Groupon Not Great For Merchants

June 28, 2011

You’d think the future would look rosy for what’s been called the fastest-growing company in history: Groupon, which boosted revenue 35-fold in its second year of operation and currently is valued at $20 billion — just three years after it started.

But a new study raises questions about the future of online daily-deal sites, just as Groupon filed the legal paperwork for an initial public stock offering.

Groupon and similar sites use digital and social media to spread the word about deals, such as 50 percent off at a restaurant. But when you get a deal through Groupon, LivingSocial or another deal site, you’re not their customer. Their customer is the merchant that offers the deal to you. And a study released this month by Rice University suggests that the merchant-customers aren’t too happy with how those deals are working for them.

The author, graduate management professor Utpal M. Dholakia, surveyed more than 300 businesses that offered deals through five major sites, including Groupon and LivingSocial. He found that about half of the businesses offering these online deals lost money on them. Not surprisingly, about half of the businesses said they wouldn’t be offering similar deals again.

What’s the problem? First, online deals appear to be ineffective at generating repeat business. When a business offers you a discount, they hope that you’ll come back again and buy at full price. But in this early stage of their development, online daily deals seem to be attracting hard-core bargain hunters who take their one-time discount and never come back. The Rice study found that only about one in five daily-deal customers returned to the business as a full-price customer.

Second, online deal companies typically take a huge cut of the deal for acting as broker — anywhere from 30 to 50 percent of the original, non-discounted price of the deal offer. It’s easy to see why a business wouldn’t be thrilled at handing someone a 50 percent commission to set up a money-losing deal.

Finally, the dealmakers haven’t built loyalty among their merchant customers. About three-fourths of the surveyed businesses said they’d be willing to try a different dealmaking partner for their next promotion. That means the Groupon customer today could easily be a LivingSocial customer next week and an OpenTable customer next month.

Like so many Web-based business models, daily dealmaking is in its early stages, and will undoubtedly adapt to address the concerns raised by the Rice study. One likely outcome is lower commissions for the brokering sites. That makes sense — but if Groupon starts getting less than its current commission rate, all of a sudden it’s not such an attractive investment. Then that $20 billion valuation would start losing altitude fast.

Consumers love deals, and they love being online. Daily-deal sites are definitely here to stay. But the door is wide open for participating merchants to start demanding a better deal for themselves.

This is John Reinan’s weekly marketing column for