Is the Groupon Model Really Sustainable?
Amanda is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If imitation really is the most sincere form of flattery, then Groupon (NASDAQ: GRPN) should be blushing like a schoolgirl. Since the meteoric rise of the relatively new internet business, the idea of selling daily deals en masse has really caught on. There are literally hundreds of Groupon imitators doing business these days -- more than 800, according to aggregator site Yipit -- and more in the works. Even big players such as Google (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), and eBay (NASDAQ: EBAY) have developed their own daily deal departments, and nobody disputes the fact that these guys know how to make a buck.
Lately, however, a few small cracks have appeared in the industry's veneer. A recent survey revealed that although eight out of 10 merchants enjoyed working with a daily deal site, more than half do not plan to repeat the experience within the next six months. A survey by Business Insider in July of 2011 yielded similar results, though with a much smaller sample. One of the biggest merchant complaints seems to be the lack of repeat customers, the desire for which is why many of them use the service in the first place.
On the face of it, this type of business doesn't seem destined to last. While businesses have always run special offers in order to attract new customers, they generally have control over the details of the promotion. With Groupon and its ilk, merchants pay high broker fees (50% seems common) and are inundated with one-time coupon users, which often winds up costing them money. This makes for a great outcome for deal sites and coupon users, but not for those actually supplying the goods. Without them, of course, the whole house of cards falls down.
This is not to say that the idea is a total failure -- far from it. So many would not have taken on so much so soon if there was no profit in it, at least in the short term. For the long haul, well, that's something else. Remember, Groupon is only three years old and born during the Great Recession when everyone was scrabbling to both make and save a buck. It's just possible, now that the economy is showing signs of life, that the notion of a business model built entirely on "group couponing' might not be sustainable. Business people tried it, at least half didn't like it. Oh, well.
Established entities like Amazon, eBay, and Google can afford to add a bit of this model to their already successful profiles, tweak it, and see how it flies. Even Groupon itself seems to be realizing that it needs to broaden its base, having added other products and services to its arsenal in the form of Groupon Getaways, Groupon Goods, and Groupon Now! -- as well a new partnership with Deutsche Telekom. Everybody loves a deal, of course, so these sites won't just fade into the sunset. What the successful ones will do is diversify. Which is, as any investor knows, the real key to success.
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