Everyone knows I “have a thing” for local search and business metrics. In the past year alone we’ve seen the mega-trend of localized coupons take deep root.
Right now the 800 lb gorilla in the game is Groupon. Groupon has shot ahead of the market by having some fairly substantial investment supporters (substantial in the form of 1.12 billion dollars!)
CNN recently wrote a piece on Groupon,
Here’s a snapshot of the company’s growth: Groupon says it currently has 40 million subscribers to its daily coupon e-mails, up from 1.5 million a year ago. It is offering deals in more than 300 markets in 35 countries, up from just 28 U.S. markets last year.
And Groupon says it has saved its customers more than $800 million so far this year, up from about $50 million last year.
For consumers, that means spending less cash — always a nice thing in tough economic times. And for local businesses, that means bringing new customers in the door, which makes them happy, too. That’s why so many restaurants, stores, and service providers are rushing to get their deals on Groupon that the company has had to change its business model to keep up — no longer just “one deal per day, per city,” but several potential deals, customized for the user.
As for the company itself, Groupon has more than 3,000 employees — up from about 125 last year — including about 1,000 in its wacky Chicago headquarters.
The controversial challenge on the street is that Groupon also claims that it has saved shoppers hundreds of millions of dollars and that it has generated millions in revenue for the businesses it features.
The ratio of consumer savings vs business profit can kill small business.
The Groupon model is not about promoting the brand of a small business. If we look at the base details the model of Groupon is nearly identical to the long term model of Walmart.
Walmart drives local shoppers into a ‘price reduction’ mindset where they are looking for the best deals on products they use. When a consumer walks into Walmart, they are not looking for brand considerations or premium services: but the knowledge of what they are buying is at or below fair market value.
Groupon uses a similar methodology, driving consumers to subscribe to daily deals at local stores.
Small businesses simply cannot drive a profitable model when working with Walmart. The simple economy of scale issue requires that a business be capable of scaling it’s business model upwards of 100k units (enough to stock thousands of stores.)
The last decade has presented tremendous news coverage of Walmart disrupting local economies and shifting how national business trends work. Walmart has been held up as both a glowing example of exemplary business strategies and as the harbinger of small business death.
Small businesses simply cannot drive a profitable model when working with Groupon. The simple economy of scale issue requires that a business grow organically with a consistent revenue trend. A massive spike in “one off” advertising creates customer turn-over, employee challenges, and loss of on-going revenue.
In the past year, Groupon has received tremendous news coverage for it’s inventive market strategy and has been one of (if not the fastest) growing company in America. It has also received it’s share of negative coverage that ranges from poor Super Bowl ads to bad flower deals:
- Groupon Super Bowl Ads Draw Scorn ( MSNBC )
- Groupon Phenomena Bad for Business (Reuters)
- Groupon offers refunds after bad flower deal ( Chicago Sun-Times )
- Groupon Class Action Lawsuit ( Louisiana Court)
- Groupon: The Restaurant Killer ( Guide to Hospitality )
- The Dark Side of Groupon (Fast Company)
There are two primary points to think about:
Item One: the “virtual Walmart store front” that is Groupon is incredibly difficult to perceive. Unlike Walmart, Groupon has the benefit that it’s ‘business’ doesn’t need to work with local city zoning, business committees, or local market leaders.
Item Two: The digital model of Groupon allows it to quickly setup virtual discount super stores without anyone realizing a mega brand has moved in as a competitor. It has little or no issues with local market conditions or the life-blood of the community.
What does it mean?
At it’s core, Groupon doesn’t have any connection to whether it’s business model is good for the local economy.
When Walmart moves into a local area (love it or hate it) – Walmart has multiple challenges that it needs to overcome to gain the support of the local business community. In many cases they need to commit to union rules, labor issues, environmental impact, tax considerations, and community goodwill efforts.
When Groupon moves into a local area (love it or hate it) – consumers drive down prices as they look for deals and a significant portion of revenue goes back into creating an even bigger virtual Walmart (I.E. Groupon) with no consideration for local market conditions.
While regulation is not my first-choice; when examining the these models business leaders need to understand the core necessities regarding checks and balances at the local, state, and federal level. Without proper consideration to the local economy and the community, new business models can cause tremendous market degradation.
As models like Groupon grow,
what types of checks and balances
should local and global leaders think about?