Could Groupon be an $8bn a year business? How about a $25bn a year
business? Sound crazy? It’s not — at least to a number of observers,
including TechCrunch’s Michael Arrington and TrialPay CEO Alex Rampell.
Group buying is already one of the hottest markets on the internet right
now, and if people like Arrington and Rampell are correct, it could be
one of the largest markets on the internet in short order. No wonder there are rumors about a billion-dollar acquisition of Groupon.
Unfortunately, the talk about Groupon is crazy and no matter how much one likes the group buying model, it’s safe to say that group buying has jumped the shark.
What everyone seems to be forgetting: Groupon and its competitors don’t really sell anything. They serve as agents for local businesses. Those local businesses not only discount their products and services significantly to get members of Groupon’s audience through the doors, they pay a hefty commission for the privilege.
And they do all this with one major assumption: enough customers will return to make the exercise worthwhile (read: profitable). On market leader Groupon’s website, for instance, business owners are told that a whopping 89% of businesses that have used Groupon believed that the customers delivered “were likely repeat customers.”
Groupon also promotes that some 97% of the businesses it works with would use Groupon again. That obviously hints that Groupon businesses are receiving what they hoped to: new, loyal customers. But a recent survey conducted by Rice University’s Jesse H. Jones Graduate School of Business painted a far different picture. Far fewer businesses surveyed — just over half — indicated that they’d use Groupon again. The study’s authors noted:
There is widespread recognition among many business owners that social promotion users are not the relational customers that they had hoped for or the ones that are necessary for their business’s long-term success. Instead, there is disillusionment with the extreme price sensitive nature and transactional orientation of these consumers among many study respondents.
This, in a nutshell, is group buying’s Achilles heel: the growing realization that group buying sites aren’t delivering a vast audience of high-value consumers who are interested in patronizing the businesses they discover through their group buying purchases. Groupon’s own data confirms this. According to The Wall Street Journal, Groupon’s research found that only 22% of Groupon buyers go back to the businesses from which they purchased a Groupon. That, of course, is far less than the 89% figure Groupon touts on its website.
And there’s good reason to believe that the ability of group buying sites to deliver loyal customers is constantly declining. After all, group buying is sprouting up everywhere. From startups receiving millions of dollars in funding to AOL to newspapers, everybody is jumping on the bandwagon. Make no mistake about it: this will have a viral, cannibalizing effect on whatever ROI these sites might ever hope to generate for the businesses that use them. After all, if you’re a consumer, another great deal is always around the corner, so why ever pay full price? Other local businesses offering the same products or services will always have deals of their own. Just wait a few days. Further, as more and more businesses discount for the likes of Groupon, they erode their own perceived value, and destroy their own pricing power.
This is, of course, unsustainable. While Rampell writes, “I think Groupon can be the Amazon of Online2Offline commerce, and there’s no reason they can’t get to $25B in annualized revenue like Amazon, but at a much higher margin,” he forgets a simple fact: Amazon sells real products at real profit. Groupon promotes loss leaders for local businesses who believe that they’ll eventually have more than losses to show for it.
But many of them don’t, so these businesses are essentially subsidizing Groupon’s success to their own detriment. Which begs the question: how many local businesses are there out there which can afford to discount their products and services by upwards of 50%, while giving up 30-50% of the revenue to Groupon, and for how long?
For Groupon to be an $8bn-plus per year business, and to become the Amazon of online-to-offline commerce, thousands upon thousands of local businesses must have an unlimited ability to sell products and services unprofitably for years to come. For those who believe this is possible, the ghost of the .com boom is back and some great deals on bridges. Coming tomorrow on Groupon, of course.