I got an email yesterday from someone who told a very different story of the widely celebrated Gap-Groupon deal. The coverage of that event was overwhelmingly positive, including a piece in AdAge that quoted Groupon president Rob Solomon saying that the company’s phones had been “ringing off the hook” since the promotion:
Since last week’s national Gap promotion, Groupon’s phones have been ringing off the hook, said Rob Solomon, president-chief operating officer of Groupon. He expects the company’s next national retail promotion will happen “pretty soon,” with more to come during the fourth quarter.
In that same article there are details about how the Gap will benefit from in-store customers making up for the discount and so on. And I basically supported that idea in the abstract. But here’s a paraphrase of the “off the record” email I received:
A pretty good source said the Gap CEO was livid at the Groupon deal. He said it was so bad from a profitability standpoint that it will negatively impact their earnings per share.
Let’s be very cautious about taking this and running with it. I haven’t sought to verify any of this with the Gap or with Groupon (I haven’t had time). But if any of it is true it represents the exact opposite outcome of the story being told in the mainstream coverage.
On a related note, I was moderating a local-mobile discussion at the Omma Mobile Insider event last Friday. Also at the conference were some brands and agencies. I heard them express ambivalence about coupons, as bad for the brand, for margins and for creating undesirable consumer expectations. They also said they didn’t want mobile advertising or marketing to simply be about coupons or deals.
There are now many contrarian stories about daily deals and local merchants starting to emerge. I wrote an early one in The Dark Side of Groupon Sites. More recently I’ve seen the following and others:
- Groupon discounts can overwhelm vendors
- Groupon Deal Unleashes Cupcake Horde on Understaffed Bakery
- SF TV station (KTVU) profile of daily deals and merchant ambivalence (via Chris Smith)
One could argue — and Groupon President Rob Solomon previously did to me — that these stories reflect early glitches and the novelty of the daily deal phenomenon. In time these kinds of things won’t happen because merchant education will be better; people will know what to expect and be better prepared.
Stepping back, there are two things going on here: the press coverage (seeking a fresh angle) is trying to find the cracks or problems with this otherwise very successful model. But there is also some merchant ambivalence that is becoming clearer. I had previously believed that coupons and deals represented the perfect alignment of consumer and advertiser interests. I knew as a general matter that’s not always true. But these stories illustrate it in a more concrete way.
Groupon, LivingSocial and other deal sites will persist and continue to be enormously successful with consumers. But I’m now clear that they won’t ultimately cannibalize other forms of SMB marketing. That’s partly because daily deals cannot substitute for many other types of marketing. But it’s also because merchants won’t want to rely on deals or couponing exclusively — no matter how attractive the “customers not clicks” business model.
Do you agree or disagree?
September 1st, 2010 at 3:14 pm
I’ve spoken with a few small businesses who have run Groupon deals (mostly dental offices), and from what they’ve said, Groupon is anything but a Loss Leader. It’s just a Loss. These dentists are having to sell their services WAY WAY under value, and I believe that this will create a certain expectation amongst prospective patients as to how much a cleaning/exam/x-ray should cost. I know in one office I consult with, we’ve determined we would have to convert half of the Groupon customers into returning patients in order to break even. Half! Break even! And every office I’ve spoken to has also been entirely overwhelmed. If you’re looking for people with less than glimmering reviews of Groupon, I would look to Dentists and similar service providers.
September 1st, 2010 at 9:23 pm
Greg,
Having represented one of the most successful Groupon & Living Social offers in the San Francisco Bay area I have to say that I AGREE with you.
You may believe that I am biased toward Search Engine Marketing (Organic & Paid) but I’ll bet my bottom dollar that the margin in Search is bigger than any offer site. Search clearly won’t deliver such a high volume of conversions in a short period of time but the return over a given period of time will be better. Satisfied customers that come in through Search, convert into sales will also garner a higher lifetime value for any company in any business vertical, whether service or product.
The truth is that customers delivered through Group Buying sites are deal seekers and deal seakers don’t have high levels of brand loyalty. One must look into the psychology and motivation of every marketing channel to understand.
Also if one runs an offer on a Group Buying site and has poor search engine visibility they are not maximizing their return whether from direct conversions or branding.
I would like to say that Search is only one marketing channel that as compared to Group Buying will remain very important but definitely not the only one.
September 1st, 2010 at 10:32 pm
Hi Greg,
I’ve spoken with a sushi shop in France one month ago and what he told me is 100% in line with what you describe.
A competitor of him used Groupon and had about 200 persons coming for the offer that was a standard groupon offer (-30%, -50%).
His fear was that a portion of the 200 customers was his customers, and that he’ll ultimately have to make a similar offer to get them back and that this logic will push prices down…
Btw, I’ve been a long time reader of your blog, this is my first comment here, keep up the good work !
September 2nd, 2010 at 12:05 am
I quite agree with you all also, however, i recently found quite a good website that offers consumers somewhere to get a deal & save money but the discounts are still quite viable for the businesses to run them. They are offers that the business would usually advertise but have since expanded on their branding to reach the online market given the opportunities for growth are ever-increasing. They now have their regular deals for their loyal customers and different deals made available online (of similar savings) for the online community. I believe it to be quite effective to broaden their loyalty base and instill their name amongst their targeted demographic, quite clever. I got my friend to sign up who runs a nail art business and she says she has gained a further 5 customers per week with minimal investment, something she was struggling with previously.
September 2nd, 2010 at 12:20 am
Thanks all of you for the specifics. Very interesting.
September 2nd, 2010 at 2:20 am
Daily Deals on the Internet are not a silver bullet for small business marketing (only the media or options holders would propose such hype). Conversely, the offerings from the currently significant players in this niche are tremendously exciting for a number of reasons.
1) They firmly establish a direct marketing alternative to search (Google) for small business, which is more and more fighting desperately to ascend to organic relevance in search placement
2) They validate a replicable model of moving a very successful traditional model of promotional advertising to the internet
3) They tease our (internet solution providers) imaginations about how to continue serving the small business in cost effective ways.
Any news about small businesses losing money or suffering as a result of this fledgling marketing experimentation is nothing more than drama. My big take-away from recent results in this space is that what we all need to be focused on near term is process, not results, because the ‘out of the gate’ (likely to fate) players have now demonstrated the potential results from this new medium for an old marketing strategy (which is only a part of the total solution).
September 2nd, 2010 at 2:27 am
Justin: I agree that this is a compelling model but one that offers a portion of an broader overall SMB marketing strategy. The larger challenge is one of education and experience for the SMB: figuring out what to do with the 2000 people who come through the door, or how to use Twitter and Facebook effectively, etc.
September 17th, 2010 at 1:50 pm
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October 8th, 2010 at 4:17 pm
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