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Crisis PR expert Tricia Fox casts her eye over daily deals site Groupon, which appears to be sailing through troubled waters.
It would seem that those in the know have suddenly woken up to the fact that the digital industry’s cash cow, Groupon, may have turned out to be more of a dog. Duncan Parry’s column for The Drum explored the possibility of what it might mean if the digital wunderkind Groupon goes down. Just like the Titanic did 100 years ago.
For quite some time, Groupon has been troubling me. The old adage that “if it looks too good to be true, it is” should have rung alarm bells all over the place when Groupon soared into our consciousness. We’re slap bang in the middle of a recession, and traditional media is losing ground so anything that connects businesses to customers for the greater good of all is a great thing, right?
Wrong. The fact that Groupon is perceived to be in trouble comes as no surprise, and to paraphraser Titanic’s architect Thomas Andrews, I believe their failure is a mathematical certainty.
Economically speaking, Groupon produces nothing. Its “product” is provided exclusively by third party businesses that sign up to a marketing scheme that pledges to connect them directly to an enormous audience at no direct cost.
But when you start to look at the indirect costs of using Groupon it takes on a very different shape.
Let’s begin with a minimum discount of 60%. So your product, which normally retails at £100, is now to be sold at the vastly discounted price of £40. Then let’s take off VAT at 20% which will leave us with just £33.33 to play with. Now here comes the ball breaker. Let’s take 50% of that value away as Groupon’s success fee, leaving the product/service provider with just £16.67.
The indirect cost of marketing on Groupon: 83.33% of turnover. That’s before you’ve created or delivered the product or service in question.
Forget Charles Ponzi, Groupon’s business model makes his scheme look positively philanthropic.
No business can sustain marketing costs in excess of 80% for any period of time. Those that try are inevitably going to go bust, those that don’t will find themselves working for “nothing” in a vain attempt to service those customers that have bagged a bargain and who will undoubtedly move on to another service provider at the earliest opportunity.
Which is where Groupon’s negative PR comes into play: Cupcake Calamities are warning signs or a business in distress and if Groupon’s suppliers are beginning to feel the pinch, it’s only a matter of time before it travels right up the supply chain and inevitably into the hands of the consumer.
In fact, it’s now such an issue, that the OFT has stepped in to tell the internet giant to pull up its socks, or else. It’s the Titanic equivalent of the HSE stepping in to suggest that the insertion of those rivets could be better…..
In order to grow, Groupon needs a never ending supply of third party product and service providers. And in a recession these are becoming increasingly thin on the ground. In short, Groupon’s market shrinks every day.
Shrinking markets are not good news for any business or its investors. The fact that the clever people on Wall Street, who supposedly analyse businesses for a living, have not cottoned on to this before now is a mystery to me. How did they think Groupon was going to continue to grow? Geographic expansion was inevitably only going to get them so far.
Groupon, like the Titanic, has been subject to a great deal of arrogant media noise but if we learned anything at all from the dot.com bubble and crash, it was that the hype counts for nothing and that the fundamental rules of business have not changed. The clock is ticking.
Tricia Fox is the managing director of Volpa
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