I’ve been actively participating in the Groupon economy by getting massages with coupons. Yesterday, I had a salon owner tell me that the proliferation of these coupons is changing her business, and in fact, could run her (and others) out of business. It raised some questions about the effect of these deals on both Groupon/Living Social and on those small businesses who have deals with them.
This salon owner was an early adopter of Groupon/Living Social. It was a way to bring in new customers, and it has succeeded in doing that. The price set means she loses money on each new customer- which would be a reasonable cost of acquisition if she was getting the repeat business at the higher price. But it does not appear to be doing so. She is not alone – a google search turns up plenty of articles who agree about the lack of repeat customers. This has driven down her margin on massages dramatically. In her words, customers are no longer loyal to the masseuse but instead are loyal to the price. In other words, Groupon and Living Social have increased the price sensitivity of the massage customer and eliminated brand loyalty.
Beyond this, she feels tricked by Groupon and she is stuck. When she first signed up, she was asked for how many units she would sell. Since this was a new concept, she had no idea, so she agreed to their suggestion. Well, it turns our that she was agreeing to was to sell that quantity at the reduced price over an indefinite time , not just the limited time she thought she was agreeing to. So, she is stuck selling the quantity she agreed to a while ago, with no control over her pricing. This raises a question about how much of Groupon’s revenue is from these old deals that they are still selling?
Further, this salon owner feels stuck because she feels it is the only way to market her massage business. She predicted that some salons and restaurants who got caught up in this will go out of business as a result of these deals.
Two years ago, Bill Bice raised this issue on CNBC – the issue hasn’t gone away
So will be the final Groupon effect be to drive merchants out of business? And what does this mean for similar new business models?
As a market researcher at heart, I am itching to study this. Contact me if you are interested.