Tuesday, June 14, 2011

Groupon's market advantage is old school sales power; disadvantage is a lack of barrier to entry for competitors

This is certainly not the first time I've written about Groupon, a quick search of TNM will reveal a number of posts on the Chicago-based company.

But posts like this one on TechCrunch, which question the whole business model for retailers, or others that have questioned the wisdom of investing in the company appear to miss some important points that have to do with "in the trenches" management.

Groupon's unique market advantage has nothing to do with its model or its extensive customer base – both are easy to replicate, assuming you are willing to spend the money on building out your lists.
What makes Groupon so unique is that here we have a Midwestern company doing business the old fashioned way, through a huge commitment to sales. The reason for this commitment to sales is that without it the company simply would not be able to generate the level of revenue necessary to grow, or even stay alive. For Groupon, sales growth is like out running the sheriff – you either keep running or else face the consequences.

For any company which wants to create its own social buying service, volume of deals is the key to success. Google, for instance, is be dependent on retailers finding out about its services, preferring their terms and signing up. It is doubtful that Google will be employing a massive phone room to drive sales.

But Google's new effort points to the problem with Groupon, in general: a low barrier to entry. Google, of course, isn't the only company starting up group buying services to compete with Groupon and Social Living. The Boston Globe joined the NYT in signing on with Group Commerce to launch its own service.

For newspaper companies, the group deal is a great way to build one's customer list, negating the hugely impressive customer numbers Groupon touts. Group buying, seen from this perspective, is a means to an end, rather than a stand alone business.

While many media companies are downsizing their classified sales forces, and retail advertising phone rooms, Groupon is one of the few building up their resources. What Groupon probably knows, that others haven't discovered yet, is that as time goes on it gets harder and harder to generate new sales unless retailers have a positive experience with the service. And here is where Groupon is falling down. Rather than obsessing with growing their existing business through increased market penetration, Groupon would be wise to begin offering their current customers additional services on top of the daily deal.

A look at the GrouponWorks website shows that the complete focus of the company is one more and increased deals. The Groupon Merchant Services section is all about "the deal" not about helping their customers be more successful – other than through the deal. One can almost sense the desperation as the company looks to drive sales in order to maintain the momentum necessary to go public.

(Even this story that appeared last night seems to point to an almost clinical obsession at Groupon to drive deals rather than to group customer services. One could easily see a situation where the ability to do group buying deals is but a small part of some other retail services, such as credit card handling, etc.)