Groupon's Unsustainable Model

Businesses are rapidly realizing just how toxic Internet discount vouchers are, at least to them. Margins fall into the red. Their reputation does not improve, as customers only see the price slashing. Consumer loyalty doesn’t exist, as no one will buy their products at a normal price anymore.

The Internet has transformed numerous sectors, such as the home loan market. Now it’s shattering the rules of commerce. Discount vouchers factor heavily into this upheaval by taking advantage of the best parts of the Internet: a wide audience for an attractive, limited-time offer.

Groupon, a deal-of-the-day discount voucher website, is at the forefront of this transformation because of its recent stock offering on Friday, Nov. 4. Financial markets are looking for reassurance of the sturdiness of the American start-up model, which can raise more than $50 million or even $100 million during the initial stages of its existence. Groupon holds the enviable record of the company that reported $1 billion in sales the fastest — in only 18 months — and it is reportedly worth over $60 billion. LivingSocial and other competitors, operating in the same domain with an identical model, are seeing similarly strong growth.

Unfortunately, it’s not as easy as it sounds for coupons, a traditional promotion tool, to make the jump to the Internet. Once, they promised to be a rousing success; it now appears that these vouchers won’t survive the Internet for long. Google and Facebook have already come to this conclusion and have backed out of the market.

Assuming that promotions are still and will remain the driving force of commerce, discount vouchers will have to do three main things in order to be effective:

– Help the business owner to absorb operating expenses while increasing volume sold, even if the margins are weak or occasionally negative;

– Improve the reputation of the business though tempting offers that increase public visibility;

– Gain new customers by first attracting them with the quality of the offer, then earn their loyalty and generating recurring revenue.

Discount vouchers, it must be said, multiply so quickly on the Internet that they become victims of their own success, and they have become so commonplace that they’re losing their appeal. The Internet has not only converted the physical world into the virtual world, but it has changed how consumers make purchases and has destroyed the advantages of coupons for businesses:

– Margins are mostly negative, as the vendor has to both cut prices and pay an intermediary third party;

– Far from improving, the business’ reputation sometime falls, as the customer sees the coupon not as personalized attention but as price slashing;

– Loyalty is nonexistent: Consumers take advantage of coupons and are immediately attracted by other offers, and won’t pay full price for anything.

To make another comparison, the widespread use of coupons has led to behavioral changes similar to those created by dating sites. The Internet provides a much broader range of choices, makes targeted “offers” and even allows for multiple dates. The nature of dating has changed; dating is no longer finding a precious moment to linger over. Likewise, business owners have figured out that Internet vouchers don’t fulfill any of the three desired objectives. In fact, coupons now completely serve consumers and voucher sites, not businesses. There is a huge market for Internet vouchers, and more people know about them every day. Business owners are seduced by the possibilities, and yes, some of them have seen a spike in sales, thanks to vouchers. But the facts won’t be swept under the rug and business owners are starting to take note. They will eventually stop seeking out voucher sites and look for new methods of promotion — some, certainly more traditional — that will improve their image and attract new, loyal customers who will gladly continue to use their services in the long run. For now, Groupon will still be a major force with an incredibly strong reputation, built through the purchase of hundreds of millions of dollars’ worth of public investment in (often misleading) keywords, which gives it enormous clout online.

Even if the Internet voucher is unsustainable, Groupon will have the advantage of technology, brand recognition and an existing customer base to expand and diversify its services. Its IPO raised funds that will undoubtedly give them the necessary time to adapt. Groupon will be forced to adjust to its falling market. The stock market may not be aware of that just yet.