Groupon Will Give You a Migraine for Ignoring Pricing Principles


 Red flags for investors and small business advertisers



Whether you’re an investor, small-business advertiser or even a customer, daily deal sites can give you a major headache.

Continually, there are red flags about Groupon.

For example in Sept. 2014, the authoritative, TheStreet.com, rated Groupon as a “sell” with a “D” ratings score:

ID-100222653 stockimages“This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover.

“The company’s weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.”

True, Groupon reported a 7.5 percent increase in quarterly revenue in May 2013. But it still lost $4 million. In Q1 2012, it lost $11.7 million.

This is in addition to another red flag after the daily-deal company first reported a $42 million loss for Q4 in 2011.

So, investors keep propping a bad idea. Advertisers continually lose money on it coupon deals, which doesn’t promote profitable repeat business for them. Sooner or later all stakeholders will wise up, but perhaps too late.

CEO turmoil

Since the site’s stock price began plummeting, Groupon’s founder Andrew Mason and founding investors Brad Keywell and Eric Lefkofsky have lost about 50 percent of their multi-billion-dollarholdings.

Mr. Mason was fired in February 2013, and was replaced with co-CEOs: Co-founder and chairman Lefkofsky and vice-chairman Ted Leonsis.

The decline means Groupon’s image has greatly diminished — as an advertising medium, employer, as a takeover target or acquirer.

Not to be gauche, this portal has been warning about daily-deal red flags, such as Groupon and LivingSocial. Additionally, results from three Rice University studies serve as warnings for the industry, its investors, its advertisers and consumers.

Same conclusions

Indeed, in 2011,  the third Rice study by a management professor, Dr. Utpal M. Dholakia, appears to draw such conclusions.

The study caught my eye because this business portal has long maintained it’s dangerous to sell products at the cheapest price in the marketplace vis-à-vis focusing on value and customer service. (See What are the Secrets for Success from Advertising?)

Companies that focus solely on price attract the smallest segment of consumers – 18 percent – the least-desirable customers who make buying decisions solely on price. Such consumers are not loyal. Additionally, they’re the biggest complainers and more likely to return products.

But let’s consider Rice’s research.

Mixed results

For two years – from August, 2009 to March, 2011 – Dr. Dholakia’s third daily-deals study examined the outcomes for 324 businesses advertising with five daily-deals sites in 23 U.S. cities.

He concluded:

  • 55.5 percent of businesses made a profit
  • 26.6 percent lost money
  • 17.9 percent broke even

“Although close to 80 percent of deal users were new customers, significantly fewer users spent beyond the deal’s value or returned to purchase at full price,” he concludes. “48.1 percent of businesses indicated they would run another daily deal promotion, 19.8 percent said they would not, and 32.1 percent said they were uncertain.”

More red flags

His study drew other warnings.

“Overall, our findings lead us to conclude that there are relatively few points of differentiation between the daily deal sites, making it harder for any one site to stand out from the others,” he adds.

More dire conclusions by Dr. Dholakia:

  • Only 35.9 percent of customers returned to pay full retail price.
  • Many advertisers aren’t loyal to their original daily deal sites – 72.8 percent of businesses will consider advertising on different sites.
  • Just 35.9 percent of restaurants/bars and 41.5 percent of salons and spas will continue to run such promotions.

“The major take-away from the study is that not enough businesses are coming back to daily deals to make the industry sustainable in the long run,” Dr. Dholakia says. “And our results from three studies and close to 500 businesses surveyed show that the deals are nowhere close to the rates of financial success for participating businesses that some companies claim to be having.”

“The businesses that we see spending their marketing dollars on daily deal sites have dramatically cut their advertising budgets,” Dr. Dholakia warns. “This is a problem for businesses, because they’re not building their brand when they offer discounted prices for their products and services. Only about 20 percent of customers using daily deals return to businesses to buy at full price; customers acquired through other programs typically have much higher rates of full-price repurchases.”

Warning for consumers

Dr. Dholakia has a warning for consumers.

“If you’re going to purchase a voucher, make sure you use it before it expires,” he says. “Right now the getting is still good for the consumer, but that isn’t going to last much longer as these steep discounts won’t and can’t last very much longer.”

Not convinced? Consider another writer’s post: Why Groupon Is Poised For Collapse. I don’t know why investing in daily-deal sites or advertising with them makes sense.

A business will profit more from best-practices in traditional marketing, a strong Web site using search-engine optimization, and social media. Forget trying to advertise as a low-cost leader. It won’t work.

From the Coach’s Corner, here are related best-practices in marketing and sales:

Create Buzz to Win Your Major Marketing Campaign — There are many reasons for marketing failure of a campaign. Here are 14 of the more important reasons.

Strategies for Maximum Customer Loyalty, Profits — If you’re finding it a challenge to create profits, you might appreciate knowing that you’re not alone. Profits since the Great Recession have been elusive for other businesspeople, too. But here’s what you can do.

The 7 Steps to Higher Sales — Secrets for sales success – seven steps to higher sales, five value perceptions that motivate customers to buy, and the three-step process for overcoming sales objections.

What kills a skunk is the publicity it gives itself.”

-Abraham Lincoln

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Photo courtesy of stockimages at www.freedigitalphotos.net

Seattle business consultant Terry Corbell provides high-performance management services and strategies.