Update: this post was originally posted on BusinessInsider.com
For years now I have been waiting to read a post like the one I just read on the Daily Deals concept. Rocky Agrawal has done extensive research on the daily deals phenomenon and succinctly puts it: The entire daily deals industry must die.
I vehemently agree with his perspective; it finally calls out aspects of the model people have been turning a blind eye towards for way too long. Please do yourself a favor and read it. Although much has been written lately regarding Groupon and it’s historical rise (one in which I have no question been fascinated with), we should not forget: a good business might not be good for business. Here are some thoughts I had back in 2008 when we first heard of Groupon and still hold today.
Discounts are for crappy businesses
BMW is a luxury car. The Metropolitan in Seattle is a nice restaurant. Gucci and Prada command extremely high prices for their merchandise. Although these companies are more well known brands, I think you get the point. They don’t have to discount their products because they don’t need to. By building a business through offering a quality product or service (and running it soundly) they don’t need to resort to scrapping the bottom of the ocean just to sell something.
But when a business is having trouble getting people through the door they will look for any way to reverse the trend. Some hire people to wear the sandwich board, hold the arrow and dance around on the corner for minimum wage. Others will offer 2-fers. And now many are realizing the power Groupon has in getting get their name in front of thousands in one day. All this marketing does not change the fact that something is wrong with their business. If there wasn’t anything wrong, they wouldn’t need more customers and wouldn’t be running a Groupon. Rocky describes the core fundamentals of coupons and group discounts have been around for many years. Only difference now is the medium used for distribution.
Discounting is like crack for business
Once a business chooses to offer their products or services for a discount – say 50% off – they have effectively started abusing a drug. The daily deal is impulsive for consumers, as in, some experience a high when they open their daily deal email each day. “OMG, what will it be?” And local businesses get a excited when they see a large influx of customers (the high). Once this initial influx dies down two things happen. First (and most likely), their business volume will go directly back to the customer visit level previously experienced prior to offering a Groupon (the comedown). And second, they now have told the world the “real” value of their products or services. It would be foolish for a customer to pay full price for something once they know it will be offered for half the price. So businesses are forced to continually slash their prices and offer more mass discount deals to maintain customer interest. It becomes an ugly downward spiral (addiction). This brings me to my next point…
How is 50% -75% off a sustainable economic model?
Groupon (and the like) are effectively (re)training the local consumer to expect ALL products and services to be offered at a steep discount. We are creating a consumer addicted to the mass discount. This is not sustainable and downright scary for the local economy.
I should know, my previous business offered Health and Fitness services on a local level. My income could be thought of on an hourly rate for the service I provided. Given I charged $100 per hour, take away 30% for facility rent, and 20% for taxes I am left with at most $50 per hour of compensation. If I chose to offer a daily deal discount and reduced my professional rate to $50… well I think you get the picture. And what do you think I would have told my existing clients “oh, them…? they bought the Groupon so they paid half as much as you for the same service.” I would have lost all my full paying clients.
My point is profit margins are generally very low in the local economy- restaurants, health services, retail stores, coffee shops, etc… it’s not uncommon to be dealing with single digit percent profit margins. It’s like each daily deal is a knife stab to the gut of a business. There is no way this economic picture is sustainable and Rocky does an excellent job of describing what is going on: millions of people and thousands of business owners are being taken advantage of. It will have to stop.
A real business is built upon Loyalty
Pareto’s law, or something known as the 80/20 rule is at the foundation of any business, any size. To paraphrase, it says “80 percent of a businesses revenue will come from 20 percent of its customers.” Simply put, it is loyal customers who keep a business running. The hard fact is this phenomenon will never change and is the basis of why I started Loyaltize. Notice how much the words Loyal and Loyalty are popping up nowadays. I believe tremendous value will be created in the local space built around customer loyalty.
Groupon is essentially trying to swim against the natural economic current by allowing businesses to offer discounts to thousands of new customers. Surprisingly, they sell local businesses on using their service by saying “we will help you gain more loyal customers” at the same time they promote to consumers “Groupon is a way to discover new businesses in your local community.” Unfortunately these are contradictory statements and the truth is Groupon attracts deal seekers, not loyal customers who are willing to pay full price for a quality service.
If we are not careful, we are going to ruin our own local communities
I believe this mass group discounting cannot go on much longer. But if I am wrong and it does we will effectively kill off what we currently consider our local communities. Maybe it is a good time to reflect on what exactly is the “local community”. My definition is all the local proprietors who run most of the operations you frequent throughout your normal life. Actually, they are these things:
• Represent 99.7 percent of all employer firms.
• Employ half of all private sector employees.
• Pay 44 percent of total U.S. private payroll.
• Generated 65 percent of net new jobs over the past 17 years.
• Create more than half of the nonfarm private GDP.
• Hire 43 percent of high tech workers ( scientists, engineers, programmers, and others).
• Are 52 percent home-based and 2 percent franchises.
• Made up 97.5 percent of all identified exporters in FY 2008.
• Produce 13 times more patents per employee than large patenting firms.
Once we all (as consumers) only seek deals on the cheap and expect to buy dinner online for $10 instead of the regular price of $25, the local community will cease to exist. Most local businesses will not be able to operate at such levels.
Years ago, many feared Walmart and fast food was the end of local culture as we knew it. I argue Groupon, LivingSocial and all Daily Deal operators will do much more harm to all our own unique local communities than Walmart did. Go ahead, ask any local restauranteur, barista, Health professional, or masseuse what they think about giving away their products for more than half the price. I hope we can move on from 75% off deals and find a sustainable local advertising model before it’s too late.
Image courtesy of flickr user Parl