Is Groupon Stores Dead On Arrival?

by: on January 25, 2011
17 Comments

At the beginning of December, Groupon announced two radical new features: Groupon Stores and the Deal Feed, the former a self-serve deal platform for merchants, the latter a Facebook-like experience for Groupon users. The announcement was very well received: some hailed “Groupon 2.0″ as the future of commerce. True, the potential strategic benefit of the new features would be massive: self-serve offers recommended to consumers through a personalized, social experience would erect badly needed network effects in the fiercely competitive Daily Deal space. Or as Chris Dixon puts it: “self serve is the holy grail of local.”

Groupon Stores 12/3/10

However, neither appears to be taking off.

I haven’t received a Groupon Stores deal since December 3, 2010

I started seeing Groupon Stores offers in my emails immediately following the announcement. The idea was for merchants to create their own offers, then pay 30% commission for those offers to appear on the right side of relevant users’ emails. However, I haven’t received stores offers in nearly two months. A Google site search reveals many merchants who have created profiles, but almost none have active offers (I found one in the first five pages of search results). Most stores list one or no past offers.

Groupon just removed the link to “My Deal Feed”

Once Groupon 2.0 was announced, I started seeing a link in my header for My Deal Feed. The feature was active for only certain users, but the link made everyone aware that the feature was on its way. However, I just noticed that the link no longer appears for me or anyone I’ve spoken with.

Possible reasons Groupon Stores isn’t taking off

1. Local Self-Serve is next to impossible. Even Google, which runs the largest, most successful self-serve local advertising platform in the world, is building call centers to support its upcoming daily deal product. As the old adage goes, local advertising is sold, not bought. Local merchants have tremendous constraints on their time and hundreds of sales pitches to fend off, many of which are hawking competitive daily deal products.

2. Local merchants don’t want discount-focused CRM. The biggest driver of profitability for merchants is the creation of new, repeat customers. Providing discounts to your current customer base can cannabilize revenue they would have otherwise received. Further, the discount context may not be right for most merchant-customer conversations. More likely, merchants want to use channels like Twitter & Facebook that can focus more on news and new product announcements.

3. Local merchants won’t create amazing deals on their own. They require negotiation and hand-holding by an incentivized sales team. Further, the rare occasion of being a featured offer may act as an excuse to justify a large discount.

4. No intangible marketing benefit to Self-Serve offers. When a merchant is chosen as a “featured” offer, there is an implicit endorsement by the Groupon brand.

5. Self-serve daily deals aren’t profitable. There are two types of Groupon Stores deals, Promoted (deals are included on the side of certain users’ Groupon emails, 30% commission) and Non-Promoted (deals sent only to the merchant’s followers, 10% commission). Earlier, we released a merchant profitability calculator, a spreadsheet that calculated the merchant profitability of daily deals at different terms. Plugging in assumptions for Groupon Stores reveals that Promoted Deals are about a 67% less profitable than running featured deals elsewhere ($2.5 of net profit per voucher, vs $7.7). Non-promoted offers are not profitable at all. Merchants may not be doing this calculation, but many probably intuit the economics of the promotions.

6. Management focus is on the low hanging fruit of international expansion.

Possible reasons the Deal Feed isn’t taking off

1. Daily Deals just aren’t social. As we predicted earlier, building a social experience around Daily Deal shopping might be harder than everyone thinks: Yelp, Google, Facebook and countless others have been inching away at the social-local opportunity for years, and there’s still along way to go.

2. Consumers need to get sold. Self-serve offers may lack engaging editorial, curation and singular spotlight that make featured deals so compelling.

3. Groupon Stores isn’t creating enough deals to make it work… In order to move from a push-based email service into a pull-based Deal Feed browsing experience, the volume of deals probably needs to expand by orders of magnitude.

4. …and Groupon can’t afford to cover the gap with a sales force. If Groupon were able to greatly expand its deal inventory for free (via self-serve), then they would be able to create a compelling, personalized, social shopping experience. However, if every offer has to be sold by a sales rep, then the average commission available would be split accordingly. According to Quora, reps in smaller markets are already struggling to earn workable comissions, raising the question how many different offers can Groupon afford to sell per city per day?

Jim Moran is co-founder of Yipit, a service that recommends the best daily deals by learning your tastes.

  • Josh Ellstein

    After a merchant participates in a Groupon (or Living Social) deal, do the merchants receive the email addresses (and other contact info) of the customers that purchased the deal (or does this incredibly valuable info remain with the deal-site)?

    Secondly is Groupon providing merchants analytics on the types of customers that are buying their deals. e.g.; can a Groupon SPA merchant see if that customer has purchased multiple other SPA deals in the area previously through Groupon?

    Thirdly (apologizes for this rant), has Mastercard’s analytics group released any reports on Daily Deal analysis? e.g.; Mastercard should be able to tell if customers are buying daily deals where they already shop and/or are repeat customers after the deal.

    • http://twitter.com/jdmoran Jim Moran

      1. Merchants don’t receive customer contact information. In rare cases, the redemption process may require customers to re-enter contact info to claim (e.g., magazine subscription deals).

      2. Not certain, though doubtful that they are currently providing this level of detail.

      3. I haven’t seen any, though agree they have a treasure trove of data. Separately, it’s likely you will see branded Daily Deal credit cards in 2011.

  • http://twitter.com/JohnHinnegan John Hinnegan

    Thanks for the post. Good read, lots to think about.

