groupon
4 years ago
 

Does the Groupon model lead tourism businesses racing to the bottom?

In a recent announcement by Groupon, after raising almost a $1 billion in funding, CEO Andrew Mason said “we will continue on our mission to change the way people shop locally and serve the world’s local businesses”.

But is Groupon, and other group discount sites, changing the way people shop for the better or doing it at the expense of small business?

groupon

There is no doubt that the Groupon business model has been a tremendous success, you just have to look at the amount of money they’ve made and how quickly they’ve grown to realize they are on to something big.

The growth has been a result of two important factors:

  • An economy that has pushed consumers (especially those in the US) into a mindset of extreme deal seeking.
  • Small businesses desperate to generate revenue at whatever cost.

But are there enough small businesses to make this model survive? In a word… yes.

When you consider that, on average, about 80% of businesses in the U.S. alone are small businesses with less than ten employees, there are a lot of potential customers to keep the likes of Groupon and other deal sites churning out the revenue for many years to come.

But the bigger question is whether or not these deal sites are really doing anyone any favours.

Part of my issue with group deal sites is not specifically the model but the hype and lack of clear understanding of the costs associated with these advertising models.

For many small tour and activity businesses, where the owner of the business does not necessarily have a business background, the seduction of acquiring hundreds of new customers without investing any upfront cash can seem too good to be true.

But, frankly, it is too good to be true and the downstream costs for a small business, once all the numbers are crunched, are perhaps not what a business owner might have expected.

You don’t have to look very far on the web to find stories of disgruntled retailers, spa owners, restauranteurs, and even photographers who have been stung by a Groupon promotion. What seems to be a common theme across all of these stories, however, is the lack of understanding of the true costs of running a group buy promotion and the impact it has on cash flow and future revenue.

Let’s take a look at the example of  asightseeing tour as way of determining the costs of running a Groupon campaign for this particular business type.

  • A local sightseeing company with a 15-passenger van decided to try and attract new business by offering 50% off its $140 tour.
  • Groupon sold a very modest 250 coupons.
  • In this case, Groupon took 50% plus credit card costs as commission, so at the end of the day, the operator received $8,312.50 for $35,000 worth of tours and Groupon received $9,187.50.

Not bad, considering Groupon doesn’t have to handle fulfilment or customer service.

Group buying sites have suggested that the money spent on acquiring new customers should be looked at as advertising and not necessarily as the cost of sales.

For a small business whose profit margin is on average 5%, an advertising campaign that costs, in this example, $27,000 and brings in 250 new customers is not sustainable when you consider that locals (the primary consumers of group deals) are less likely to re-use a tourism based product or service again.

The other dilemma facing tourism related businesses is that there is little or no opportunity for upgrading or upselling their product. In most cases, the customer is only going to spend what the value of the coupon, so the business loses out on the up-sell potential.

Think about this for a moment, at 5%, this operator would have to sell $540,000 worth of tours to cover the cost of this one “advertising” campaign. This works out to about 3,857 full paying customers to subsidize 250 deal seekers.

Sobering numbers for a small business owner who has to spend his or her days trying to provide the best possible experience for their customers and pay the bills at the same time.

Now, don’t get me wrong, group buying sites have worked well for many types of businesses, I just think that before a business, especially a small tourism business, chooses to execute a group deal, they must look beyond the hype, do their research, and crunch the numbers. There is no such thing as quick cheap cash.

By participating in a group buy promotion a business is essentially extending credit to hundreds or thousands of customers for which they are now liable, at least until the coupons expire.

In the previous example, the company is adding $8,312.50 in revenue but they are also adding $35,000 in short-term liabilities for tours not yet delivered for the life of the coupon, that would give any accountant a mild heart attack.

The other side of this equation is the consumer and the affect that group sales sites are having on the perception of value of local businesses. Consumers don’t know the individual business’ costs or how much revenue they are making from each customer.

What many consumers will do is assume that you’ve built in enough mark-up to make the deal worthwhile because why on Earth would you run a deal like that otherwise?

Over time, this has the effect of eroding the perceived value of the service being provided and the service runs the risk of becoming, GASP, a commodity. No one wants their service to become a commodity.

Patrick Lefler through CustomerThink:

“The risk here is that profitable customers become conditioned to wait for sales and discounts–reluctant to ever pay full price again.”

