criminal minds
1235 days ago
 

Is Groupon a killer app or a serial killer in the travel industry?

Picture this: Agent Aaron Hotchner of the Criminal Minds detective drama stands in front of a room of local police officers to give them details of his analysis.

“This unsub is young but well organized.  He has all the trappings of success but is in fact hemorrhaging money trying desperately to maintain an air of normalcy and control.

“He is profit-motivated, using charm to convince his victims to give away their goods at a fraction of their true value and when he is done collecting his cut, he leaves them to pick up the pieces.

“He lacks empathy and targets victims that are highly trusting, some might say naive. They go along with the unsub’s plan because they feel they have too, not knowing that they are walking into a trap.”

I know it sounds like an episode of Criminal Minds, but in fact it’s a profile of a different kind of killer – a killer app.

criminal minds

What’s the difference between this killer app and a serial killer?  Well, in this case the unsub is a media darling about to IPO and the victims are small businesses left to dig themselves out of a proverbial shallow grave.

Think I’m off the mark in describing this company as a psychopath?  Two of the most common traits of psychopathy are a lack of empathy and narcissistic tendencies.

In fact, author Joel Bakan in his book The Corporation: The Pathological Pursuit of Power describes it as follows:

“The operational principles of the corporation give it a highly anti-social ‘personality’: it is self-interested, inherently amoral, callous and deceitful; it breaches social and legal standards to get its way; it does not suffer from guilt, yet it can mimic the human qualities of empathy, caring and altruism.”

Now, I’m not known to rant and generally speaking I try to focus on the positive but sometimes “something” comes along that makes my skin crawl and the hair on the back of my neck stand up.

In 1999-2001 it was businesses going public with no business model,s spending obscene amounts of money on Super Bowl commercials and taking average investors for a very expensive ride. These days, that “something” is the daily deals craze.

I can’t seem to get through a single day without being bombarded with talk of Groupon this or LivingSocial that.

With Groupon’s S1 filing and imminent IPO, some much needed light has been pointed at the daily deals business model and, now, finally, people are starting to look under the covers and ask questions.

In January 2011, I wrote an article titled Does the Groupon model lead tourism businesses racing to the bottom? in which I discussed the importance of analyzing daily deal promotions.

It proved to be one of my most popular posts and generated a lot of discussion around the daily deal model as it applies to travel.

Given all the discussion happening on sites like TechCrunch and Mashable about daily deal horror stories, I think it is safe to say (six months later) that “I informed you thusly”.

I’m not going to go back and rehash any of the things I talk about in my previous article.  If you like, just read it later.

In fact, I’m going to go a step further and say that if you run a daily deal for a small tourism business, I think you are potentially making a bad business decision.

I’ll go even further and say, if you’re a large travel business and you’re planning on partnering with such a company to make a quick buck in the daily deals space, then shame on you.  Would you knowingly go to bed with a psychopath?

I fully appreciate the fact that Groupon has made a boat load of money for its founders and investors and that it has provided a bunch of deal-seekers with some great savings on stuff they either would have already purchased or would not normally have purchased.

It has also helped fuel a daily deals industry that is growing at a ridiculous pace.  You only need to blink and “POOF!” a new deal site is launched.

All of these sites, however, are fishing for the same fish, the small business, and increasingly small tour and activity business are on the sonar.

With this daily deals love fest, everyone seems to focus on two things, the daily deal company (in this case Groupon and its IPO) and the consumer (and about how much they are saving by using daily deals).

What most people seem to forget is the small business in the middle that is fueling this “hot” segment.

The problem is that deal site “inventory” is delivered by small businesses that are most at risk of failing if they make a bad business decision.

In this excellent series on TechCrunch, Rocky Agrawal explains why daily deals are bad for business. Rocky explains (as I have before) that small businesses tend not be marketing experts or business analysts and, as a result, they are susceptible to hype and pressure sales tactics.

As a result of the daily deal craze, small businesses eager to hop on the daily deal bus are instead getting hit head on with the reality of delivering on an unsustainable discount and are littering the sides of the “super-highway” like so much other roadkill.

Some of you are probably asking “So what? Some Joe Shmoe doesn’t do his homework, runs a bad deal, and goes out of business. Big deal.”  Well, it is a big deal. It’s a very big deal for Joe – and that’s my main point.

This trend isn’t just about money and how much Groupon’s stock is going to rise.

