The Beginning of the End of Groupon – Why Price is Not a Sustainable Business Strategy

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One cannot read the news these days without hearing about the difficulties Groupon, Living Social and the other daily deals companies are facing. It seems as if the market is turning on these online coupon businesses and demand is declining. Merchants are now refusing to renew their offers and are shunning the Groupon business model.

According to a recent Manta survey, 82 percent of small business owners will not offer any deals though a “daily deal” site this year and only 3 percent said these types of promotion sites have brought them repeat business. This is one of several data sources describing a form of a backlash towards daily deals as a marketing vehicle.



What happened? Nothing extraordinary. That is simply it. New customers did not return in droves after their first purchase despite being able to sample a product or service at a deep discount.

For years I have written about the danger of attracting customers with deep discounts. Discounting and price-slashing is a tactic used by companies that have no other way to differentiate. Customers are not attracted naturally to you and therefore you need to lure them with financial incentives. Couponing and financial incentives have existed for years in the non-virtual world. They do not create loyalty to a brand; they create loyalty to a price. When the deeply-discounted price disappears, the customer disappears as well. “Buying” business through discounting and price-slashing is simply not a long term strategy for sustainable growth.

For some unexplainable reason, daily deal vendors managed to convince merchants that the rules are different when selling via the web. They claimed that they can turn price-cutting into a growth strategy. Now that the honeymoon period has ended, many are realizing that although the medium has changed, customers have not. Customers continue to grant their loyalty to attractive, differentiated products and services and refuse to be “bought” even with a really deep discount.

My wife has given many of the companies selling on Groupon and its daily deals competitor sites a chance to win our family’s business. On one occasion, the manicurist she scheduled never showed up. (I figured that the merchant had a customer paying full-price and therefore preferred to satisfy that customer first.) In another case, I was dragged to a couples massage at a serious discount. I went along if anything else for the purpose of trying it. It was an okay treatment, but it was a year ago. I never went back to this spa because at the full price, that spa did not deliver an experience that I felt was worth the price. I did, however, go back to my regular spa where I pay full price and receive full value.



The impact Groupon has had is actually much worse than not creating loyal customers for a particular business. Merchants who offer a “deal” to new customers cause the actual value delivered to be perceived as less. As a result, the merchant has altered forever the value these customers will pay in the future. In the name of short term gains (most of them at losses to the merchants), merchants have destroyed their long term value and viability.

No new media, social, mobile or whatever the next one is going to be, will change the hard realities of business. If customers refuse to pay your asking price, your value is simply not worth it. You either try to sell high value to the wrong customers or your value is not up to your customer’s expectations. The solution is not price reduction.

The solution is one of several options:
1. Identify the customers who will pay your price for the current value you deliver and focus on them solely.
2. Develop greater value that will allow you to command your price among current customers.
3. Develop new value that will fit the price customers are willing to pay.

The Groupon experiment proved yet again that reducing price is not the answer to business troubles. An attempt to claim that a new medium will change the constant rules of business was proven once more to be false.



Customers will grant their long-term loyalty to exciting, differentiated, exceptional, attractive, alluring, surprising products or services. They will be loyal to those whom with they fall in love. Ultimately, money cannot substitute for love. Just as it is in one’s personal life, the eternal rule remains true: love trumps money every time.

7 COMMENTS

  1. I talked with a local restaurant owner recently and asked whether Groupon or other daily deal sites worked.

    Her answer was an emphatic NO. Customers attracted by the deals didn’t return again, and in some case they overwhelmed the restaurant and actually hurt business with loyal customers.

    The strategy instead — good old fashioned Word of Mouth in the local community. The dining experience wasn’t anything amazing, but the food was, so I offered to write a review on Yelp. Haven’t done that yet, but I’ve been back three times and recommended it to several neighbors and friends.

    Bottom line: if you don’t have a good value to customers, price promotions whether via social deals or whatever are not going to fix that problem. You may just end up going out of business faster.

