Sustainable Grouponomics

Rather interesting article on Grouponomics by Felix Salmon, especially on it's competitive advantage - a guarantee to the seller that the minimum signup will be met:

....first it’s worth looking at the innovation in the name of the company: the idea that coupons only become activated once a certain minimum number of people have signed up for them. This is essentially a guarantee for the merchant that the needle will be moved, that their effort won’t be wasted. With traditional advertising or even with old-fashioned coupons, a merchant never has any guarantee that they will be noticed or make any difference. But with a Groupon, you know that hundreds of people will be so enticed by your offer that they’re willing to pay real money to access it.

That ability to sell a discount against a minimum volume is a key thing, as it allows the merchant to design profitable discount systems. However, that is easily replicated by fast followers, so Groupon's risk is that those fast followers follow, fast - ie they have to continually out-execute:

Groupon’s CEO, Andrew Mason, attributes his company’s success not to the genius of the idea itself, but rather to Groupon’s ability to execute — to keep both consumers and merchants happy. According to Groupon spokeswoman Julie Mossler, more than 95% of merchants would run their deal again or recommend Groupon to a fellow merchant. (Dholakia’s numbers are lower, but still high.) Keeping that number high is not easy: the company needs to be able to give good quantitative advice to merchants on issues such as where to price the Groupon, where to set the minimum and maximum number to be sold, how to avoid being overwhelmed by a huge influx of bargain-hunters, and the like.

The article goes on to hypothesize that Groupon is "more social than thou" (I know, I know, aren't they all....) but for all that there is a telling point:

For all that digital-marketing types love to talk about creating viral social-media campaigns and the like, social media is at heart a fantastic way for companies to compete on quality rather than marketing glitz. Social media is all about turning word-of-mouth into a tool which is much more powerful than it has ever been from a marketing perspective. And the best way to get great word-of-mouth is to deliver fantastic service. For a small company or even a large company which is great at what it does and never does any marketing per se, social media is a godsend

I think this is broadly correct - copying the business model is easy, copying a business culture that is built around good service is much harder and thus this represents more of a barrier to entry. Not only that, but in this more networked age good and bad service is broadcast across the nets far faster, far further. We recently did a piece of work on customer service that showed that it was increasingly a tool of sales and marketing (recommendations from friends/social networks, service ratings on comparison sites, alerts from "friended" companies - all these are seen before purchase by the c 85% of people who now use the 'Net to make buying decisions, and transmitted by the c 50% of people who will blog/tweet/sms etc etc a good or bad customer experience).

Groupon's weaknesses I think are that it is still a "fire and hope" system, albeit a big one with no doubt an increasingly honed feedback loop system. But this leads to a number of chinks:

(i) Reward for Constancy - yesterday we noted how Seth Priebatsch had started up a business that gives benefits for repeat buying from one supplier, rather than Groupon's "every transaction is a first" model

(ii) Limits to growth - there are only so many coupons that so many people will buy in a given timefarme, and ultimately the mature "Olde Media" coupon businesses of this ilk are not exactly stellar value creators

(iii) Does not "own" the customer - people looking for bargains are notoriously fickle, so I think "Customer loyalty" is going to be a tough ask.

(iv) It is still CRM based - ie it's retailer-out B2C aggregation, rather than VRM based C2B, ie Groupon is still not getting a view of true demand, and thus (in theory) has a higher friction than a VRM based systems longer term

There is also evidence of "Groupon Gaming" as one of the commentators noticed:

i’ve also stopped buying restaurant groupons as most are semi-ripoffs (e.g. here in london they will sell you a “discounted” meal, but then charge 12.5% service charge on the theoretical full meal price (thus doubling the bill)) and other shenanigans of same order.

These are hard to control, so you have to add complexity (eg eBay like supplier review data) which adds a cost to the transaction.

Nonetheless it's a fascinating business play. My prediction is that it has a fairly limited shelf life as a high value play, but (in my view) it's owners' strategy is to build, operate and IPO into the Bubble. Apres Moi le Deluge, and all that.....