Groupon, that’s the new WWW sensation. Most internet savvy people either heard about it or shopped for a deal in there. It’s a quite simple concept, a website that offers incredible discounts for local businesses on your city. Great, I can get a $100 dinner on my local favorite restaurant for $50, that’s sound a great deal isn’t it. Well, in theory it’s an amazing deal, for customers at least.
Groupon alleged has monthly traffic of 3 million users, moreover it is believed that the firm’s revenue was $500 million dollars in the last fiscal year, quite impressive for a 2-year Chicago based start-up. Groupon numbers and growth are without doubt off the chart, however until when this business model can be sustained?
In reality many businesses are using Groupon to gain brand visibility. Groupon is a “cheap” way to advertise. A small biz owner that sells $100 deal for $50, have to give 50% of its sales to Groupon, so in fact in $100 deal the business owner gets only $25. One may think it is worth because hundreds of thousands of locals will be seeing your ad. Yet most of small businesses in the US have profits margin between 10% and 15%. So how can a small business stay in business offering such low prices? The answer is, they can’t! It’s actually a mix between long term marketing strategy along with a dumping strategy, where a business sell below its cost expecting to increase business visibility and customer base to later sell at full prices. Plant the seed now to collect the crop in the future.
Great!! However, many businesses are realizing that Groupon actually are hurting their businesses. Current customers are using Groupon to get a deal. Therefore, the current customers that before were willing to spend full price, now are actually bringing only 25% in revenues. In the long term, I believe, small business owners will realize that Groupon is not such a good deal.
If one is opening a new business or wants to increase its business visibility Groupon is a great and cost effective advertising channel, nonetheless I believe that small business owners can’t survive using this business model and eventually, once they grow their customer base, or when they are selling at capacity (i.e. summer time for restaurants) they will stop using the website, hence Groupon will face a challenge not only to grow revenues but to sustain it to the current levels.
Source:
http://blogs.reuters.com/mediafile/2010/12/01/is-google-overpaying-for-groupon/
http://www.retaildoc.com/blog/groupon-worst-marketing-business/