In a segment dominated by small businesses, the in-destination tour and activities segment is an excellent target market to advertise on group buying sites like Groupon.

Considering, however, that over 85% of these businesses don’t distribute their products through sites like Expedia and Viator because they consider 20-30% commissions to be too high, it seems ironic to me that they would be willing to jump on a model that charges an effective commission of 75%!

 
 
Stephen Joyce

About the Writer :: Stephen Joyce

Stephen Joyce is a contributing Node to Tnooz and has been working as a travel and tourism technology consultant since 1995. Stephen is the CEO of Rezgo.com, a cloud based software as a service reservation and booking platform for tour and activity providers.

Stephen is the Past Board Chair of the OpenTravel Alliance.

Stephen is a graduate of Capilano University, is a certified commercial pilot, and holds a certificate in IT Management.

 

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  3. Sanovnik Destang

    This is a very interesting article. I agree that in some cases the Groupon model does not work and can be detrimental to a tourism business’ bottom line. But in the case of a hotel it can make sense. We own a 4 star resort in Saint Lucia (Bay Gardens Beach Resort) and have used Groupon, Living Social, Sniqueaway and quite a few other flash sites to move distressed inventory and more importantly to generated exposure for our properties. The incremental cost of filling a hotel room (labour, maintenance, utilities etc) is very low. Between $30-$40 a night at most. But our fixed costs are high.

    We only offer our more expensive room categories that start at $300/night so even with a 40% discount and 25% commission we are still able to generate a room rate that covered our variable costs and contributes to covering our fixed costs. And we almost never run a Groupon promotion for travel during peak season. We have not seen any evidence of brand erosion as we continue to receive bookings at rack rates during the winter even with these sales running. This is primarily a marketing tool for us as we can’t afford to get this kind of exposure otherwise.

    For more on our experience with Groupon see this article http://hospitalitymarketingtips.blogspot.com/2011/11/groupon-effect-and-caribbean-hotels.html

     
  4. Sarah

    I wonder if one can really save by buying from these sites? Maybe one can, especially if it’s for a group, but me haven’t tried buying any deal yet.

     
  5. Scott Pearson

    Groupon is a suckers bet according to Wall Street analysts. They are trying to ride the wave of LinkedIn for an IPO. Groupon had a net loss of $389 million in 2010. They will bleed the travel industry of profits coming out of the dregs of the recession. They are offering nothing new – they are just shifting business from one bucket to another (with typically an unprofitable margin).

     
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  8. Claude

    Interesting article on Forbes “China Groupon Clones’ Strategy: Burn Money Like Youku.com”
    http://tinyurl.com/4ywh6ux
    But it’s china market…

    Hopefully, in France, Groupon biz model is failing for hotel and tourism area. Many professionals don’t want this kind of business that destroy their brand and value.

    Even if some suppliers try one time because their was lured by Groupon sales guys, even if Groupon have now a travel agency licence for France, I think they will fail in the France market and for tourism area.

    Here, in South of France (first tourism destination) they have only very few tourism offer in their channel…

    You can’t fool all the people all the time ….

     
  9. Joel Spiro

    I think the idea of group buying and incentives is great but the economic model behind it stops making sense when you are forced to make 50% discounts. Bulk discounts and wholesaling is a time tested business model that in a sense is based on this idea. What we are seeing is this same bulk buying discount offering concept but applied in a setting where indiviuals can now be aggregated into one entitiy made possible by advances in technology.

    In Micro Economics you learn about break even points and how price is effected by supply and demand. I think it would be great to see a sustainable group buying model that makes the traditional discount concept more efficient through technology in which a merchant sets his retail price and then the site utilizes a predefined supply/demand/pricing equation to define the different pricing points and people required for the deal “to be on”, ensuring the merchant always remains within a set cost margin. The discounts to the end customer are not as great but at least the model is sustainable.

    Perhaps deep discount sites like Groupon will be the stepping stone and customer education required for this type of model to eventually be desired, efficient and effective.

     
    • Henry Harteveldt

      Let’s not forget that supliers have access to Priceline.com and Hotwire to help sell their excess inventory.

      The deep discount required to participate in -some- of these “daily deal” sites concerns me for two reasons. First, the cost. Second, the likeliood that daily deal sites will undermine the integrity of suppliers’ published rates — at least in the traveler’s mind. Why pay $200 from a supplier or travel agency when you can buy something similar through a daily deal site for $100?

