If you haven’t heard of Groupon you are likely over 35, married or male. Groupon is a really cool idea. Each day the site makes a single group offer available. What sort of deals can you get? Pretty standard stuff such as:
- $3 for a bagel that would normally cost you $8
- $15 for cupcakes that would normally cost you $33
- $24 for a manicure that would normally cost you $55
- $49 for a spa treatment that would normally cost you $154
The reason Groupon is so successful is the social nature of the deals. To get them YOU must get your friends to buy the deal so you can get it. It is just a matter of time before EVERYONE has been exposed to Groupon. It is such a simple concept LOTS of entrepreneurs have or plan to launch competitive businesses. Lots of people have approached me about starting a Groupon-killer so I started looking into the business (one such entrepreneur suggested I read Chris Dixon’s post on competition if I didn’t want to fund his deal). Groupon is backed by a Russian investment firm (helpful if anyone gets out of line). The demographics are REALLY interesting:
So Groupons are perfect for young, educated women who have money. Groupon has effectively figured out how to get their attention and before long almost all ‘young, educated women who have money’ will know about the concept. But what happens next?
One of our friends owns a spa that uses Groupon to market their services. Once a quarter or so Groupon allows his spa to run a ‘Groupon’ for spa services in a major city. Over the past few days he sold more than 1,500 Groupons generating $70,000+ in revenue for Groupon and $50,000+ in revenue for the spa (Groupon gets to keep between 15-30% of the revenue and send the rest to the spa a few days after they collect it). These services are provided at a 68% discount – and I suspect they are delivered on a break-even basis. The spa will convert a certain percentage of these new customers into active members making the deal worthwhile. My question is how many more times can he use Groupon before reaching the total universe of potential customers?
Throughout the rest of the quarter the same ‘young, educated women who have money’ who were attracted to his spa by the GREAT deal will be seeing other GREAT deals from other spas. Will they learn to ‘wait’ to use these ‘loss leader’ deals or will the abandon the Groupon and commit to our friend’s spa? If deals become commonplace and consumers expect them my friend (and his competitors) won’t be able to continue their practice of offering margin-free services. On the other hand Groupon users settle down and start using their favorite spa and stop taking new deals from new spas the system won’t work anymore. Either way it is just a matter of time before Groupon breaks. Groupon seems to focus on food and personal services – each susceptible to this same problem.
The Groupon model is PERFECT for generating more business for local service businesses (spas, massage parlors, restaurants), but the volume of business is troublesome for many retailers. Take the example of my friend’s spa. Assume that he has 17 treatment rooms and that each room can offer 6 one hour treatments each day per room (leaving room for cleaning and such). This means that his spa (and it is a big one) can handle 100 treatments each day or 700 per week. The last Groupon he ran generated more than 1,500 treatments. Assuming his business has been operating at 50% capacity prior to the sale of the Groupon it would take five solid weeks to fulfill the Groupon. Of course this sort of ‘perfect fill’ would be impossible because most ‘young, educated women who have money’ want to get their treatments in the evenings and weekends. I suspect that more than a few of the ‘young, educated women who have money’ who bought this deal will be surprised that they won’t get a treatment for several weeks. More and more businesses who use Groupon are recognizing this issue. This week Aaron Crowe wrote an article titled, “Groupon discounts working too well, overwhelming small businesses” covering the issue following a Business Week article on the same topic.
There are a LOT of ways Groupon can build on its success and even more ways for it to shoot itself in the head. I wish I had come up with the idea AND had the time to actually execute, but I would be surprised if Groupon is a long term success…