards: on Groupon's core problem

Groupon's exponential rise to prominence raises the question of whether discounts alone can sustain a brand in the long term.

A few months ago, Groupon was the poster child for the digital age, heralded by Forbes magazine as the 'fastest-growing company in the history of capitalism'. This February, though, in its first quarterly report since its oversubscribed IPO, it shocked the markets with a $42.7m loss.

The irony will not be lost on the shareholders of the world's biggest online discounter that their paper itself is now trading at an eye-watering discount, close to 40% off its November high.

That swingeing valuation lurch is symbolic of a business that has displayed bipolar tendencies since its inception just over three years ago. Groupon is the online trader with a burgeoning sales force that makes it as resource-heavy as many a traditional offline enterprise. It is the New Age socialisation platform that appeals to our most self-serving pecuniary instincts.

At the level of the brand, there is transparent tension between the way Groupon promotes itself and the more credible, more humdrum, reality of everyday use.

Groupon claims to be a 'discovery engine', encouraging people to abandon their comfort zone and try new experiences, prompted by the daily deals on offer. Users sky-dive, kite-surf, and gather at new local watering holes, widening their circle of friends and, according to Groupon PR, even reviving their routine-blunted marriages.

In reality, its franchise includes an unwholesome number of people who like to cut out coupons and collect money-off vouchers. These are the folks who traipse round supermarkets with smartphone apps to compare prices, boast that they make all their major purchases in sales, stick to the all-inclusive deals in restaurants and make it a point of principle not to tip.

They are the inert ballast of consumer voyagers, not so much moved by new experiences as resolutely planting their feet wherever the discount is deepest. With these guys on board, the brand looks about as New Age as Green Shield Stamps.

Still, who doesn't like a deal? We all do; deals and discounts have universal appeal and, judiciously used, will always be part of good marketing. A deal works best all round, though, when it represents a saving off something we already value.

That subtlety poses a big question for the businesses that partner with Groupon: can they convert people who arrive through the door for the first time at a 60% discount into regular users? Many have learned the crowd that shows up for a £2 pizza disappears when the same item is back to full price.

The question for Groupon itself is whether a brand can be sustained for the long term on the concept of discounts alone. It's all hole and no doughnut. Price-comparison websites and deep-discount supermarkets offer similar benefits to consumers, but the former appeal as a service to guide choice and the latter do at least have something to sell.

There is a troubling question for investors, too. Does this asset deserve to be mentioned in the same breath as Amazon, eBay and Facebook? Or is there a danger that it was overvalued and could go the way of Pets.com, Bebo and MySpace?

For my money, if I'd invested in a brand that depends totally on other businesses for its value, and that needs to deny its most natural consumer franchise, I'd be way outside my comfort zone.

Helen Edwards has a PhD in marketing, an MBA from London Business School and is a partner at Passionbrand

 

30 SECONDS ON: GROUPON'S GRIP

As many local businesses have discovered, the Groupon effect can be positive or negative.

  • Need a Cake, a bespoke cupcake maker, usually fulfils about 100 orders a month. After its 75%-off deal on Groupon, the Berkshire-bakery took orders for 102,000 cupcakes. With a loss of about £3 on each batch sold, profits for the entire year were wiped out.
  • Pennsylvanian salon Hairs to You saw Groupon as a potential generator of exposure for a cost of 'zero advertising dollars'. The salon's owner claimed to have acquired seven regular clients out of 77 voucher redeemers.
  • Posie's Cafe in Portland, Oregon lost more than $8000 but saw little return after listing on the site. Owner Jessie Burke's blog post on the ordeal – in which she describes using Groupon as 'the single worst decision (she's) made' – went viral.
  • Elkhorn Inn in West Virginia let guests use multiple Groupon vouchers, which encouraged them to book rooms for friends and family. Some 99% of Groupon guests were new, so little revenue was lost from regular custom. Staff used up-selling opportunities – such as premium dinner options – that many Groupon customers bought.

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