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Two years ago, Google offered to buy daily deal giant Groupon for $6bn. The Chicago-based startup, at the time one of the fastest growing companies in the world, refused. Late last year, it went public and saw its valuation soar to more than $17bn on the first day of trading.

It has been all downhill since then and on Tuesday, following an earnings report that disappointed investors, Groupon shares have plummeted more than 30% to their lowest level yet. Today, the market values Groupon at well under $4bn.

This isn't surprising given the Wall Street is increasingly skeptical about Groupon's business model. As one analyst put it, "It appears the daily deal business has run into a wall." That may be true, but it's just one part of the story. In reality, the demise of Groupon as we know it arguably has to do with the way Groupon handled its relationship with the local businesses it works with.

Here's what B2B businesses can learn from the ongoing train wreck that is Groupon.

1. Getting between your customers and their customers is tricky

Groupon built a billion-dollar business by inserting itself between local businesses and their customers. But it may have killed the goose the laid the golden egg.

How? Keeping both sides of a two-sided market happy requires a certain level of sophistication and patience, as well as a willingness to balance the interests of both sides of the market for the long-term sustainability of the market. Arguably, Groupon has failed in all these respects.

2. Delivering customers < delivering profit

Groupon has excelled at getting customers through the doors of local businesses, but as numerous businesses have learned the hard way, profit doesn't always follow. Groupon's value proposition has always assumed that the customers it delivers will come back for more (paying full price) but it has become increasingly clear to businesses using Groupon that a significant portion of Groupon's audience is not interested in long-term relationships. That makes doing a daily deal with Groupon far less enticing.

3. You must understand your customers

It was recently reported that Groupon CEO Andrew Mason has taken a not-so-secret secret job as the maitre d' at a Chicago restaurant. His goal: learn the ins and outs of the restaurant business by putting himself in the trenches.

This might have been a smart move -- if it had happened years ago. Mason's effort to learn about the kind of local businesses his company serves is essentially an admission that he never really understood their needs in the first place -- an obvious problem for the CEO of a company that has been telling business owners that it knows how to help them grow.

4. A big sales force doesn't guarantee sales

At its heart, Groupon is a huge sales organization. Some might even liken it to a boiler room. Instead of stock brokers hawking penny stocks to hapless investors, Groupon's sales force hawks daily deals to local business owners.

But as those business owners increasingly question whether daily deals are productive and profitable, the company's substantial sales force is finding it more and more difficult to convince them that Groupon is a good fit. That serves as a powerful reminder to B2B companies that may wish they had more salespeople: if you don't offer something somebody believes is worth buying, it doesn't matter how many people you have selling.

5. Trust matters

The longevity of the daily deal model may be questionable, but it appears that Groupon's treatment of business owners has hastened its demise. From claims about questionable sales tactics to the less-than-impressive, PR-focused way the company has responded to daily deal disasters, when Groupon was on top, it had opportunities to build trust with business owners -- opportunities it will increasingly have fewer of now that it's on the decline.

FUNNEL, Econsultancy's B2B marketing conference, is taking place on 13 November at Emirates Stadium, London. You can see the agenda and register at funnel-marketing.com

Patricio Robles

Published 15 August, 2012 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2381 more posts from this author

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Andy

Has it really got anything to do with over half of the issues listed? Or is it simply the case customers got bored of daily deals. It was a fad, nothing more.

Investors warned that Groupon was massively over-valued. I don't understand how people thought there was long-term sustainability in daily deals.

almost 4 years ago

Jignesh Ghaghada

Jignesh Ghaghada, Managing Director at TreatHer.com

Exactly right Patricio - good article.

Actually, it's a pity because the daily deal model can work very well when done correctly.

The problem here is that Groupon's marketing expenditure is so high, it needs to use very aggressive sales tactics to make each deal work in it's favour. I was once told by someone at Groupon that they had an internal target of £30k revenue for each deal.

If you imagine that a normal Groupon deal consists of 50-60% discount + 60-70% commission (of the remaining revenue), there's very little chance of a merchant seeing any return - even if you found you could somehow factor in customer lifetime value (questionable for many businesses).

Groupon certainly started a good trend, but it will be subsequent companies that learn from its mistakes and get it right that will see long term success in this sector.

almost 4 years ago

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Roisin Waite, SEO & Email Specialist at M&G Investments

I think the main cause of their demise was lack of care they took in selecting the businesses they partnered with.

