Friday, March 4, 2011

Going Like Sixty

Going Like Sixty

Why Groupon Will Fail

Posted: 03 Mar 2011 11:28 AM PST

Groupon.com is slated to have an IPO of stock this summer.  The experts value the company at around $15 billion.

Expert = “X” is unknown value in mathematics.

“Spurt” = a drip under pressure.

XSpurt = Unknown drip under pressure.

Here’s why Groupon.com, and all the others like it, will fail with the same plodding thuds not heard since the dotcom bubble bursting days.

And I hate it. I  hate it because I love a deal.  And there used to always be fantastic deals on Groupon.com and the others.

First: Groupon.com was too successful in the early days. Somehow the sales chicks at Groupon.com convinced CMOs and CEOs that there was value in heavily discounting their core merchandise to get a huge crowd through the doors. They fell for the old bromide:  “I lose money on every sale, but I make it up in volume.”

A hairstylist in Anchorage, Alaska, fer chrissakes, says about Groupon.com

"They contacted me more or less out of the blue. Thirty-nine dollars for $100 worth of services — people can’t look past that that easily. As a matter of fact, it’s a loss for me. But dollar for dollar, as far as advertising goes, it’s brought in 10 times the new clients as we would normally expect, which has resulted in the salon revenue practically doubling."

Yup, revenue is through the roof, but the styling salon is losing money on every sale. And true to form, the hair stylist overlooked the fact that Groupon.com took a cut of that $39.

Second: The Deals Cause Ill Will. When a thousand people slam into a cupcake joint looking for the deal and the cupcake joint can’t handle the traffic, people go away mad. Or quality and service suffer.  The early Groupons were practically unlimited as to the number of customers that could grab up the deal. Now Groupon is counseling their sales babes to set a low limit to match the physical and fiscal resources of a business.

Third: The Deals Are Not Sustainable. Because of the early success, merchants (and Groupon) are learning to tone down the wild deals that marked the early days. Gone are the days of six tanning sessions for $26 – a $135 value. Gone are the deals of $20 worth of fast food for $10. The deals were too good, the redemption rate was phenomenal, the loses were too large. Now the deals are much more subdued as Groupon and merchants learn that too much business can be a bad thing. And that means people like me, who would never blow money on tanning sessions unless the deal was too good to resist, will resist. The deals are getting lame: X % off framing services or 1/2 price limo service or $20 off lawn treatment, $45 off language lessons. ($165 value.) All very resistable…

Fourth: The Deals May Never Expire. Some states have laws that prohibit “gift certificates” from expiring – ever. A lawsuit is pending saying

13. Defendant Groupon’s systematic placement of expiration dates on its gift certificates is deceptive and harmful to consumers. Consumers must act quickly to purchase gift certificates–usually within a 24-hour period.

14. As such, consumers, like Plaintiff, feel pressured and are rushed into buying the gift certificates and unwittingly become subject to the onerous sales conditions imposed by Defendants, including illegal expiration terms that are unconscionably short–often just a few months.

A merchant can temporarily go insane – or fall under the spell of the sales honey – and offer a super-dooper deal, only to have it show up a year later.

Fifth: The field is getting very crowded. Entry into the email deal coupon business is very easy. Competitors are springing up like spores on dog shit. I can’t name them all, but here are a few:

  • Living Social
  • Gilt
  • Tippr
  • Buy With Me

And everyday somebody else enters the market – people with sales staff already in place and doing business with many of the merchants.

  • Newspapers came late to the game, but they are coming in droves.
  • Yellow Pages will be rolling out their version soon.
  • Chambers of Commerce are setting up local deal email blasts.
  • Radio and Television giants are pushing local imitators.

Here is a more complete list.

And then there are the others just waiting in the wings: Google, Facebook, Amazon, Microsoft maybe you have heard of them?

Smaller Merchants don’t follow-up. Losing money during a sale is OK sometimes. If a merchant can capture email information and will use it to do follow-up  sales and marketing. Trouble is, this is spam. Small merchants don’t like spam because they see it all the time. Customers don’t like spam. Nobody likes email marketing anymore.

Somebody is going to make a fortune when Groupon.com launches their IPO. I’m betting it will be the bankers and the stock-spectulators.

About the only deal that is a sure thing with Groupon.com is wait for the IPO,  short the stock and wait. That will be the best deal they offer.

If you’re paying full price – you’re paying too much. Groupon.com et al will make it pleasant to be a bargain-hunter for the short term. But long term, as an investment, Groupon.com is destined to fail dramatically.
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