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Group buying startups have managed to succeed where many .coms have failed before: local. By offering attractive, time-limited deals on goods and services from local vendors, companies like Groupon are proving that local commerce is as big an opportunity online as it has been hyped to be for more than a decade.

But national companies face many of the same challenges local businesses do, and on the surface, there's no reason the group buying model can't work with deals from national brands.

Yesterday, Groupon proved that it can work when it teamed up with Gap to offer a voucher good for $50 worth of clothing for $25 at Gap stores in the U.S. and Canada. Before noon, Groupon had already sold 200,000 of the vouchers, making the Gap deal Groupon's biggest seller yet.

So is this the beginning of a new phase of the group buying trend? Perhaps. The success of the Gap deal will certainly pique the interest of other large retailers in markets where group buying is mature. But that doesn't necessarily mean that the success of the Gap deal isn't also somewhat deceiving.

There can be no doubt, of course, that Groupon is happy selling hundreds of thousands of vouchers in a single day. It almost certainly made out very well. But as many have noted, it's far less clear whether the deal is really all that good for Gap. One on hand, some argue that Gap will do alright as customers using the vouchers will likely buy more than $50 worth of clothing when they visit the store. On the other hand, some argue that Gap will almost certainly lose money on the deal.

So who is right? Only time will tell, and it's difficult to gauge the true ROI -- or lack thereof -- on any of these deals without hard numbers those involved are unwilling to share.

This said, I'm not sure that, from a business perspective, the Gap deal is worth getting too excited about. While it's quite clear that group buying is not going anywhere, and probably still has the potential to experience significant growth despite the already high level of popularity, I think there's a lot to dislike long-term, at least for the businesses participating.

The reason: successful businesses don't simply move product; they acquire profitable customers. It is yet to be seen whether or not that's something that is consistently being delivered to businesses by group buying, especially in an economic environment in which more and more consumers are more loyal to bargains than they are to the companies behind them. The risk for businesses relying on group buying sites like Groupon is that they're moving product (and lots of it) but may not be acquiring profitable customers.

This is particularly true on a national level, and I think big sales numbers will mask the challenges big companies face with group buying. Gap, for instance, has been slumping for some time now. Same store sales dropped 4% in the last quarter alone, and CEO Glenn Murphy, referring to the company's latest earnings, stated "I was disappointed in our inability to generate the sales that we had expected to." He noted that Gap stores weren't offering enough tops to compliment the jeans it sells. The question for Gap: will hundreds of thousands of people coming in to buy $50 worth of clothes for $25 generate repeat, profitable customers? Maybe, but in the absence of the company fixing what the CEO knows is already broken, probably not.

From this perspective, I think the group buying trend can be beneficial in helping business, both local and national, remember that selling and selling profitably are two different things. Wal-Mart may move a lot of product because of its low prices, but it has built a business model and economies of scale that enable it to do so profitably. Hoping that a large number of loss-leader sales will deliver profitable customers the next time around is a far riskier bet.

Patricio Robles

Published 20 August, 2010 by Patricio Robles

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

2380 more posts from this author

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Theo

This is the kind of myopic analysis that seems to pervade every story about the effectiveness of Groupon marketing for businesses. Once again, with feeling: Groupon marketing is used to establish relationships with new customers and increase brand awareness. It is NOT a tactic used to drive one-times sales. I suppose the author would be more congratulatory if Gap were to just dump $10 million into a national advertising campaign with no meaningful way to measure ROI. If Groupon sells 500,000 Gap coupons, that is 500,000 customers that most likely would not have visited Gap stores during the back to school season. Many of these customers are not only likely to spend over the $50 purchase limit, but they will also be exposed to Gap's new fall collections and thus may return to purchase additional items. Whether the coupon is a loss-leader in the short term is irrelevant. Will these coupons save Gap? Of course not, it is just one component of an overall marketing strategy but reaching 500,000 new customers is a good start.

almost 6 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Theo: successful businesses don't acquire "new" customers, they acquire profitable customers. That's the point of this post. What percentage of the people who bought a Groupon voucher will turn into profitable customers? Big question.