A bunch of already rich people are going to make a stink load of money when Groupon hits the public markets – that’s a given.

But it’s not about them, it’s about all the Joes and Janes out there trying to make a success on their own terms. It’s about understanding and appreciating the role that small businesses play in our local economies and about how important they are to the health and vitality of communities.

It’s also about how small businesses can make or break the tourism experience for a visitor.  It’s about treating small business as a renewable resource rather than one to be exploited.

Fundamentally, this trend is about empathy and the lack thereof for the people most affected by daily deal failures. Believe me when I tell you that no small business is going to get rich running daily deals. Most are lucky to break-even.

Small tourism businesses have a hard enough time making ends meet.  It’s easy to say they don’t matter and that “Oh well, so sad, another one bit the dust”, but at the end of the day, it does matter and it matters a lot.

So, that said, instead of eroding the value and offerings that these small business people struggle to deliver, why don’t we find ways to empower them to deliver superior products and services to a market that is actually interested in the experience and not the deal?

Let’s wave a joyous goodbye to the deep discounted daily deal trend and usher in a new future, one that treats small business with respect, nurtures them to succeed, and focuses on mutual benefit.  Let’s focus on delivering value to travelers rather than pandering to the notion that cheaper is better.

That future sure looks a lot better to me than standing around a shallow grave site surrounded by police tape thinking about how I’m going to explain to a family that their small business just fell victim to a serial killer app.

 
 
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. Wayne Geddings

    I design offers for the daily deal industry in the Costa Rica tourism sector; In fact I live here. One potential client (small boutique) was talked out of the daily deal business by their old-time, traditional marketing company. Just down the road another one listened to me and has run 6-deals.

    The first one is suffering with very little business, even after a major remodeling. They are depressed. My customer has learned to up sell and use the “spark” of daily deals to grow their social media presence. Their margins are low, but their hotel is now almost full – during slow season! They told me today their profits are the highest in four-years!

    You guys are dancing around the point. Daily Deals are a combination of advertising and show-biz. People don’t want to search and study on how to travel, in fact, already they don’t! Most travel sales now come from word-of-mouth (social networks). They want someone to show them a great time – something different! Then, they tell their friends. Fail to understand the new mindsets of your customers and how the Daily Deals business perfectly fits at the peril of your business and your customers!

     
    • Robert Gilmour

      Wayne

      This is not the way hotels see it, in the UK at any rate – and its nothing to do with old fashioned or traditional, its basic economics and financial prudence.

      For, with every deal, someone loses/gives up something, in this case the hotel. The opportunity cost is massive, and the quality of the guest is uncontrollable by the property. Daily deals are like the pay day loan, they’re receivables factoring. Hotels are not in the showbiz business.

       
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  4. shannon stowell

    Stephen- great article and insightful. When I was at altrec.com (retailer of specialty outdoor gear), one of our advisors was the former president of Nordstroms. He always pounded into our heads that discounting for any reason was like heroin. It is very addictive and blunts the user’s ability to say no the next time to worse and worse deals. You lose your creativity for making solid business choices when you give in to discounting.

    We (at least in the adventure travel space) are a SPECIALIZED product and should not allow value erosion. We are not a commodity- maybe certain pieces of the travel industry are, but that’s another discussion.

    Remember WHO is signing up for groupon-type sites, too. People looking for the cheapest deal possible. If that’s the customer you want, then by all means go for it. If not, let that bottom feeding customer go to the competition or better yet, not find it on Groupon, et. al, and pay full price for great product.

    If I had a local restaurant, I would consider using such a site to get that customer in the door for the first time. Then my job would be to keep them coming back. But most adventure travel businesses will be lucky to see a lot of repeat business. The lifetime value of a cheap customer I don’t think is worth the cost or the value erosion.

    The full story remains to be told, but I firmly believe that specialty companies in the travel industry should say no to this dealer of addictive substance. It never ends well.

     
    • Stephen Joyce

      Stephen Joyce

      Thanks Shannon, that’s a great analogy and makes a lot of sense for the adventure travel space. For the large package operators or specialty multi-day, daily deals are not really an issue. The small adventure outfitters and activities are definitely at greater risk of getting caught in a bad deal.

      The daily deals are on the hunt for specialized product because it makes a more intriguing deal then just another spa or restaurant deal. Having a sober voice from the adventure side certainly helps to educate the industry to be weary of such marketing approaches.