      Certainly, there are circumstances where participaiton in a daily deal site provides value. As several have noted, participation can be viewed as a form of advertising. Virgin America recently extended an offer through Groupon as part of its entry into Chicago. Great example of when using a daily deal site makes sense.

      If participaiton in a daily deal site is something a travel seller is considering, it must establish clear objectives and metrics. The seller must also use these sites in a thoughtful, strategic manner lest they turn into a “crutch.”

       
  10. geraldkrug

    Groupon is good if the customer brings a friend who pays in full
    also as part of the deal, no?

     
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  13. Quora

    How well do hotel deals perform on group deals sites like Groupon?…

    I believe the answer to your question depends on how the hotel/travel advertiser structured the deal via groupon and what they are selling. But, I know Groupon takes their pound of flesh. I’ve heard a range ofsuccess and horror stories in the travel i…

     
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  15. BJ Knapen

    I can live with the 75% discount, although it’s a lot. My main problem is that groupon only pays us when we sent them the vouchers. Groupon receives the money the day of deal, they should pay out your half directly. This way you also benifit of the no-shows, which can be as much as 30%

     
    • steve sherlock

      good point and suggestion BJ.

      guess that [50% upfront] gives a clear differentiation in the model, and an opportunity for a competitor to hammer home in their sales spiels.

       
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  18. AROMAL JOE

    This is a really useful article. Just talking about the tourism industry i think It wouldn’t be a bad idea for hotels to have Groupon deals especially during off-season

    They can even cut down their overall cost by reducing a few not so noticeable services in the package, like Spa or massage, the tourists are still gonna take it as they know its a good deal for the price.

     
  19. Daily Deal Media

    Great article written by a guest author for us, on if the Groupon Model is going to go bust:

    http://www.dailydealmedia.com/is-the-802groupon-bubble-about-to-burst/

    I enjoy all the comments here – lots of great info, keep it up!

     
  20. Chris Nadeau

    I agree 100% and the biz needs to do the math exactly like they would if they were going to run an ad in the New York Times. However, I think if the business can figure out a well thought out deal, this would be the most powerful form of advertising available to SMB’s right now.

     
  21. Chris Nadeau

    I agree with you to a point. Groupon does cost small businesses money BUT you forgot to ask where would that money have gone otherwise? Most likely other forms of advertising that cannot be attributed to direct sales (discounted or otherwise). When a small/medium business offers a deal through Groupon, at the end of the day they know exactly how much business they can count on. For a lot of small businesses that means A LOT.

    KEY STATEMENT: “Groupon is advertising. But with a twist.”

    Great analysis…but what if you were to compare the group buying concept to traditional advertising?

    I think what we will see, is that the group buying sites will have to take less of a cut on the deals, if this model is to thrive moving forward.

     
    • Stephen Joyce

      “When a small/medium business offers a deal through Groupon, at the end of the day they know exactly how much business they can count on.”

      I think part of the issue is that it is not entirely clear what the business can expect from a Groupon deal. Because there is so much hype and so many stories about incredible deals and record sales, businesses are not taking the time to do the math to make sure the deal they offer will work for them.

      What I am recommending to small businesses, especially to those in low repeat, high cost per sale, businesses like tourism services that they approach group buying with the same care and attention they would have with investing in any advertising campaign. Sure there is no upfront cost, but at the end of the day (as in this example) the business is still investing almost $10,000, which is a lot of money for any small business.

       
      • Chris Nadeau

        One thing I forgot to clarify when I meant count on. With Group Buying, you know you can count customers coming through your door, because it is measurable. Going in you do not know that, but afterwards you do. What other advertising allows for measuring like this? That is nice data to have and allows SMB’s to really figure out what it cost to acquire a customer.

        Other means of advertising are so difficult to measure and it is really hard to figure out the ROI.

         
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  23. Matt

    Surely Groupon are not doing anything different to other media companies. Once they go into a market they will appreciate the margins in that market and price accordingly.

    The product would be well suited to companies who have an asset and need to make it work. airlines, cruise companies, hotels etc

    As for discounting and the longer term implications on customers expectations …. heard all this before when lastminute.com came to prominence and it never materialised.

