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The downfall of Groupon: and WHY

I predicted that Groupon would crash the day it was launched.  It seems to be crashing now, finally.  I recall getting a call from a Groupon salesperson who was trying to get me to sign up my company (GlammaTOYS) to offer Daily Deals.  After listening to her, I did some math and told her I wasn't interested.  She was a good soldier though, and persisted to sell me.  So, me being the OCD guy that I am, sent her my thoughts, calculations, and projections.  I never heard from her again.  Maybe she was put off by my thoroughness, or perhaps she was well trained by the uppity-up con-men at Groupon to back off when she encountered someone who knew the TRUTH.  The most telling fact I unearthed is that Groupon, when pitching to a merchant, claims to build customer loyalty, but forgets to include the all important element of that loyalty - the loyalty being built is between Groupon and the customer...not between the MERCHANT and the customer.  So who is bound to win (in the short term)?  Groupon, of course - that is, until word gets out and merchants stop signing up because they realize that Groupon is nothing but a loosing proposition for them.  Great for the consumer in the short run, but bad in the long run because there will be fewer merchants from which to buy from.  Isn't this just basic economics?  Nothing like preying on desperate merchants and sucking the last drops of life from them, training consumers to buy only when there are deep discounts so that even merchants who have deep pockets and buffers will eventually fall because they cannot maintain the profit margins necessary to continue buisness.  Jeez, it's just all BAD.

Chicago Tribune

Peter Cohan

Forbes

August 20, 2012

http://www.chicagotribune.com/news/chi-why-groupon-is-over-20120820-2,0,6389149.story

 

Investors are giving up on Groupon (GRPN) and they're scrambling for the exits on Facebook (FB) too. Since Twitter is not publicly traded, they can't get out of that one as quickly.

But social media attracts consumers because of dopamine and like any drug those consumers need a bigger dose to get the same effect. Social media's inability to deliver that is at the root of what makes it hard for it to grow into its lofty valuations. Not only that, but it's failing to come up with compelling ways to earn a return on spending to turn those consumers into repeat customers.

The list of investors getting out of Groupon shares contains prominent names. They include Andreessen Horowitz, Hedge fund Maverick Capital Ltd., and Fidelity Management & Research Co, according to the Wall Street Journal. Others like Kleiner Perkins Caufield & Byers and Morgan Stanley (MS) are bullish on Groupon, reports the Journal.

Groupon and the whole daily deal business are under pressure because so many participants offer a money-losing proposition to merchants. In June 2011, I wrote that the SEC should spare investors the agony of losing their money when Groupon sold its shares to the public. The SEC did not listen to me (no surprise there); Groupon went public in November 2011, and that day's Groupon stock buyers are now 82% poorer.

But Groupon's biggest victims are the small businesses that get suckered in to accepting Groupons. Restaurants lose money on them because consumers flood the restaurants, order very low priced meals, strain waiters and cooks, get lousy service, and never return.

Examples abound. As I wrote in June 2011, a restaurant in Portland, Ore. believes its decision to work with Groupon was its worst business decision ever
costing it $8,000. And according to the New York Times, Muddy's Coffeehouse it serves coffee and granola had to take out a loan to cover its Groupon losses.

Muddy's gave Groupon customers $24 worth of food and coffee for $12. It paid Groupon half of its revenues, drew in crowds, lost money, and would have shut down were it not for that loan. As owner, Dyer Price, told the Times, "They don't warn you that you're going to get hit really hard and that you have to be prepared. We will never, ever do it again."

Customers and daily deal providers are bolting. UnsubscribeDeals.com
it unsubscribes people from daily deal e-mails got 7,800 unsubscribers in its first three months and doubled in July, reported the Times. Daily Deal Media reported that in the last six months of 2011, 798 daily deal sites shut down.

I interviewed Ben Edelman, a professor at Harvard Business School, about this. He pointed out there are good daily deal sites. For example, Restaurant.com has been around for over a decade because it creates value for restaurants and consumers. "Restaurants like the fact that it does not require them to pay for the daily deal and that it lets them add restrictions to push business towards slow nights," said Edelman. By contrast, Groupon tends to disallow such restrictions.

And Edelman believes that while consumers might initially be frustrated that they can't get the discount on Saturday, the value they're getting is sufficient that they might be quite happy to try the restaurant on a Thursday. They will likely get better service and perhaps consider coming back to pay full fare in the future.

Why the recent social media fever that has contributed to excessive stock market valuations for Groupon and Facebook? They deliver Dopamine a brain chemical that makes people feel pleasure.

Since I am not one of Facebook's reported 955 million users, I asked the woman who applied my makeup before I went on TV to discuss the Facebook IPO in May why she uses it. She keeps the site on her computer all day while at work and in her free time she looks at photos and checks on the evolving status of her friends.

While I consider that a near-complete waste of time it turns out, some consider Facebook and the cavalcade of social media pings including daily deal emails, Tweets, and texts a dopamine delivery system. And that may help explain why they're so popular.

Author William Powers suggested that the brain is set up to detect and respond to new stimuli rewarding that mental process with a "dopamine squirt." Powers argues that while the stimuli have changed in the last several thousand years from woolly mammoths to Facebook updates human brains still reward timely and accurate detection and response to new stimuli with dopamine.

And yet, like any drug, it takes ever bigger doses to get the same pleasure. And Facebook is not delivering enough additional dopamine which may explain its slowing growth. I discussed Facebook's growth challenge with a class of Babson College undergraduate students and all but one of them had a Facebook account.

But they think Facebook could suffer from a reverse network effect if it starts to try to generate more revenues by advertising. They were not happy being fed advertisements based on Facebook making all their personal data available to companies.

And even though they are aware that Facebook is doing this through Sponsored Stories in which, say, Wal-Mart (WMT) sends advertising to people with photos of their friends who "like" the retailer the more intrusive the ads become, the more they are reminded of this unpleasant bargain the less dopamine Facebook delivers.

In short, the more Facebook tries to "monetize" its users, the less the users will enjoy the time they spend on the site. And that could mean those users become less valuable to advertisers. As that value declines, so may Facebook's revenues.

That's not all I estimate that Facebook is cutting U.S. productivity by 9.4%. That's because a study in May 2011 found that Facebook users in the U.S. spend an average of 15 hours and 33 minutes a month on the site. And if that time was spent working instead, those Facebook users could add $1.4 trillion to the U.S. economy.

Twitter is lucky that it's privately held so I can only rail against people who decide that reading celebrity Tweets should be on the evening news. Groupon and Facebook have provided enough evidence to me that their days should be numbered.

 


 



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