Will merchants still feel the love for Groupon a year from now?


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High-flying internet startup Groupon has been in the news lately. First, its well-publicized rejection of Google’s almost $6 Billion offer this past December stunned most observers in terms of the valuation (and Groupon’s response to the offer). Second, it’s been reported by Forbes Magazine that Groupon’s internal projections are “that the company is on pace to make $1 billion in sales faster than any other business, ever”. And finally, Goupon now serves over 40 million customers who, by most accounts, love the service and are lusting for even more money-saving deals.

Groupon’s business model is relatively simple. In its over 150 different geographic areas (everything from big cities like Chicago and Boston to smaller cities like Tulsa and Syracuse, to the suburbs like Central Jersey and Ventura County), Groupon offers a ‘daily deal’ which allows consumers to buy discount vouchers (usually about 50% off but sometimes worth up to 90% off) that can be applied to a local business. Groupon then charges the merchant a (roughly) 50% cut for every voucher sold. Goupon sets a predetermined minimum number for the deal to go into effect – if a certain number of people sign up for the offer, then the deal becomes available to all; if the minimum is not met, no one can take advantage of the deal. This minimum amount is an especially important incentive for merchants who can then frame the use of these coupons as quantity discounts – something they couldn’t do with regular coupons. And unlike traditional classified advertising, it doesn’t cost the merchant anything to participant.

But how do Groupon’s retail merchants–the various clothing stores, spas, coffee houses ranging in size from The Gap to small mom-and-pop retailers–use Groupon services? And more importantly, how will they view Groupon a year from now when the hype surrounding Groupon has died down?

To answer that question, merchants need to weigh the benefits of the service versus the downside risks. According to a recent Harvard Business School Working Paper titled, To Groupon or Not to Groupon: The Profitability of Deep Discounts, the are two major benefits of the service for merchants.

First, discount vouchers can provide price discrimination, letting merchants reach customers who value the merchant less than the merchant’s ordinary customers do. For instance, some customers are willing to pay full price for a given restaurant—great! The restaurant would like to keep charging those customers full price, while charging a lower price to new customers who aren’t willing to pay as much but who are still willing to pay something above the restaurant’s costs.

Second, vouchers can provide an advertising benefit—announcing a merchant’s existence to thousands of consumers en masse, and potentially building buzz among consumers above and beyond sales to the consumers who actually buy the vouchers. This effect is more difficult to measure, but many merchants perceive it to be real. Where it exists, it’s an important source of value that a discount voucher service can deliver.

And correspondingly, the risks to using Groupon are also significant.

One risk is that once new customers use the vouchers, they will never come back to pay full price. Whether they wait for the next deal or try and “game the system” by opening multiple accounts to purchase multiple vouchers, the risk is real that these new customers will either not come back as repeat customers or that if they do buy again, they will only do so at a discount. Having never paid full price for the product or service from the start, they will always reluctant to pay anything close to full price going forward.

But the greater risk is that existing (and profitable) customers somehow migrate to Groupon which would then strip the business of its primary source of profits. Similar to what happened to the American auto companies who offered discounts to lure new customers but didn’t erect high enough barriers to prevent their existing customer base from taking advantage of these same discounts, the risk here is that profitable customers become conditioned to wait for sales and discounts–reluctant to ever pay full price again.

It will be interesting to see how Groupon grows over the next twelve months. In order to continue their existing growth, they will need to cultivate sustainable and repeat business from their merchant customers. And once the initial hype of Groupon is over, these same merchants will need to measure the pluses and minuses of doing repeat business with Groupon.

Here’s the takeaway: In order to continue its torrid growth, Groupon needs to cultivate repeat business with many of its merchant customers. And the only way this will happen is if these merchants become convinced that the benefits of doing business with Groupon outweigh the significant risks that exist with both its new and existing customers.

Republished with author's permission from original post.

Patrick Lefler
Patrick Lefler is the founder of The Spruance Group -- a management consultancy that helps growing companies grow faster by providing unique value at the product level: specifically product marketing, pricing, and innovation. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.


  1. We began working with groupon 3 years ago to which we noticed all the problems that are mentioned in this article occur in our business, but more importantly Groupon are not a trustworthy company towards their merchants.

    Casa Spa are a health and beauty spa based in central london. We specialise in providing treatments such as facials, massages and Hammam Spa treatments.

    We had run groupon deal on 11th June &17th August 2011 that generated a total sale of 1152 vouchers at groupon value of £200 per couple, with a validity of 6 months. At Casa Spa, booking can only be accepted by email. They have provided us with a scanner to redeem these vouchers and as a great surprise we found out that we did not get paid for 168 vouchers although the customers have been to Casa Spa and had their treatments. Their sales director's Mr. Geet Samra’s attention was drawn to this matter and had assured us not to worry and that we will get paid, it is only a technical problem.We have been in contact with them since and finally they had agreed to to pay us and further they appealed to us to deal with again to which we agreed providing we get their assurance that we will get paid, upon receipt of a senior staff (Astrid)confirmation nd I have signed a new agreement with them. From that discussion onwards, there has been silence from groupon’s end.Several emails have been sent and eventually we heard from them and their reply was that these 168 vouchers were not redeemed and 336 customers did not show up and the money collected from the customers is theirs.So I gave her couple of email address and names and she came to terms Yes I can see this. I have kindly requested to pass me the full names or the email address which she refused after a length of time she agreed to send me a list of name ie Jacky, John, Zoe..I have reminded her that groupon vouchers clearly states that Bookings can only be taken by email She kept in telling me Data protection we can not pass you any details. Besides the numerous long-term problems that groupon brings to its merchants ie losses and risks st you, it can at times deceive its merchants, clearly demonstrating how they can bully their smaller merchants by not paying the fees they are due to pay to them. They rip off the merchant. They impose on you to give away up to 70% of the face value, They take 30% for themselves and they leave with the promises that the customer will come back to you as a full paying customer. I trust that my case will bring further merchants forward to stop theses giants and save small business .


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