     
    • Stephen Joyce

      Matt, I’m not sure you can compare the business models or the affect on consumer behaviour here. Lastminute does not provide deeply discounted vouchers for local merchants, it is a travel agent just like its parent company Travelocity. It may claim low prices but that is not the foundation of its business model. Groupon touts itself as a marketing and advertising vehicle but with the twist that IT collects payment from customers.

      It is early days but I remain skeptical because I think 1) businesses for the long term will not continue to support the model 2) consumers will begin to get deal fatigue.

       
      • Matt

        Stephen, I think there is a very close comparison in the business models if you look at how lastminute.com started off. A supplier loads a product onto your system, you focus on the marketing effort with some kind of twist, you sell the product and collect the cash (in the eyes of the consumer). All that’s different is the commission level and the method of booking. I believe the principle is the same.

        I agree that maybe lastminute.com in terms of their focus have moved on but my reference to them was related to their first 3/4 years of operation.

        I agree that consumers may well get deal fatigue but if the company is smart it can move on and adapt.

        I also think that the 50% commission may be a bit of a red herring. I imagine many of the groupon deals are low ticket value and their focus is the £ or $ value. So they could accept a much lower percentage for higher ticket products like travel.

         
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  25. Henry Harteveldt

    Well done, Stephen. I completely agree with you.

    Groupon may make sense for a business that appeals to local or repeat custoemrs, but for businsses who lack up-sell or cross-sell opportunities, that tend to get “one time” customers, or that have very infrequent repeat purchase rates, it’s probably not a wise choice.

    I heard Groupon’s CEO claim the business has a backlog of >6 months. They may be “sitting pretty” now. It will be interesting to see whether and how demand for Groupon changes when the economy shows solid, sustained, and real improvement.

     
  26. Terry Mowery

    Take it from a member a sales force that visits hundreds of local merchants every month.
    Groupon and clones will NOT work for 99% of the local merchants. They can afford the 75% hit.
    “Bubblelisious” (old commercial) is the word that comes to mind.
    I took a bad hit with the tech and telecom bubble.
    My advice: “Warning Will Robinson!”

     
  27. Peter Syme

    Hi Guys

    I am an activity company and adventure tour operator. I have reasonable capacity as I can handle well in excess of 30k clients a year.

    I have not used Groupon as I can count and whatever way you look at it with a 75% discount from retail I makes a significant loss per client. Based on some testing in our area via other companies and on other discount sites it would be very easy for us to acquire thousands of customers via Groupon but that would just drive the business into loss making and devalue the product and service.

    This is not going to go away they have huge growth to come, a very small amount of online buyers have actually purchase via them yet hence the huge investment they can raise.

    There will always be small businesses willing to chase the clients on the hope of return business. Not a hope, these clients will only buy via discount sites.

    Also I have seen companies massively inflate their prices for the time the deals are running to make the deal work and give them a return so it is not always as good as the consumer thinks.

    That said if I had a high fixed cost asset that had spare capacity and up sell of food or drink could be done then I can see the rational.

    For a small adventure business tour operator it is suicide but I am watching many commit it.

     
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  29. Johannes

    One very important point that was not mentioned in the article + comments is that the Groupon business model is actually based on non-redeemed vouchers. Unless otherwise agreed with Groupon (and this is something they typically don’t negotiate) all collected vouchers which are not redeemed within the short time window of the deal (typically 3 months) will expire and the cash remains with Groupon.

    This makes it much harder for suppliers to break-even on the deal…

     
    • Jim Kovarik

      @johannes Thanks for clarifying who keeps the revenue for breakage (unredeemed coupons). I wasn’t aware Groupon keeps 100%.

       
      • Daniele

        But this is only in Europe. In the US it seems like Groupon shares breakage revenues too with the merchant.

         
  30. Nic Blair

    I think this article sums up one key point that is the problem, many small business owners (definitely not all) don’t completely understand the numbers. They don’t appear to be the best accountants often and when it comes to making decisions like this don’t take every aspect of it into account.

    No business that operates on there in my opinion can blame the deals site if they run a promotion and lose money. At the end of the day it’s their responsibility as a business owner to crunch the numbers and find a price that works. There’s no hidden, secret costs, they know what they’re in for.

    The smart ones that crunch the numbers beforehand and find an amount that works will do well out of these business models.

