Periscope Depth

four signs the Groupon bubble will burst

1. Groupon’s Competitors Have Flooded The Market

The existence of a near dozen competitors – Groupon, LivingSocial, BuyWithMe, Dealfind, Tippr, Thrillist, Yipit, Jasmere, AtCost, DealMap, DealOn – isn’t a bad sign in and of itself. But it’s a bad sign when they’re nearly indistinguishable. What does Dealfind do that LivingSocial doesn’t? If this many companies with identical missions can find funding, then the market for “social coupons” is being overserved.

“But what if the demand is just that high?” you ask. It probably isn’t (see #4).

2. Groupon Gives You A Lien on Participating Businesses

Say you get a social coupon for a restaurant that expires in 6 months. What happens on day 181? Is the money you spent on the coupon lost?

Nope. Check the Groupon Terms & Conditions:

According to applicable law, the Merchant may be responsible for allowing you to redeem your Voucher for the cash value based on the money you actually paid for your Voucher (i.e. if you paid $20 for a Voucher which gives you $50 of value to the Merchant, the cash value that you paid is $20, not $50), for a period of time that extends beyond the expiration date on the Voucher. While the expiration date on the Voucher dictates the last date that you can use your Voucher at Merchant for the promotional offer stated on the Groupon, applicable law may provide that the Merchant is responsible for honoring the cash value that you paid for your Voucher for a period of time beyond the expiration date stated on the Voucher. In other words, you should be allowed to redeem the cash value (or purchase price) of your Voucher up until the greater of: (1) the Voucher’s expiration date; or (2) the minimum length of time allowed by applicable law for a Voucher to expire.

Meaning, if the coupon expires, you’re probably still entitled to its cash value up through a certain period. In Massachusetts, for example, that period is five years.

Do you, as a small business owner, want to put a whole bunch of five-year liabilities on your books? Is it worth that much to get some added foot traffic and Facebook cred?

Groupon clearly has enough customers who don’t mind this sort of thing. But all it’ll take is a few horror stories about businesses paying out for unclaimed coupons to start driving folks away.

3. Groupon Exposes The Margins

(I owe this point to Ilkka; can’t find the post, though)

You get an offer in the mail. $100 worth of accessories at a local boutique for $50. Your first reaction: “Sweet! What a great deal!” Your second reaction: “Why would I pay $100 for that many accessories under other circumstances?”

Offering a Groupon for your goods or services tells everyone who cares that you have a 50% margin built into your price. That’s not a crime; it’s not even a sin. But it does give away more information about your pricing structure than most business owners might consider wise.

For a service industry, like a massage spa or a beauty salon, this probably isn’t as big of a problem. But for retail stores? Do you want your customers to know that your sweaters are only worth half of what you charge?

4. Groupon Only Works Once

But let’s say, contrary to my points #2 and #3 above, Groupon turns out to be a success for your business. You move $10000 worth of fashion accessories at cost. In doing so, you build a word-of-mouth buzz that results in added foot traffic and more loyal customers. You’re thrilled with the results. Six months later, your Groupon sales rep calls you up and asks if you’d like to do another.

You laugh and hang up the phone.

What is the added value of a repeat Groupon? Why would anyone offer a Groupon for their business more than once? If it works, then you’ll have a new pool of loyal customers. If those new customers dwindle to nothing once the 50% coupon is no longer available – and anecdotal evidence suggests that’s common – then isn’t that solid evidence that Groupon didn’t work? And if your new pool of customers sticks with you, then why bother with another Groupon?

Unless I’m missing something, Groupon probably has zero customer retention. And considering the army of identical competitors, the pool of potential customers – small business owners who haven’t done Groupon once already – can only diminish over time. By 2013, everyone who’s interested in some sort of social coupon will probably have tried it.

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