Is GroupOn good for your business?Paul Cubbon Presentation to BCAIM, January 2011

Paul.cubbon@sauder.ubc.cawww.blogs.ubc.ca/paulcubbon/

Speaker notes in each slide provide reference links and more resourcesA fuller version of this presentation can be found at www.slideshare.net/pcubbon

A brief history

• Before Groupon– Aggregating buyer volume to gain price reductions• B2B• B2C

• Groupon launch: Nov. 2008

Less than $15 to the salon for 1.5 hrs?!

Follow the money.• Consumer pays Groupon $29• Salon gets $14.50 from Group-on;

installments over ~4 months • Salon costs include staff, product,

rent, utilities etc.• Some costs fixed, some variable• BUT, a loss maker on the single

transaction• SO, WHAT HAPPENS NEXT……?

What happens next……?

• IF Groupon customer is a NEW customer she could:

• Return to buy at full price;• Only return when deep discounts are offered;• Influence other consumers, positive/negative• Impact staff morale, positive/negative• Impact customer service, positive/negative

Variations with upsideIf 2 people consume $40, Pivo gets $25 & possible repeat

Expiring inventory; plus time controlled entry slots - $11 vs. $0

Groupon Gap deal

• Aug 19th 2010 - $25 for $50 value

• 441,000 groupons sold = $11m+

• First national deal for “local” model

• Mutually attractive advertising?

The cocaine analogy

“High-low pricing is devastating to the consumer’s opinion of your brand.”

Seth on Groupon

Sees potential based on:• Fun• High margin items• Working with baskets of aligned goods• IF an improved permission based

customization ability is developed

Academic study 1

• Harvard: “Is Groupon good for retailers?” Jan 10th 2011

• Working paper: “To Groupon or not to Groupon?” http://www.hbs.edu/research/pdf/11-063.pdf

• Key themes– Price discrimination – Advertising benefit

• Structured approach to questions businesses should ask before deciding

Academic Study 2Rice University, Fall 2010• 150 Groupon businesses in 19 cities (6/09-8/10)

66% profitable; 32% unprofitable. – Restaurants were the most unprofitable category,

describing Groupon customers as "entitled," poor tippers, and definitely not repeat customers.

– Spas, on the other hand, were the most profitable (though their Groupon-using customers were still bad tippers).”

– 42% said they would not use Groupon again• Recommendations include: selective, partial

offers, designed to link to repeat behaviour.

Living Social

Competition

Jan 19th 2011: Living Social Sells >1 million Amazon coupons: $13m+

Like Gap Groupon

A national, mass advertising playFor Amazon, a $15 discount off of normal basket.

SwarmjamMore competitors. Barriers to entry?

eConsultancy view

• “Group buying and the new customer acquisition lie” Jan 20th 2011

•

eConsultancy cont.

• Patricia Robles:

Experiments with higher price, higher margin items

Example: Men’s Fashion start-up• Average consumer spend = $500• Groupon is -$150 at $50 cost to consumer• Run in multiple cities Fall 2010• Net from consumer on purchase = $350• Company also gets $25 from Group-on, in 3

staggered installments.• So far, only ~10% redeemed• Intent is to follow-up with custom messaging to gain

repeat purchase and leverage word of mouth

Business strategy and potential role for deep price discounts?

• STEP BACK• Why offer discounted pricing at all?• How does it fit your business model for

• Customer acquisition• Retention• Revenue growth• Margin management and profitability?

• What are the long-term as well as short-term implications?• Will deep discounting be the new norm in your category?• Can you WIN with this tool?• Will you start a price war?

Demand peaks and valleys

The conventional result of a price promotion (lower price, non-perishable). A= price down, volume up; B = price back up, Volume down; C= volume eventually recovers to pre-discount level.OUTCOME: only existing customers forward buy, at reduced cost: Diluted margin, disrupted supply chain.

A

B

C

In this scenario, as price drops volume goes up as new buyerstrial at the lower price; but they abandon when price returns tonormal. Existing buyer keep buying. Typically, lower cost, perishable items. New buyers saw little appeal except low price.

New buyers trial, attracted by low price, but appreciate thebrand benefits to the extent that they re-purchase at the full price

The last scenario is what you should be trying to achieve – with any price discounting. But for it to work, your core offering, the brand experience and perceived benefit has to superior to the next discounting competitor.

IF price discounting, alternative choices to Groupon, etc

• 2:1 coupons in existing media

• Fundraiser books

• Direct promotion

Should Groupon have accepted Google’s $6 billion offer?

Google OffersNewsleakedJan 20th 2011

“Why we invested in Groupon”… the power of data

• VC Greylock explains investment as a focus on the data and potential to customize offerings– Techcrunch interview, Jan 11th,2011.

Takeaways• What is your marketing strategy?• Where does price discounting fit into this? (if at all.)• Work through margin as well as revenue implications.• Look at longer-term as well as short-term:

– Financial– brand

• Can you customize to improve effectiveness?– Partial discounts– Time controlled– Linking to subsequent behaviour– Leveraging social media during and after usage.

• If you decide to price-discount, is Groupon (or a similar aggregator) your best choice?

Q&A

Questions?

Comments?

Helpful info-graphic (link in notes)

Resources: some places for context on discount buying and online behaviour

• http://www.web-strategist.com/blog/ jeremiah owyang

• http://www.altimetergroup.com/ charlene li• http://forrester.typepad.com/groundswell/ josh

bernoff• www.emarketer.com • www.mashable.com • www.iab.com • www.econsultancy.com