     
  31. Ben Alcock

    It must be tempting as, say, a small tour operator to leap at Groupon’s offer from a potential acquisition and traffic standpoint.

    But I can think of some very bullish travel retailers who wouldn’t hesitate to pull the plug on long term contracted distribution should you dare to jump into bed with Groupon.

    Great post BTW.

     
  32. Jim Kovarik

    Interesting article for sure and definitely worth exploring, but not certain all the required data points are included to determine whether or not this is a profitable promotion for the company. Don’t you first need to understand the cost basis for operating this business?

    Also important to understand that the merchant pays no money out of pocket, with the exception of future liabilities as mentioned above which may or may not be material depending on the business. And then there is breakage, the 10-20% that don’t redeem the coupon (or whatever that % is).

    And the competitive cost as well. If consumers are indeed embracing this model hadn’t you better move to it quickly lest the guys down the street snap up all the business? Unless this model is increasing demand – which I do believe to a certain extent it is.

    To some extent this reminds of the huge successes of the merchant hotel model post 9/11, except this industry is even more fragmented.

    Interesting and timely topic for sure – nice post!

     
    • Stephen Joyce

      Thanks Jim. You’re right, you do need to understand the cost basis of the business. Unfortunately, that’s hard to extract from most small businesses. That’s why I used the 5% profit margin, which (from my research) seems to be a fairly reasonable number for most small businesses.

      As far as the competitive costs are concerned, I strongly believe that it is the belief in this competitive cost that is driving the hype and hysteria around this model. As Tim mentioned, the stronger this model becomes the stronger the brand loyalty to Groupon becomes.

      The future liabilities and breakage are also excellent points, but without any guarantees or solid stats, it’s a gamble for the business. I would definitely like to see more data from small businesses, especially those in the tour and activity segment.

       
  33. @CravenTravels

    Stephen:

    Great explanation and math breakdown for a small business tourism product using the Groupon type marketing/advertising model. Cheers!

    @CravenTravels

     
  34. Timothy O'Neil-Dunne

    I have spoken to many regular users of Groupon from the customer pull side and they love it. There is a certain degree of expectation that this is a temporary drug not a permanent one. IE if the vendor uses it for market share building exercise – then the value of the product will rise once first trial at high cost of Groupon is completed.

    However the sellers after trying it hate it. Its good for a while then it becomes a drug for them also. There is a strong risk that the seller will not be able to market conventionally and must appear in Groupon to effectively compete.

    However the drug is that the customer expects to receive always a deal and therefore will only shop in Groupon and will no longer have any brand or outlet loyalty except to… Groupon.

    Stephen is right therefore – there is a race to the bottom. In one article Mason was quoted as saying he shares profits with the seller. That was vastly incorrect. He shares REVENUES and this is not good. The model is not sustainable over the long term in my view – but Groupon can capture a large percentage of local sales just like Craig’s List, Ebay and Gumtree have done in different markets.

    However the Groupon model works on all vendors large and small.

    I believe that the “group” definition is already fuzzy and has effectively ceased to exist.

    Cheers

     
  35. Terry Mowery

    Yes Groupon is destined to be but a minor player in the local advertising arena.
    I deal with hundreds of local merchants and none of them can afford the 75% cut in income.
    We charge the local merchant 5% with nothing upfront in our USA Savings Club fundraising program. Half goes to a local school, church, sports team or charity.
    We have hundreds of local merchants willing to discount a reasonable amount and help the fundraisers.
    How many yoga and skydiving lessons can you take?

     
  36. Konta Firmowe

    In my opinion somebody that even once used a groupon offer for next few years will feel that he is going to overpay in place he visited in a group offer and he is not going to visit it ten…

    Therfore groupon deals clients are non returnable clients as it seems it’s going to be a one time stay…

     
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  38. Steph Lee

    Fantastic article. Thanks for going at it specifically from a tourism angle.

    Steph Lee
    @iamstephly

     
  39. Johannes

    Very good article Stephen! I fully agree with your observations and having run 2 deals on GetYourGuide, we can confirm that there was little upselling and few return customers.

    The Groupon guys are extremely dedicated on what they do and they indeed deliver the traffic & bookings. However, the key questions should be whether you get the right customers and how likely it is that they would buy again at a higher price (!)

