Groupon’s $6 Billion Blunder

By On March 22, 2011 · 25 Comments

GUEST POST

The Groupon

The way we shop is changing and it’s most likely that you’ve heard of the group buying site called Groupon.  It’s a new and exciting model, but over the last little while, I’ve come to learn that it’s not exactly perfect.  And in case you haven’t heard, Groupon recently turned down a $6B acquisition offer from Google, which I believe was a big mistake.

My Groupon Experience

When I first signed up with Groupon, I remember being excited about all of the deals that were flooding my inbox.  The novelty of the site and huge discounts encouraged me to try a deal or two.  But then something happened – Groupon started becoming popular and suddenly I was bombarded by my friends about participating in deals.  Truth be told, it was becoming difficult managing all of these offers. And then another thing happened ­- if I tried to book an appointment with one of the deal providers I was put on a list.  That meant I had to wait three or four months just to get a massage or to try a new sushi restaurant, and that wasn’t exactly appealing.

A Small Business Experience

The overwhelming popularity of Groupon kept small businesses (SMBs) busy. But, were these businesses flourishing as a result of their Groupon experience or barely breaking even?  It turned out that some of the businesses underestimated the amount of demand that Groupon would generate.  They didn’t calculate unperceived expenses like paying staff longer hours or having enough inventory to fulfill orders.  In fact, a recent study by the Merchant Circle Report claims that 55% of SMBs are saying that they do not plan on using the Groupon service again. So perhaps the group buying model is failing to generate repeat customers?  Or maybe it’s just too costly for a small business?

Facebook Places Emerges

Geo-targeting applications like Facebook pages and Foursquare are becoming popular and SMBs are taking notice.  The same Merchant Circle Report states that 32% of these companies are currently using it and 12% are planning on using it.  Essentially, Facebook Places allows businesses to track people who are stopping by their store. It’s an evolving application and there could be some promising business opportunities.

Using Twitter

Twitter is another great tool for SMBs to leverage their fans.  A burrito company out of Boston called Boloco spread the message of a free gift to all of their customers on Twitter.  And it turns out that their fans showed up in throngs to discover that they would receive a free burrito.  The main difference here is that Boloco controlled their own expenses and revenues from this campaign and it resulted in excellent word of mouth and repeat customers.

Seriously? $6 Billion?

I’m actually not here to castigate Groupon.  I only wish the best for the company and I’m surely aware that there are a lot of fans of the site.  But I wonder if the novelty of the site has worn off?  Are the amount of deals too much for us to manage?  And from learning about the disdain of the SMBs, I wonder which businesses will be left for Groupon to target?  Will they blast through all of the SMBs and put them out of business or will they help them generate repeat business and long term customers?

As for the Google deal, a lot of people were claiming that Google was making a huge mistake by offering the deal to Groupon?  Maybe these people were right?  Or maybe Google inadvertently avoided a $6 Billion mistake? At the same time, if I was Groupon, I would have signed that deal right away.

Key Lessons

  • If you’re a small business and you want to leverage the power of social media and group buying sites like Groupon, prepare for the unexpected demand and try your best to predict any unforeseen costs that could arise from excess customers
  • Make sure your business is listed using Facebook Places and connect it with your company Facebook Page. Learn how here.
  • Develop a following on Twitter and nurture your fans.  Treat them like gold and they will praise you relentlessly.  Come up with creative campaigns that generate buzz and word of mouth.
  • If someone offers you a $6 billion dollar deal, say yes and take it:)

Zaid RasidAbout the author: Zaid Rasid is the founder of the internet marketing blog Better Social* Skills. He provides expert social media, lead generation & brand awareness advice to small and medium sized businesses. For a practical look at how online marketing can work for you, visit www.zaidrasid.com or follow him on twitter: www.twitter.com/zaidrasid

 
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  • http://twitter.com/KyleHarder Kyle Harder

    Huge blunder for Groupon! I agree completely. Plus at the rate of change among applications and consumer web services, they could use the ally of Google (and their cash) to help expand the platform. Even further, the amount of competition is going to dry up repeat customers faster than a wet sponge in the desert.

