A recent article by Sam Decker, titled “Why Product Reviews Can Drive Group Buying Success for Retailers”, makes predictive statements about deal driven customers from GroupOn like sites. These are not supported in the data. I call into question those statements:
- “A recent Forbes profile on Groupon reported that the group buying site’s sales have reached $500 million“: The Forbes article does not take into account the cost of sales to the businesses and that incremental profit from these promotions may not match up to alternatives. See my articles on GroupOn costs and profitability.
- “Discount buying sites drive sales, but require brands to become better to retain profitable customers“: No data to support Mr. Decker’s claim that the deal seekers will become profitable. On the other hand, research by Prof. Utpal Dholakia sheds light on the lack of profitability from deal seekers because the repeat purchases do not materialize.
- “By listening to customers, both on the retail and manufacturing side, business participants in group discount buying sites can increase their chances of converting coupon customers into full-paying ones“. Mr. Decker’s claim ignores the profile of the customer and the behavior of the deal seeking customer. If one business can woo away someone else’s loyal customer with a promotion, what makes this business believe that the customer will return because of great experience?
As one of the Group Buying site, ScoutMob, depicts in its website, the customers getting the discount coupons score, do the victory dance and move on to next deal.
Through 50% off promotion, the business has also set a low reference price in the minds of the customer, it is harder to improve that reference price just by listening to these deal seekers and by “over delivering”.
Businesses fail to account the opportunity cost and the incremental benefit from a deal seeker vs. that from acquiring a customer through non-promotional means. Stating that these customers will return because of reviews and great service is not supported in the data!
Group buying is profitable to a business only if:
- The product has high contribution margin (price less marginal cost)
- The business has excess capacity (with sunk costs and no other way to monetize it)
- There exists a segment of customers with low willingness to pay but reducing the price to include them will deliver less profit than your current profit (even though it is still profitable)
- There exists a segment of customers with low willingness to pay that the business cannot reach through any other way
- Businesses can serve these low willingness to pay customers without the full price customers knowing about it (third degree price discrimination)
If any of these are not true you have hard math in front of you for determining profitability, not service excellence.