Instead of speculating that many of these Groupon customers will spend more than $50, and "may" return to purchase additional items, here's what you should be asking in my opinion: shouldn't a company whose CEO has essentially admitted that his company hasn't offered enough tops, for instance, to compliment the jeans it sells, fix its suboptimal product mix before it lures hundreds of thousands of people into its stores and offers them $50 worth of product for $25?

almost 6 years ago

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Philip Wilkinson

It'sma good question to ask regarding the group buying deal a day sites, and ultimatey comes down to the quality of the customer base who buy the deal. Some sites (perhaps the one in this article), may have a user base who is only after the short term bargain. So, at Keynoir, we've found that the majority of our customers spend more when they're in a place (restaurant, spa etc..) than the deal originally gave them - going for nice wine or an upgraded hotel room as an example. In this case they want a great experience on something new and fun, and the deal aspect is the mechanic that finally helps them take action and do it. The deal in this article is offering nothing special - a high street shop with a boring pair of jeans, in a shop, as the last commented mentioned, where the product mix is poor and unlikely the customer will buy more than the one pair of jeans. So it's about the customer base you have, the type of deal you offer, and the quality of the place/product you send your customers to experience.

almost 6 years ago

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buyer beware

Philip, your offer of a Keynoir Moleskine for £2.00 was seeded on moneysavingexpert's forum by an affiliate partner. This might have driven sales but aren't you attracting the sort of short term bargain hunters unlikely to turn into unprofitable customers and not the big spenders you describe above?

almost 6 years ago

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Ramit

I wish groupon would show case studies on clients that have actually made money using groupon. Actual proof of ROI being there.

Perhaps it time customers who have used Groupon or similar services give their feedback on their true experience and ROI .

almost 6 years ago

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Contus

I love Groupon.com too! So happy to see you giving it the props it deserves.

almost 6 years ago

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Ted

Groupon is essentially acting as a liquidator for businesses  - just look at the financials of a typical groupon:  50% off the retail price of a product or service, 25% to groupon as fees, 3-5% to a credit card processor and the remaining 20-25% to the merchant.  This is what you would expect a liquidator to do in a "going out of business sale."  

This begs the question:  what if these same merchants offered this type of deal to their existing customers as a "loyal customer discount", or even utilized traditional media to offer these deep discounts?  Would they be just as successful without groupon? 

Average groupon redemptions are not that high - see the groupon web video here:  http://vimeo.com/15875216 at the 1:50 mark - especially considering the size of the locale and their email list.  

The irony here is that many merchants cringe at the thought of using coupons, but groupons deeply discounted certificates are more damaging to the merchants financial position.   

What's even worse, and is that groupon is essentially targeting consumers who are "serial deal seekers" interested primarily in getting a good deal on a product or service.   These customers are not necessarily interested in the product or service category - they may be taking a "test drive" of a product or service they would not  try otherwise, thus many groupon users are not likely to become loyal customers. 

One question that I don't hear small business owner discuss often is what does it take for a customer to become a loyal customer.  For example:

  • a loyal customer likely has a inherent interest in your product or service, at least a strong interest in the product/service category...
  • a loyal customer is likely align with your brand, even if its only a local brand.  They find your physical location appealing, your staff appealing, your policies and proceedures appealing, your business image appealing, etc...
  • a loyal customer likely lives, works, or plays near your business location.  Not only do they like your business, but its also easy for them to access it.  This could include online, too.

Keep in mind, that loyal customers are much less expensive to service for nearly all types of businesses - primarily because they become familiar with the companies procedures & policies and need less hand-holding by the company.  They are simple less costly to sell to and service.

If I was a merchant, here's what I'd want in a promotional platform for my business:

  1. Robust targeting capabilities that allow merchants to target consumers based on user preferences (e.g. broad categories of interests & likes) that are easy to use (e.g. point and click targeting)
  2. Geo-graphic targeting capabilities that allow merchant to tailor offers to the location of the consumer (e.g. at home, at the office, traveling...) and exclude consumers too far away from their businesses to become regular customers.
  3. Strong legal mechanisms to protect merchants who inadvertently create erronous offers, don't know the laws relating to promotions, and limit the exposure to consumers looking to make a buck by filing a lawsuite.  Small business owners are responsible for everything - a good promotional platform won;t let them make stupid mistakes.
  4. Ability to deliver promotions and offers via the web, desktop, mobile, automobile, etc...without extra work.  One promotion...many channels.
  5. Be inexpensive.  Less than existing media like the newspaper or coupon booklet or email distribution.
  6. Be easy to use.

So, what else would you add to this list?  The only current promotional platform I know that meets all these criteria is a company called Zimini - although I'm sure there are others.

over 5 years ago

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Frank

So, basically...Gap was in a terrible slump and groupon was it last chance to make some money. 

over 5 years ago

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