  • Pingback: Daily deal finder revenues skyrocket: Local marketing an online must « News [Brafton]

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Hey Kyle, thanks for the comment. I’m curious to see who the major competitive players will be as well. I know up in Canada, Groupon is doing well, but some local buying sites are also pretty important.

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Hey Kyle, thanks for the comment. I’m curious to see who the major competitive players will be as well. I know up in Canada, Groupon is doing well, but some local buying sites are also pretty important.

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Hey Kyle, thanks for the comment. I’m curious to see who the major competitive players will be as well. I know up in Canada, Groupon is doing well, but some local buying sites are also pretty important.

  • David Weigner-Lodahl

    Putting aside my feelings on daily deals and marketing strategy, Groupon’s revenue in 2010 was $3-4 billion so they did make the right choice w/r/t the Google deal (link: http://techcrunch.com/2011/03/17/groupon-25-billion/ ). Interested to see how the real-time, location based “Groupon 2.0″ app will play out, leaving the deal design in the hands of business owners rather than a sales force.

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Hey David, thanks for sharing that article. With regards to the actual amount of revenue they made in 2010 and their own projections, maybe they were right. But that’s based on a year of data and a year that was very good for Groupon, without any results coming out from people who had used the service. So I wonder about it’s sustainability and how they will do next year? I mean I could be totally wrong and they could make billion upon billions but I’m not certain they will. I guess we could get into a whole other conversation about over-inflated valuations too:)

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Hey David, thanks for sharing that article. With regards to the actual amount of revenue they made in 2010 and their own projections, maybe they were right. But that’s based on a year of data and a year that was very good for Groupon, without any results coming out from people who had used the service. So I wonder about it’s sustainability and how they will do next year? I mean I could be totally wrong and they could make billion upon billions but I’m not certain they will. I guess we could get into a whole other conversation about over-inflated valuations too:)

  • David Weigner-Lodahl

    I also have big questions about the sustainability of the deal a day model (which should make the dynamic model more interesting, as it increases barriers to entry by it’s new capabilities and large network of users). Especially the many studies that show the limitations of promotions in long term customer value.nnIn my research on this topic, I found the local advertising spending in 2010 was about $133 billion. Does that mean Groupon can be 19% of the entire market? Seems unlikely. Then again, yellow pages are still almost 10% (about $13b) of this market. Yellow pages! For a local business, Groupon (a service where they don’t have to lift a finger to design the promotion) is light years ahead of that. The amount of room for online and mobile spending to grow on a whole is huge.

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Wow, I didn’t know that the Yellow Pages share is so large! You make some great points, thanks. And I’m going to contradict myself a bit today but I just watched a video with Gary Vaynerchuk who says that the onus is on the businesses to make money using these tools – http://www.youtube.com/watch?v=YIuLdeSPrGM&feature=player_detailpage#t=346s

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Wow, I didn’t know that the Yellow Pages share is so large! You make some great points, thanks. And I’m going to contradict myself a bit today but I just watched a video with Gary Vaynerchuk who says that the onus is on the businesses to make money using these tools – http://www.youtube.com/watch?v=YIuLdeSPrGM&feature=player_detailpage#t=346s

  • Damian Thompson

    You are spot on Zaid. Very competitive marketplace, low barrier to entry, and the large retail corporations (Nordstrom, Neiman’s, etc.) will get better at doing it themselves. nnI wrote an article in January (Groupon’s a Sure Thing — Right? http://bit.ly/fmu6eH) also highlighting the unprofitability for many small business owners as well as the competitive pressures.

  • http://twitter.com/project_modern Daniel Woodard

    Groupon’s market has low barrier to entry and requires a large sale force. People have loyalty to the coupon, not Groupon. 2 for 1? I really don’t care who offers it to me. I was very surprised that they did not do the google deal. I admire them for trying to do it right or go it alone, but $6 billion dollars? Also, business owners are not _that happy with it since they split the money and eat the credit card fees on the transactions. Small businesses will adapt and eventually return to solid marketing which may use social media, but will basically be building repeat business through satisfied customers and word of mouth.