       
  5. Blog de turism » Hotelul vs Site-urile de cumpărături în grup

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  7. Rahima

    Interesting views on both sides. However, it doesn’t sounds like many of you have done any indepth research or spoken to merchants who featured a deal on Groupon/Living Social, etc, apart from reading the articles. Yes, it’s true that if the deal isn’t structured well, then it can adversely affect a small business. However, there are many cases, particularly in travel where the merchants (hotels, tour operators, etc) have been so pleased with the results that they are requesting to be featured again. I helped structure and set-up travel deals on Groupon UK and all of my international merchants were requesting to be refeatured. It’s all about the deal structure – if you set it up so that there are upsell opportunities once the consumer gets to the merchant & make sure you do your math well – you’ve got a deal where the consumer, the merchant, and of course Groupon is happy.

    Of course there will always be instances where Groupon gets greedy & structures a lopsided deal where it wins the most – & these are the ones that make it to the press.

     
    • Robert Gilmour

      Not true in my case. I don’t read articles for a living, I provide practical, business and channel maximising, mainly on line solutions for UK hotels. Without going into detail, and I take on board your point re structuring the deal, I always try to to this, not one of my clients will do business with Groupon again, for a whole host of reasons – bad experience dealing with Groupon, demographics, segmentation, profile, unacceptable damage to yields and returns, turning away business at better yields &c &c

      Also, as a supplier, convert the Groupon ‘economics’ into maths – calculate the true cost of the business and the opportunity cost in particular, then invest that cost in more productive, higher yielding alternatives. If your business is so reliant on Groupon that you can’t do this, then you’re in the wrong place

      I will try to see if any of them will post comments, don’t just take it from me!

       
    • Stephen Joyce

      Rahima, actually that’s not the case. I’ve had to work with many small businesses who have already structured the deal with Groupon and now have to figure out how to handle the bookings. This actually brings up another important subject and that is whether or not retail systems are even designed to support daily deal prepaid vouchers. This would be easily resolved if the daily deal sites offered an API for voucher validation and redemption, but to date (as far as I know) none of them do. This means that merchants have to print or download a spreadsheet and then (if available) upload the voucher codes to a system or simply check them off in a binder.

      As I have mentioned before, with certain businesses, the opportunity is there to structure effectively. With tours and activities, upsells are generally not realistic and repeat business is rare so the deals are pretty much always a loss.

       
  8. Rod Cuthbert

    Besides the specific issue of Groupon’s value to the travel industry, the financial markets — or at least the NY Times’ DealBook pages — are beginning to question the company’s business model and sustainability: http://tinyurl.com/3wtwym7 Well worth a read, though I suspect there’s enough positive hype around the company by now that even a cool and critical analysis like this will not have much effect on their IPO prospects.

     
  9. Tom Costello

    A bit on and off topic…here’s a spoof regarding the alliance between Groupon and Expedia entitled “Groupon & Expedia’s “Sort of a Discount on Your Next Getaway” Partnership http://bit.ly/megKyw

     
  10. Robert Gilmour

    As a contributor has already said, the hotel industry has already completely caved in to the OTA’s over the years, so what’s new. Groupon and others are miles ahead of some of us hoteliers, perhaps we just ‘submit’.

    None of my clients would touch Groupon, and they’ve been well told and trained why, and to come to me and justify the numbers if they think they can (and to their shareholders!). We have different price/value equations and sales/marketing tactics at Innfinite apparently. My clients collectively had record profits in 2010, i wonder why?

    This is doomsday scenario stuff and we all sit idly by, pontificate about it yet watch it happen. Not me.

     
  11. Jonathan Alford

    The whole issue is a good debate – lots of good comments here.

    What may be interesting is to consider that in the longer-term – or even medium term, Groupon may not be just a daily-deal provider any more than Amazon stayed a book seller.

    The value might be in the consumer data to develop entirely different models / products / services. Lots of good consumer info that the rash of other daily deal sites may not have the scale to achieve. Or the financial resources to diversify away from the daily deal model that may not support so many competitors.

     
  12. Joe Buhler

    Just came across this article in today’s Wall Street Journal http://on.wsj.com/kITjpp
    It does seem that the deals model works for some and the examples mentioned are tourism service suppliers.

