Three reasons why group buying does not serve merchants, marketers, or consumers.
You may have been left with the opinion, if you were fortunate enough to read my column, "How Groupon's Value Is Based on Performance," that I am a huge Groupon…well, Groupie. While I am a "member" of Groupon, I am far from a fan of the model. Since my last column sounded like a love-letter to Groupon, it seemed smart to look at the other side of the story and tie it into online marketing, and more importantly, what can be learned from three of Groupon's shortcomings that could doom it to failure.
While companies like Groupon and LivingSocial have had huge growth and gained enormous value, they now appear to be stalling. According to Compete.com, Groupon.com went from an all-time high of 33 million unique visitors in June to 15 million in September. LivingSocial.com's traffic decrease has matched Groupon similarly. And according to a Bloomberg report, Groupon owes almost twice as much to merchants at the end of September as it held in cash. (Groupon is scheduled to have an initial public offering that could raise as much as $450 million and value the company at $10 billion.)
Those who say that Groupon is just a fad are partially right. While Groupon will likely continue to exist in some way, here are reasons it will eventually fade away as a footnote.
1. A limited number of companies will do business with Groupon more than once. Simply put, the model is really to some degree a one-shot deal. Providing discounts of your product over and over again through group buying doesn't add up. A group-buying deal might bring new customers but there's no guarantee those customers will return. Worse, many merchants are cutting into their profit margins on products and services they sell through these programs.
2. Flash sales work much better. When a company offers a serious discount, people use email, social media, and other methods to tell their friends about the offer. I don't see Groupon offers on Facebook anymore, but I constantly see posts from my friends about one-day sales. Flash sales offered by merchants themselves work much better in gaining both buzz and long-term customers. More importantly, it builds brand recognition for the merchant.
3. Group-buying sites aren't targeted. I don't think I've seen an offer that really interests me on Groupon except once or twice. On a weekly basis I get tons of offers that have no interest to me whatsoever. As I get more and more offers that don't interest me, I'm less and less interested in the group-buying site in general. Online advertising more and more is becoming about targeting. Groupon is starting to seem like spam.
What Groupon, LivingSocial, and other clones apparently did not account for is a key lesson of online advertising: know your audience.
In wanting to be extremely successful, the group-buying services expanded too fast and didn't built target audiences. Whether you are a performance-based marketer or a brand marketer, you learn first and foremost to always understand your audience and to market to that audience.
It's possible that Groupon, in particular, started out with a savvy, knowledgeable audience. But as it began to advertise, trying to get anyone and everyone to join, it lost any target. There are very few companies that can appeal to everyone. Because it is trying to market everything from half-off dentures to pole-dancing courses to the same audience, it is starting to see huge cracks in its business plan.
Pace Lattin has been working in interactive advertising since its inception. From being a co-owner of the company that sold advertising in ClickZ before the turn of the century to founding a major interactive advertising publication, he has been involved with all aspects of the interactive advertising industry. He is currently the executive director of the Executive Council of Performance Marketing, an industry organization that represents over 100 C-level executives.
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