Groupon is very big in Chicago. That people like getting discounts on services does not make the Windy City special. But Chicago is where Groupon is based so every business writer in Cook County seems to be writing about how the company is the Second City’s Great Tech Hope. The headline from Crain’s Chicago Business back in May — “Groupon represents Chicago’s best shot at Internet glory” — about says it all.Vodpod videos no longer available.
For those unfamiliar with Groupon, it is a group buying site. They offer significant deals only if enough other people also buy. Think getting a meal at a fancy restaurant at 40% off but only if at least several hundred other people also find the deal attractive. As Chicago Magazine points outs (On Groupon and its founder, Andrew Mason, August), group or collective buying is not a novel concept. The twist Groupon founder Andrew Mason brought to the party was applying it to inherently local services.
The history of collective online buying is a storied affair that began in the 1990s and—in its first phase—ended with a whimper by early 2001. Some of the larger players included Mercata and MobShop. “I looked at those out-of-commission sites and, to me, the reason they failed was obvious,” says Mason. “They were selling consumer goods, like TV sets or cameras, but they were competing with places like Amazon. So they couldn’t really drive the price down enough. You could get whatever they were selling other places online, you could get it cheaper, and—because they needed a week or so to get the right number of people together—you could get it more quickly other places, too.”
Mason took what he gleaned from the failed collective buying sites, switched the concept from goods to services, and married it to the basic premise of The Point [Mason’s original social organizing site]. In November 2008, Groupon opened for online business.
As Mason says in the video above, Groupon was a way for local business to get into e-commerce and take advantage of social networks. There is, of course, an operational problem that follows for this model. These are primarily service businesses (e.g., restaurants and salons) and they are consequently capacity constrained. The kicker is that a successful Groupon offering is going to generate a demand pattern that is absolutely horrible for a service business. If several hundred new customers all buy coupons in a week, just handling phone calls for reservations can be a challenge and negatively impact existing customers.
This, as the Chicago Tribune reports (Growing with Groupon may be tricky for businesses, Aug 16), is not just a theoretical problem.
The Groupon wave can unsettle even a merchant with large capacity. Blo, a 3-year-old beauty salon on West Armitage in Chicago, netted 4,000 new clients in one day in an April promotion, said owner Elizabeth Floersheimer.
The phones were tied up for 10 days after the deal, which cost $40 for $110 in services, and the salon is booked through September.
Unable to get through, Groupon holders groused about the experience on the online review site Yelp, damaging the salon’s reputation among the same tech-savvy constituency it sought to reach. Hoping to assuage core customers, the salon posted a message on its Web site instructing regulars to send inquiries via e-mail.
“We never could have been prepared as far as the phone lines go,” Floersheimer said. “We have a strong following, and our regulars couldn’t get through.”
To add insult to injury, Groupon takes half the revenue from selling the coupon. Thus Blo only got $20 per customer.
There are ways to try to control the impact of a Groupon surge. Groupon supposedly works with merchants to help them plan capacity ahead of the promotion. Capacity, especially for discounted sales, is expensive and may be needed for a while. Groupon reports that 20% of coupons are redeemed in the first month of the promotion but 15% are not claimed until the final month of the promotion.
A service provider can also limit the number of coupons given out but then risks turning away customers. However, one suspects that disappointing people who want to buy coupons is better than frustrating customers who have already paid for the service.