Is Groupon's strategy doomed?
In less than 18 months, Groupon, the popular daily deals site, has won more than 700 million users and an estimated valuation as high as $25 billion. But some says its business model — offering deep discounts to users when enough of them want a deal, then splitting the profits with participating businesses — isn't sustainable, and doesn't make sense for the restaurants, spas, dentists, and other merchants that use Groupon. Fair criticism?
Groupon is bad for businesses: "Groupon is just advertising, and fairly expensive advertising," at that, says Megan McArdle in The Atlantic. And it gives consumers and businesses a pretty raw deal. Studies have shown that nearly a third of Groupon merchants, after ponying up a discount and splitting profits with Groupon, lose money on their deals. That's "terrible business." And for consumers, "there's been a real decrease in the quality of the deals available." So much for Groupon being the next Google.
"Why does Groupon work?"
And, when it comes to restaurants, Groupon customers are bad customers: Not only do the deals attract "Groupon cheapskates" who don't order enough food and drink to make their visit pay off for the restaurant (and rarely return), says Mark Lacter in LA Observed, but Groupon customers can also strain a restaurant's kitchen. Result: Longer waits and poor service for the "regular customers" paying "regular prices" — the people who come back often (when served well), and keep businesses in the black.
"Groupon isn't much of a deal — well, for some merchants anyway"
No, Groupon really helps businesses: Groupon can benefit participating restaurants, one of their biggest sectors, in countless ways, says Felix Salmon at Reuters. The offers target customers in a specific neighborhood, which is great "customized advertising," and "jolt people out of their day-to-day habits [to] try something new." Sure, businesses must offer steep discounts. But that's how you win new customers. Don't be fooled: Groupon is uniquely "clever and innovative," which is why it's shown such phenomenal growth.