Groupon is Not a Marketing Strategy

Groupon logo.

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Groupon‘s UK Managing Director Chris Muhr opined today that the reason Google would want to purchase Groupon was because Groupon has “…something that Google does not have and no one else has and that we have really tapped a new market,” but is it really a new market or have the just tapped into the greed and laziness of businesses who long for days of old media? I think it’s the later, which is why the idea of Groupon is at once appealing and dangerous to small businesses and brands all over. But first a bit of background.

How Groupon Works - Groupon highlights one business in each city every day with a sale that’s too good to pass up. (They also have “side deals” and Groupon Stores, but we’ll focus on the main deal here.) Usually 50% or more off retail price of a service or item. They like to focus on a price range that makes the item easily bought on impulse and guide businesses to try to stay under $50 for the best results. So if you sell wine for $30 a bottle they’ll want you to offer it for $12-$15 on Groupon. Then Groupon takes 50% of every transaction successfully processed through the offer. So to continue the example, if you sell wine for $30 regularly, you’ll put in on Groupon at $12 and you’ll end up with $6 per bottle sold. They’ll also set a tipping point for the deal to be activated (the “group”” in Groupon) and will also let you cap your deal at a certain amount of sales. It’s pretty easy to see that if you don’t have much margin built into your product, you’ll be in the red on every sale, depending on how you structure your Groupon. And if you can give up 75% of revenue and still make a profit, it’s likely going to be a very small one, which means you need to sell a lot of units to make any money.

So, then why does a business use Groupon? Businesses use Groupon because they can drive a large number of visitors to a store location with a single event. They hope that the new customers reached by Groupon will buy additional items above what is advertised (if you’re losing money on your Groupon this is considered a “loss leader” strategy,) and/or you hope that they become loyal customers that come back. But I also think they use Groupon because they’re lazy. That’s right. Lazy. And here’s why.

Groupon works a lot like a newspaper ad used to. You find the biggest circulation possible, you make an appealing offer and you hope that you get customers that will come in and like your business. It’s the old “spray and pray” model of marketing that worked so well in the days of mass production and mass consumption. Get it in front of them and they will buy. It takes little thought, little effort. It doesn’t take cultivating relationships, building a brand or finding customers who really need your service. It’s the laziest form of marketing out there.

If you’re a business you have four critical attributes that help drive sales: your brand, your prices, your awareness level and your location. There are of course many more; but let’s look at these four for a moment.

Your Brand – If you have a strong, growing brand, you don’t need Groupon. Your brand drives customers, customer loyalty, word of mouth marketing and strong margins. You can charge more, spend less on advertising and focus on growing your brand through unique experiences and high quality products. It’s a virtuous cycle, but one which few companies get into and fewer still that can maintain it.

Your Prices - If you don’t have a strong brand but you have incredibly low prices then you’ve defined yourself as the low cost leader, you’re first in the race to the bottom and you know you’ll live a life of low margins and need to move a lot of units to make up for it. You also aren’t ideal for Groupon because you probably have a brand associated with being the low cost leader, and Groupon’s pricing structure doesn’t work well in a low margin world (as outlined above.) If you’re priced in the middle of the market you really don’t have a lever for sales on prices because customers can go to the low cost leader.

Your Awareness Level – Among your customer base your awareness level is what drives repeat visits, word of mouth and new customer acquisition. If you have great awareness, if everyone knows that you’re the only 24 hour locksmith or the only tux rental place in town then you’ve got great awareness. If you’re one of 12 women’s clothing stores, like a Chico’s in a strip mall somewhere, you’re awareness level isn’t great. Groupon starts to sound like a good idea here.

Your Location - Unless you’re a virtual retailer with a strong ecommerce presence, you’re really limited to the surrounding area for your customers. How far they’re willing to travel to get to you is a function of all three above. Groupon makes sense here too.

So if you’re a middling business with little or no brand, little or no price differentiation, and a fixed customer base that is more or less only growing with the population in your area, then you have only a few levers to pull to make your business go. You can go about the hard work of building a brand in your community. Connecting with core customers, building word of mouth by creating an amazing experience, or demonstrating expertise above and beyond the competition. Or you can cut your prices, be the unbeatable low cost leader and price match anyone else. People know that they’ll get the lowest price from you and that goes a long way. Or you can increase your awareness by advertising, sponsoring events, etc. Or you can open more locations, a capital intensive process that may or may not work for your business.

Or, you can Groupon. Because with Groupon you don’t need to do any of that. You just spray and pray. Cut the prices on an item and let Groupon do the rest. But is that really it? Do the customers come back? Do the customers care that you exist? Do the customers remember who you are and where to go the next time they need something you provide? There are plenty of Groupon disaster examples on the Web that say “No.” Because without thoughtful marketing in place, Groupon is just a flash in the pan.

In the PR trade they say “Getting on TechCrunch is not a PR strategy.” I say “Getting on Groupon is not a marketing strategy.” And it’s where I think Chris Muhr is wrong. Google provides the savvy, thoughtful marketer a lot more than Groupon ever could. It provides the people willing to invest in their brand, their customer experience and their awareness with an avenue to showcase their business to people actually looking for them, not just people looking for a rock-bottom deal.