    All that said, price is still part of the equation. Some companies (think Wal-Mart, Costco, Target) feature it, but it’s not something most companies can base their strategy on.

    I also think that properly targeted offers can help companies start a relationship that will eventually recoup the up-front investment. That’s how cell phone companies and credit cards work.

    But social is not targeted. I’ve never understood why Groupon investors thought it would work. It’s actually a worse business model than Facebook.

  2. I enjoyed reading this article because it was clear from the beginning that Groupon’s super low pricing model would cause their business to implode eventually. Attracting new customers with financial incentives are great; however, the merchant must offer more than low prices to retain an acquired client. The love affair with the new customer must continue on a more sustainable level or else the customer with the low price mindset is always on the lookout for the next best deals.

    They should have taken that billion dollar offer from Google when they had a chance. Now it’s too late because Google has their own daily deals.

  3. Bad treatment by the merchant when using a Groupon coupon may be partially responsible for the lack of repeat business. One such horrible experience resulted in my writing my first review, a very negative one, for TripAdvisor. My wife and I were ignored for twenty minutes while the restaurant waitstaff served other customers without coupons first. In other cases, I have felt that the restaurant was skimping on value to make up for the costs of providing the coupon. I will conclude by saying that some experiences have been quite positive and that I have added restaurants to my favorites list that I would have never considered without the Groupon coupon.

  4. Lior, you are right on! As Don Peppers famously quipped…and I’m paraphrasing….”when you compete on price, you are always at the mercy of your stupidest competitor.”

  5. I’m very much in agreement with the authors view and have been trying to drum into my clients that the race for the bottom means living in a place where there is no loyalty and little or no return for your efforts.

    Yes I know everyone talks about the big supermarkets but they have the buying power to order hugh quantities at a time to drive down the suppliers price and often control of such a high percentage of the market to force suppliers through them.

    The rest of us aren’t quite so lucky. Having said that I have found a few businesses that make a reasonable return on Groupon like promotions. But they are limited to the low season and often involve offering lower quality of shorter sessions (if a service) to deliver a reasonable return. Having said that the critical upsell ROI doesn’t seem to be present. So as we pull out of the recession I see these essentially counter cyclical businesses going into decline.

  6. Coupons work – as long as you’re not confusing them as a strategy to grow a business with simply a tactic as part of a strategy.

    In short, use a coupon to get customers in to sample your business, wow them with your great service and product, get them onto a database and continue marketing to them. That way the customer has a low risk way to try out the business, and by their quality service/product the business owner has earned the right to ask for contact details to keep in touch with the customer – which the customer may agree to as a result of how impressed they were.

    The fatal mistake that business owners make is in treating coupon customers like they are second class. The easiest way I’ve found to overcome that is not to ask for the coupon upfront, but only ask for the coupon to be presented at payment.

    For the longevity of the companies that offer coupons, they need to be involved in the education of the business owners who partner with them so that a clear strategy is in place for the use of the coupon before the offer is made. This would need the coupon company’s representatives to move from “sales” to “consulting” at the risk of losing a few customers, and it is that risk of losing customers that means the move won’t happen.

  7. I agree with James Phillips in that the Groupons and other Daily Deal sites bring a great deal of value to both the business and the consumer taking part in each deal. The consumer is more likely willing to give a business a shot when they can do so at a lower price point; it is then up to that business to prove to the customer that they made a good choice and that their product or service offering is worth the full price. If the Groupon/Daily Deal holder receives poor service and/or product, what incentive is there for them to return?

    I have used many of these deals, and I have had mostly positive experiences. I have also found several places of business that I now think of and frequent, based in large part by my initial experience using the Goupon/Daily Deal incentive.

    I sincerely hope these deal sites do not go away, and if they do, it is going to be primarily because of the businesses that treat the deal-carrying consumer as 2nd class customers rather than opportunities to gain loyal customers.

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