While their value proposition may have aimed to encourage full price paying repeat visitors, this relies on the initial Groupon purchased experience being positive.

The experience of myself and many of my peers was that the deal was often third rate - difficulties in booking and redeeming the vouchers as well as poor customer service during the redemption dissuaded me from returning as a full price customer.

Businesses can't rely on people simply rely on Groupon to advertise their brand, they have to follow this up by delivering a good experience, and this is what induces people to return again.

Groupon merely offers an advertising platform, but by selling deals for poor companies who delivered bad deals, this ultimately reflected poorly on Groupon, damaging their trustworthiness and credibility.

Focussing more on luxury and exclusivity could have really added value and differentiated them in the market.

almost 4 years ago

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Gary

another insightful article Patricio, excellent!

daily deals never ever create ongoing relationships, unless its targeted to a specific audience, even then its touch and go!

happy thursday!

almost 4 years ago

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Michael Davenport, Digital Marketing Executive at JLT Group

The title is a bit misleading don't you think? Groupon aren't dead. Admittedly they're on the ropes and on their way out but the headline made it sound like they'd gone into administration...

almost 4 years ago

Jim Banks

Jim Banks, Head of Biddable Media at Cheapflights

Is this situation just specific to Groupon or is it Daily Deal sites generally?

Now that Groupon is a publicly-traded company it's first loyalties (rightly or wrongly) is to the shareholders who keep all the executives of the company in gainful employment, so does that make their decision making process different than it was before it IPO'd.

As an acquisition tool I think daily deals are great, but a lot of business owners didn't know what to do with the new customers they got after the deal was done. You can't blame Groupon for their inabilities to build lifetime value.

almost 4 years ago

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Peter Clarke, Head of Marketing at Pumphouse

From an end-user's point of view, rather than generate loyalty with one restaurant, the groupon model just made me look for other restaurants in the area offering deals. As there were plenty of these I didn't bother returning to the original restaurants - except once where the food and the service were exceptional. What I like about Groupon is that it made me try something new. For consumers it offers great value.

Having been in business for twenty years I cannot understand why most businesses would get involved. Only if the business offers something with a high price/cost ratio such as a golf club this model works.

By offering a reduced round cost, especially at non-peak times, the golf club has activity in its shops and restaurants and can recoup some of its outlay for no extra outlay. The threat though is that other clubs are doing the same thing and that discounting then becomes the business model. This then drives down brand value, which is hard to restore.

Businesses should concentrate on their target audience and offer genuine value for money for their products and services. By shoe-horning all and sundry through their doors, they are asking for problems.

Is anyone other than the end customer a winner here?

almost 4 years ago

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Rasha El-Shirbini

This is a great article Patricio, very insightful and so are the comments from you all.

One thing I wanted to mention, or discuss with you all is the new type of customer groupon and other daily offer sites have created or identified.

There is now a breed of customer that will happily wait until the next deal comes along, throwing loyalty out of the window.

As the offers are usually similar or on similar products or services, these new customers will travel to the next local beauty salon, or dentist or hotel to get the best deal, with no real consideration to returning to the business unless another offer guide's them there.

The way to really appeal to these new customers is to accept they are only after offers, and you will need to keep them loyal by giving them more offers on their arrival to your business.

A business will need to evaluate if they are the profitable customers before paying for services like Groupon, which leads to Patricio's point about the golden goose. Groupon and others need to place the local businesses at the heart of what they do and cater to the demand for value by not exploiting them.

almost 4 years ago

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Robert

Many small business that I know of who buckled under the many sale calls that they received from Groupon kept a wide berth after offering deals. There were many problems, firstly the deals that Groupon pushed were never going to be profitable and the return business as you report never materialised.

Secondly many small business were inundated with orders / customers which they were simply not setup to deal with, mainly becuase of the 'pressure selling' from Groupon sales staff. This resulted in bad publicity so many small business owners have been burnt never to return to Groupon.

almost 4 years ago

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Chris L

This is a good article which finally highlights some common sense! I think the Groupon model along with all these host of websites driving retailers margins to the wall are crazy. All businesses have to make profit in order to invest and grow. Unfortunatley customers are being fed the idea that they can get something for nothing nowadays. Businesses are shooting themselves in the foot if the continue to support Groupon or any other daily deal site.

As a business owner myself and retailer I trully hope that this wave of ridiculous deal sites ends soon. They bring no value to businesses at all, and I would go out on a limb to suggest they bring little long term value to customers either.

almost 4 years ago

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