     
    • Stephen Joyce

      That’s a good article. As Daniele so rationally put it, this is a marketing method that works for some and doesn’t work for others. If the incremental increase doesn’t affect 1) your revenue opportunity with full paying customers 2) you have excess capacity at no additional cost, then daily deals would work well.

      What I find disturbing is the pressure the daily deal sites are putting on merchants to sign-up and do deals without giving them the information they need to make good informed decisions.

       
      • Joe Buhler

        On the last paragraph is where our difference lies. As I mentioned earlier, in my opinion, it is the responsibility of any owner, large or small, to conduct due diligence before making an important decision affecting the business.

        The harder the sales push the stronger the suspicion should be that something might just not be as advertised. If it’s sounds to good to be true, it usually isn’t!

        A simple Google search would probably bring up a whole bunch of articles explaining the pros and cons. Wasn’t the case a few months ago but surely now.

         
  13. Daniele Beccari

    I agree with all the comments and insights on the “cons” of the deals model, but let’s get back to reality one second.

    Daily deal sites exist and seem to prosper: a billion dollar industry does not appear without value in the chain.

    We can debate about who is so crazy to sacrifice huge margins, etc but some do – again and again. It’s just another marketing tool, which works for some and does not work for others.

    The key question, from an investment standpoint, is the growth potential – is there more, or is this it. Groupon’s management already knows the answer.

     
  14. Robert Gilmour

    Definitely a serial killer for me.( i just emailed 15 of my clients and they all told me they wouldn’t touch it with a bargepole, they are well trained!!!!)

    If the hotel’s marketing mindset is sell rooms at any price, then good luck to them. For sure this is not the way to dig the hotel supply side out of its current hole, cavern in fact.

    There are two base types of pricing for me – strategic, and tactical. Tactical pricing has to be within the strategic context, which as far as possible is to maximise REVPAR, or profit par whichever way you look at it. There needs to be a value equation in there somewhere. Also if your competitive set is giving their rooms away on groupon, let them get on with it. A room sold on Groupon is a room left to sell on better value channels- you might just win some ‘decent’ business!

    Where your strategic pricing is cheap deals, then your strategic and tactical pricing are one and the same thing, which is the road to nowhere.

     
  15. Sharon McAuliffe

    The more things change, the more they stay the same. Years ago during the another economic downturn, when the internet was still new, Hotels.com offered the carrot of filling rooms at empty hotels by offering deep discounts to consumers. The hospitality industry jumped in with both feet. Ever since, there have been millions of words written about that bargain with the devil that was made in desperation, the loss of rate integrity, the resulting love/hate relationship with third party distribution channels, and how to use those channels in the context of responsible yield management.

    They’re baaaack! Groupon uses the same high pressure tactics to “force” businesses to honor their coupons during peak periods when it does not make sense for the business. In my last position in the hospitality industry, I took one look at the model and ran the other way. I sincerely hope that hospitality providers, not to mention all businesses in general, stand firm and educate Groupon and its wannabes that they can have discounts, but only on the supplier’s terms. If a business allows the fear of “missing the boat” to lead them to a poor business decision, then all I can say is “Fool me once…”

     
  16. Lee Hayhurst

    Two. I think relevant, insights from the UK travel industry. We recently held a roundtable on domestic hoidays and an agent here derided the arrogance of hoteliers who shun selling through third parties (who may not only derive added value and loyalty, but also be able to give feedback about demand dynamics from consumers). It is this arrogance that leads them down the Groupon route rather than spending the time and effort to forge more lasting fulfilling partnerships. The other is from the ITT conference when the former Tesco boss Sir Terry Leahy criticised all industries for chasing the customer they haven’t got rather than the ones they have. This is no more true than in travel, sadly. However, this has been said many many times before, and what changes? Good advice is never hard to come by in the travel industry, exponents of it, however, are. These are themes touched on in our piece by regular columnist David Stevenson, of the Financial Times, on Groupon and Travelzoo of earlier in the week. http://www.travelweekly.co.uk/Articles/2011/06/13/37346/city-insider-travelzoo-has-the-edge-over-groupon.html

     
    • Stephen Joyce

      Thanks Lee. I think we can all agree that sound marketing principles and customer relationship management are key to long term growth. It still surprises me that a small business would give up 75% of its revenue for a Groupon but grumble at 20% commission for a channel partner. Shows what hype can buy I suppose.