     
    • Stephen Joyce

      Given you run a merchant model with tour and activity suppliers I can’t imagine how the Groupon would have worked for you. I would be interested to know more about how you structured the deal if that’s something you can share.

       
      • Johannes

        In both instances it was a three party deal, where a supplier wanted to generate extra bookings for a product by giving a big discount and we decided to give away our commission margin. In aggregate it amounted to the discount necessary for running a deal on Groupon.

        In other words: The supplier gave the discount, we provided the booking engine + infrastructure & Groupon brought in the leads.

         
  40. Karen

    Couldn’t agree more with this assessment. I looked into this option for my own business and chose to reject the option. Not only do retailers have to give up more than 50% of the deal value, they also don’t get paid immediately for the sales. Groupon doesn’t pay the full amount of the sale of the Groupon until up to 90 days after the offer is accepted by the customer. That means the business in many cases will be providing the service/product to the customer before that 90 day payment is made by Groupon. The retailer is not only getting dinged by the high cost of acquisition, they are also having to pay their vendors for any costs/products provided to the customer before they’re paid. Plus, retailers are probably eroding revenue because many of their existing customers will be buying these Groupons. The formula doesn’t work for the retailer and it just illustrates that they either don’t understand what they’re getting into or it shows how desperate they are for any revenue at this point.

     
  41. Ophir

    I think the article is right on target and the comment from Patrick Lefler basically says it all. Group deals create an addiction to discounts. The clients will rarely come back to pay retail prices. Perhaps small business owners can plan for this by offering deal groups a coupon to return with a smaller discount at a later time, rather than make it a one-time event.

     
  42. Daily Deal Media

    wow, great article, we share some of the same general concerns about this market! Come write for us anytime at Dailydealmedia.com – we’d love to have you!

    DDM

     
  43. Charles de Gaspe Beaubien

    That’s exactly the trend I expect for Groupon. In my home town, the better attractions who enjoyed great success with Groupon for 2 years are seriously evaluating their options for next year.

    If the more exciting attractions and suppliers aren’t present, people will stop paying attention to the daily emails.

    I would take a billion in investment, but not sure I want their business model in the long run. Will be interesting to see if they regret not taking Google’s offer.

    Charles de Gaspe Beaubien

     
  44. steve sherlock

    i think you still make a valid point.

    guess the thing is that there are enough new clients lining up that repeat users are perhaps not such a concern for groupon.

    though if the advertisers’ thinking is; new client acquisition combined with a strategy to turn new customers into loyal clients, then some companies might be able to make the numbers work.

    however i think the numbers used aren’t exactly accurate.

    for example the value of the tours @ $35k is the retail cost, but the cost of sale to run those tours f.ex could be $16k. In which case the ROI would be 0.5. (cost $16k / revenue $8k).

     
    • Stephen Joyce

      Stephen Joyce

      Good point Steve. It this example I couldn’t get a cost associated with the tour which is why I used overall profit margin versus just the cost of running the tour, which may be quite different. Your math still results in a loss of $8K which would most likely be applied to an advertising expense. To spend $16K in advertising for $8K in business that may have no long term residual benefit or up-sell potential still doesn’t add up in my mind.

       
  45. Duncan

    The promiscuous nature of the ‘dealseeker’ means that for hotels this type of deep discounting does not drive brand integrity nor promote valuable repeat business. It’s just not sustainable. I can understand why many hotels refuse to trash their brand by offering these types of discounts. Once it’s set as par for the course, it becomes nigh on impossible for an hotel to re-position its brand to work to a more agreeable margin.

     
    • Jeremy Head

      This is absolutely the key point for me. If you attract the hard core deal hunters chances are you won’t get repeat business from them. Discounting for disloyal customers is not a great business model.

       
  46. Tweets that mention Does the Groupon model lead tourism businesses racing to the bottom? | Tnooz -- Topsy.com

    […] This post was mentioned on Twitter by Alex Bainbridge, ClaudeBenard, Jonathan Spitz and others. Jonathan Spitz said: Groupon model sustainable? For Groupon, but perhaps not for merchants – do the math! http://bit.ly/hONeXS […]

     
  47. Claude

    Agree with your analyse

    On the hotel market, it’s the same:

    Groupon ask for 50 % discount

    Then keep 25 % on sales

    75% discount it’s crazy business!

     
 
 

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