This goes for big brands as well as small businesses. If your brand is flagging, and you’re undifferentiated among your competitors Groupon is not going to solve your woes. It doesn’t matter how many gift cards you sell if you can’t convert those customers into repeat customers and advocates of your brand. And if you don’t fundamentally change your brand and the customer experience then Groupon will be nothing more than crack for your marketing department. Because each time you run a Groupon you’re high will be a little less than the last time and your hangover will be a little worse. For every Groupon you run, you dilute your brand a little bit. Do it once and it’s a marketing stunt. Do it over and over and you begin to redefine the value of your product or service. You hurt your brand and any differentiation you had. You’ve chosen the low cost leader, commodity approach. Prepare to accept the consequences.

So can Groupon work? Absolutely. Is it the right answer? Maybe once. Is it a strategy? Absolutely not. Is it easy? Too easy. Small businesses and big brands should focus on reengineering their customer experience from the web site to the warranty service. And when that is done then, maybe, it’ll be time to shout it to the world with Groupon. But more likely, the people that have been blown away by the change in your service will have already told the people you want to reach. Don’t be lazy. Do your job. Your brand and your bottom line will thank you.

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13 thoughts on “Groupon is Not a Marketing Strategy

  1. Great post Morgan. I’ve spent a lot of time studying the Groupon Effect recently including looking at what numerous business owners have said that used the service. In almost EVERY instance I’ve seen, small businesses have been either decimated by the service or at least severely hurt (look at almost every photographer that’s used the service.) I do think though that big brands stand to benefit from the service. Look at the Nordstrom example from the other day. They took down Groupon as people couldn’t buy enough of the $50 gift certificates for $25. I think that Nordstrom will see numerous people take advantage of that which haven’t previously been to a Nordstrom before and I think because Nordstrom has such good customer service and other parts of their business to back up the Groupon marketing system, they will monetize on it. Most small businesses just don’t have the capabilities to handle that many more people and continue to offer the higher level of customer service that patrons of small businesses usually expect.

    • morganb says:

      Thanks Eric,

      I agree with you that small businesses don’t have the infrastructure to either handle the volume or convert Grouponers into repeat and loyal customers which is where the value really lies in these things. (outside of the pure profit on breakage.)

      The only thing about Groupon for big brands is that if you have any type of premium positioning, like the Gap for instance, you can’t run Groupons too often or you reset the consumer’s perception o your value. I think the most a big brand could run these are twice a year, more than that and it’ll really start to erode the differentiation they’ve worked so hard to acheive in the first place.

      Full disclosure – I bought the Nordstrom Rack Deal. :)

      Morgan

  2. Groupon is a marketing channel and no more. Any belief or expectation that it’s anything more is misplaced.

    I can’t wait until enough companies have used Groupon to get some solid data; I would love to get a analysis of net profits from Groupon offers by type of companies, type of products, type of offers, etc. Groupon isn’t a revolution, but just a new marketing channel, and it will become more apparent as companies learn about the long-term impact of using Groupon.

    As for Groupon as a company, well, I’ve got other thoughts. Another day…

    • Morgan Brown says:

      Thanks for the comment Taylor. I agree completely. I also would love to see some firm data coming out that shows wins/loses of the Groupon model by business type, offer type, price point, etc. so that there could be a more cogent discussion about the merits/downfalls of that type of approach.

      And you’ve definitely piqued my interested on the company… If you ever post about it let me know.

  3. For the most part, I am on the same page with you in that Groupon isn’t advantageous for all companies of all sizes.

    However, where I disagree with you is the idea that Groupon is “lazy marketing” for some businesses.

    Let me give you an example. I did a video once for a mid-size salon in San Francisco. They didn’t have the budget for a marketing person, nor even for a marketing consultant. The owner barely had the budget for a video. I saw so much potential for the salon (great neighborhood, talented staff, nice interior), but the owner was “old school”. So, he went with a Groupon-type promotion for his salon.

    Would I call his decision lazy? Hardly. I would describe it more as a simple, easy way to market his salon with the limited budget, sources, and foresight that he had. Were I hired as a marketing consultant I would’ve thought of something different, but considering the owner was already stretched in terms of his time and budget, his Groupon-like promo was the way he went.

    How successful was it? Beats me, lol. I know he told me, though, that he ended up gaining some loyal customers out of that experience but “some” doesn’t necessarily mean it was worth it in the end.

    My point, though, is that I never felt it was a lazy effort on the owner’s end. I just don’t think he had the vision or budget that you’re suggesting for mid to small size businesses within your post. I guess my “irk” is with the word “lazy”. Instead, I agree that it makes sense for some, but not for others. But if a co. decides to go with a Groupon-like promo, it doesn’t mean they simply “can’t be bothered” with a proper marketing vision. Sometime it means that Groupon is *maybe* one of the very few options a business owner can afford to invest in with the limited resources and time he/she may have.

    Just my two cents. :)

    • Morgan Brown says:

      Great point Cristian. I can empathize with small business owners that don’t have time to do everything they want to market their business (I’m related to one!) I was more admonishing the idea that Groupon might somehow be a cure-all for a businesses woes. Which I do think is lazy thinking.

      In regards to your example, I think Groupon makes sense in that situation, because they have some of the other things in place to take advantage of the exposure. A unique experience, talented staff, etc. These are differentiators that can create long term value for the business via customer loyalty. I guess I’m referring to more of the non-descript business with an average staff, average prices, average business thinking that Groupon is the answer. When clearly they have other things they need to do to get their house in order.

      Thanks for the comment!

      • “A unique experience, talented staff, etc. These are differentiators that can create long term value for the business via customer loyalty.”—Agreed, when the resources are there for it. :)

        Great piece overall Morgan. A good read, and a good discussion point.

  4. Feng says:

    @Galactic:disqus  no matter it is lazy or not. it is good to have more options rite??

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