  • http://itsmutable.com/ Iqbal Mutabanna

    Nice post Zaid. I wrote a similar one last week in the context of SEO being too burdensome for SMBs. In that piece I also brought up Groupon, the difficult economics around it, and issues with customer satisfaction. Would love to hear your thoughts – http://itsmutable.com/2011/03/13/local-commerce-moving-beyond-seo/

  • http://itsmutable.com/ Iqbal Mutabanna

    Nice post Zaid. I wrote a similar one last week in the context of SEO being too burdensome for SMBs. In that piece I also brought up Groupon, the difficult economics around it, and issues with customer satisfaction. Would love to hear your thoughts – http://itsmutable.com/2011/03/13/local-commerce-moving-beyond-seo/

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Damian, that’s a great post your wrote! It’s interesting that you mentioned Facebook at then end. I mean if they grab a hold of this model, well then we all know about the massive customer base that would be:)

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Totally agree with you. I think this model can work for a lot of businesses if they use it right and calculate costs. If your business is attractive as well then that should generate repeat customers. But never mind $6B, it looks like their valuation is close to $25B as of today!

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Thanks Iqbal, I’ll leave a comment on your post. Cheers.

  • http://twitter.com/MT_Richardson Matthew Richardson

    I’ve heard some anecdotal reports about Groupon having bad customer service for the businesses who sign up. There have been stories about sales reps, eager for their commission, neglecting to tell the merchant that they can put a cap on how many groupons are bought. The results are the sorts of waiting lists and overwhelmed businesses you’ve written about.nnIn a semi-related note, a few months back the Charlotte groupon office had a free party for Groupon customers. They had a good band and free drinks. It was great evidence of how much money Groupon has to throw around, but I don’t know how successful it was as an event. Were they trying to make it more of a real life social network? Or was it just a thank you? If the latter, then it was a smashing success. If the former . . . not so much.

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Thanks Mathhew for the great comment. I’m hoping that’s not the case with their sales reps.

  • http://twitter.com/MT_Richardson Matthew Richardson

    Thank you.nnIn the story I originally read, it sounded like Groupon was taking steps to address these complaints. As to whether they have, I couldn’t tell you. I’d be curious to hear more from a merchant.nnOn a similar note, the manager from my old job at PRP Wine launched a coupon today with Living Social, so I’m curious as to how that will pan out. It’s especially interesting since they’re selling basically a sales presentation (wine tasting), so if they get overwhelmed, there may be a lot of very unhappy wine consultants (sales reps).

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Hey Matthew, I’m hearing both sides of the story from merchants. Some are loving it while some are hating it. Which is interesting. I got a hold of a merchant out of Toronto and this is what she had to say:nn’I had a great experience with Groupon and the other deal sites. Its great exposure and they have been wonderful to deal with. (Otherwise I wouldn’t have dealt with them). I highly recommend deal sites to new/small businesses.’nnI won’t disclose the merchant. Perhaps if businesses manage these sites better there can be some positive effects?n

  • Kristy

    With everyone and their brother coming out with similar Groupon business models – it was very foolish of Groupon to not jump on it. The market will be saturated within a year or two, and people will be annoyed with merchants not being able to fulfill. Even if Groupon does a great job, people will start thinking of all these business as a type and anything that goes wrong (as is happening more and more frequently) will hold a heavy weight over all of them. nPlus, it creates a problem for small businesses. They may loose money on the groupon deal in hopes of future business returns, but more than likely the consumer is going to move on to the next company offering the same thing, different day and possibly different discount site. Massage, house cleaning, or photo book? I can buy a different one every other week from any number of companies from one of these sites.

  • http://www.facebook.com/zaid.rasid Zaid Rasid

    Kristy, you make a great point about over saturation and indeed the idea of setting up the precedent of expecting continuous discounts is another interesting aspect I didn’t consider. Thanks.

  • Tasti_seid

    Yellow pages is still huge in small markets, I know cities in LA and NY donu2019t need yellow pages but if you are in small town that is still a big part of your marketing. n nNot sure where groupon will be 2yrs from now but for now the IPO is valuing the company 3 times what Google was willing to pay. Not sure if this business model will survive in the long run.n