  • Ali

    Great post, great blog! Somehow I cannot access the archive of your blog…?

    • http://twitter.com/jdmoran Jim Moran

      Thanks for pointing that out. We just added pagination as a result, let me know if you run into any issues.

  • http://www.facebook.com/people/Shai-Dardashti/100001693706786 Shai Dardashti

    Jim,

    Amazing insights!

    Per Daily Deal Credit Cards in 2011 — do you think Local Deals ultimately become “mobile phone” centric, rather than “desktop centric” — see:

    http://www.appleinsider.com/articles/11/01/25/apple_finalizing_wireless_e_wallet_for_iphone_5_ipad_2_report.html

    Google has Android. And: Latitude / Maps. Groupon has a website with nice pictures.

    Building on Josh’s thoughts — perhaps American Express eventually enters the Local Deal space, with closed-loop economics and/or programs catering to “Black Card” members vs. “Platinum Card” members.

    Finally, Apple had a revolutionary idea with iTunes back around 2003. Sitting on a ton of cash waiting for the next huge idea. Might “Local Deals” (Apple OS powered — iPhone, iPod, iPad — all eWallet) be part of Apple’s next chapter?

    If Google Android OS becomes a Kingmaker in the Local Deal space, why not Apple OS?

  • http://www.facebook.com/people/Shai-Dardashti/100001693706786 Shai Dardashti
    • http://twitter.com/jdmoran Jim Moran

      Thank you. This is fascinating stuff and certainly has big implications for the daily deal space and local in general. I need to think more about it.

  • http://twitter.com/spwilko Simon Wilkinson

    Jim
    Another thought provoking read; thank you.
    In your self served deal example above what did you base your assumptions on for the existing/new customer percentages and why did you assume there would be zero breakage?

    • http://twitter.com/jdmoran Jim Moran

      The existing/new percentages are nearly impossible to estimate. My thinking was that non-promoted deals would be bought mainly by the current customers, since those are the people who follow the business and the deal is not promoted through the Groupon newsletter. Promoted deals would have a higher percentage of new customers, however, since the personalization/targeting of these deals would likely go into relevant demos in their own geography, there is a good chance that many are current customers still.

      I read somewhere that a base case assumption is that 20% of customers who purchase a daily deal are already customers of that business, so I upped the percentage for the “Promoted” deals, as I assumed a tighter promotion.

      Still, this is a pretty loose assumption. I would add, however, that I delineate between “current customer” and “customer who would go anyway,” elsewhere in the model, where I try to add another conservative assumption.

      I assumed zero breakage revenue to the merchant because Groupon keeps the breakage as part of the contract: http://blog.yipit.com/2010/10/28/groupon-releases-pricing-for-self-serve-product/

  • Tracey

    Very interesting premise…the Groupon craze is fascinating. I thought this was fascinating too:
    http://blog.wealthhabit.net/2011/02/group-buying-and-carb-bingingany.html

  • http://www.facebook.com/pawjones Paul Jones

    Great post! What I think that could make it enticing for a merchant if the deals would also offer the merchant the ability to be able to form a direct relationship with those that have either purchased a deal previously or who subscribe to the deals. I believe that this would allow the merchant to continue to market their business to an interested user using promotions that fall outside of the economics of the “group deal” and potentially allow it to offer more profitable promotions on a direct basis.

    Nevertheless, I don’t think Groupon is giving up those email addresses any time soon, and it really is not in their interest to do so. I just mention this because I think offering a form of direct relationship between the merchant and customer/interested lead could increase the pool of potential customers and provide new incentives for the merchant to run deals.

    I think loyalty programs that help the merchants keep the new customers they get from these deals are going to be very important as the space continues to grow.

  • http://www.partofdeal.com/how.php Dan

    This is a great article. On the surface, it really really seems like an intuitive thing that self service would fly here (after all Groupon deals are loss leaders for merchants) and having friends recommend deals (on Facebook) to each others is likely to result in more repeat business but without a sales force . I so much believed in this that I created a platform (with a few buddies, we were bored during the Xmas holidays  and subsequent few months) http://www.partofdeal.com It has revenue sharing (MLM like), fully Facebook integrated … Still, there is a chasm here that needs to be crossed before any of the self-service local deals takes off. Sales force is still the king.

  • http://www.partofdeal.com/how.php Dan

    This is a great article. On the surface, it really really seems like an intuitive thing that self service would fly here (after all Groupon deals are loss leaders for merchants) and having friends recommend deals (on Facebook) to each others is likely to result in more repeat business but without a sales force . I so much believed in this that I created a platform (with a few buddies, we were bored during the Xmas holidays  and subsequent few months) http://www.partofdeal.com It has revenue sharing (MLM like), fully Facebook integrated … Still, there is a chasm here that needs to be crossed before any of the self-service local deals takes off. Sales force is still the king.

  • http://www.partofdeal.com/how.php Dan

    This is a great article. On the surface, it really really seems like an intuitive thing that self service would fly here (after all Groupon deals are loss leaders for merchants) and having friends recommend deals (on Facebook) to each others is likely to result in more repeat business but without a sales force . I so much believed in this that I created a platform (with a few buddies, we were bored during the Xmas holidays  and subsequent few months) http://www.partofdeal.com It has revenue sharing (MLM like), fully Facebook integrated … Still, there is a chasm here that needs to be crossed before any of the self-service local deals takes off. Sales force is still the king.

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