       
    • Kevin May

      Kevin May

      What a shame Travolution doesn’t allow people to put links in the comments section on its articles. We are happy to include links to stories (when relevant).

       
  17. Alex Kremer

    While I agree that Groupon’s deals are (at best) predatory towards small businesses, the basic premise that the concept is cancerous to travel is way overstated. There are many large travel brands who can successfully leverage the marketing opportunities created by a popular Groupon/etc deal.

    However, small businesses should stay far away.

     
    • Stephen Joyce

      Yes, excellent point Alex. I believe you are spot on. When large companies negotiate with other large companies, they have leverage and influence, so the negotiations (and therefore the deal) tend to me more mutually beneficial. Small businesses don’t have that leverage or influence and so they tend to get the short end of the deal.

       
  18. Garen Armstrong

    I love the comparison Stephen and I couldn’t agree more.

    Groupon is a devaluing buisness model and giving business a addictive attraction to quick cash and leads a lot of small buisness to make bad decisions.
    It is equivalent of taking a keg to a AA meeting, the hangover far out weighs the benefit. So now the Travel provider sold deals & made promises and cant deliver.. Now what.. the hangover.

    Groupon my be good for a start-up college student.. “Hunks moving Junk” (think: 2 Men and a Truck)…. but the students only have to worry about keeping their buisness model open for 3 months….. Those kids can spend their cash on a keg.

    Just like the kids dont worrying about the long term business model, Groupon doesn’t either as they are psychotic when they cut their throat by not selling to Google.

    Either way, Groupon is becoming white-noise in the background, and as the economic landscape turns more positive Travel providers will be looking to give deals that Increase Value, not Decrease value by jeopardizing Value Integrity.

    It doesn’t surprise me that average Entitlement American thinks this is a good deal! Aren’t they used to getting freebees…at the cost of govt but buisness?

    Bottom line Groupon is a cancer for buisness!

     
    • Stephen Joyce

      Thanks Garen, I appreciate the comment. Value erosion is never a good thing. It takes years for sectors to recover from discounting and price reductions.

      Some businesses have seen success using daily deals. I know of one customer who was a start-up and in her first season she used Groupons to build awareness. It worked well and it brought customers through the door. But, it seems, for every success story there are who knows how many horror stories.

      At the very least, we now have the ability to question these models openly and publicly, which is a step in the right direction.

       
  19. Joe Buhler

    I agree with the basic premise made by Stephen in this article and have tweeted the Agrawal TC article for people to get more than just the hype about Groupon. With all those stories widely available on the web, it behooves travel suppliers to inform themselves before deciding if working with Groupon is right for them. That is a basic responsibility for any business owner and in today’s transparent world it is much easier to get relevant information than ever before, provided those owners are having their eyes open to what’s going on in the marketplace that affects them. Making an informed decision about Groupon is just part of the process of running a successful business. Caveat emptor applies here too but often it seems that W.C. Fields is proven right when he said “there’s a sucker born every minute”.

     
    • Stephen Joyce

      Always sound commentary from you Joe. Thank you. My story may have been a tad over the top but the point I am trying to make is that sometimes the media, the public, and investors have to look beyond the money and consider the larger implications of a business model. I think what we are seeing with the daily deals model is that it is not all roses and that even though there are suckers born every minute, should we knowingly praise an organization for taking advantage of those suckers? I just hope people take a step back from the greed for a moment and consider the bigger picture.

       
      • Joe Buhler

        I’m totally with you on this, Stephen. To debunk the hype machine is necessary and I’m trying to contribute my small part. My point was that unfortunately many small business owners seem to neglect to inform themselves before making important decisions instead of doing due diligence by ignoring, or at least be suspicious about the hype.

        The same principle applies when it comes to social media and whether to participate and who to listen to. Always dig a bit deeper before deciding.

         
  20. Tom Costello

    Great article Stephen but it will eventually be up to the business owner to say no to the deep discounted daily deal trend, especially hoteliers. Until then, Groupon and others will continue to profit and consumers will continue look for cheap and not value.

     
    • Stephen Joyce

      I agree Tom. It’s always up to the business owner to make the decision. My argument is that, because of the hype, there is not enough balanced commentary about the value of running these deals so business can make an informed decision.

       
  21. nikolas

    For insights from a Groupon cloner, check out this article http://www.techberlin.com/post/6517580180/is-groupon-doomed

     
 
 

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