groupon
1327 days 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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  1. Do your homework before doing a Daily Deal | Travel & Tourism

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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…

     
  14. How well do hotel deals perform on group deals sites like Groupon? - Quora

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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