Groupon – what’s in it for us?

Friend of This Tourism Week Simon Blackburn – of Three Trees at Spionkop (which has just become the first KwaZulu-Natal property to receive Fair Trade in Tourism accreditation) – wrote to say, “This Groupon  thing seems to be taking off – but cannot figure it out – product offered at 50% of advertised rate, and then Groupon takes their cut – another 50% – so accom gets 25% of rack – I just don’t see what is in it for us?”

Indeed, what is in it for us?

If you aren’t familiar with Groupon (group + coupon), it’s a group buying site that allows retailers to offer special discounts to groups of people – specials that only become valid once a minimum number of people have indicated that they’ll take them up.

It sounds like a great idea – you know in advance how much business you’ll be getting, and what your turnover’s going to be. And your clients save, save, save.

What you need to know, though, and as Simon pointed out, is that the site typically takes a 50% commission.

Still, in these quiet times, surely 25% of turnover is better than nothing?

Well, yes. But.

In what you could call the argument for the service, Christopher Steiner, writing in Forbes Magazine (August 30, 2010), asked, “What’s in it for the vendor – which might be a museum, a yoga studio or an ice cream shop? Exposure. Since the resulting revenue is not only discounted but shared (typically, 50/50) with Groupon, the vendor may scarcely break even on the incremental sales. But it now has customers who might never have thought of patronizing the business. Groupon gets its offers in front of eyeballs by buying ad space through Google and Facebook and via the word of mouth of its 13 million subscribers.” (Meet The Fastest Growing Company Ever)

But in the South African context, I think there are a few things to consider.

First – margins. Typically, accommodation providers (especially smaller accommodation providers) and tour operators in South Africa are working on such small margins, that losing as much as 75% of your revenue is hardly going to put you in the black. So – can the average business afford to spend (in effect) 75% of its turnover on creating exposure for itself?

In ‘Does the Groupon model lead tourism businesses racing to the bottom?’ Stephen Joyce says, “A local sightseeing company with a 15-passenger van decided to try and attract new business by offering 50% off its $140 tour.

“Groupon sold a very modest 250 coupons.

“In this case, Groupon took 50% plus credit card costs as commission, so at the end of the day, the operator received $8,312.50 for $35,000 worth of tours and Groupon received $9,187.50.”

Second – ethical tourism. Yes. Ethical tourism. Because what’s remarkable about Groupon is that it doesn’t actually provide the service – the bed, the tour, or the meal – that the buyer buys. And that, I would have thought, would create problems when a claim arises in terms of the Consumer Protection Act. If, as I understand the Act, everyone in the supply chain is liable. Is Groupon part of the supply chain? It would be interesting to know how the courts would decide.

On the other hand, if the complainant had bought the accommodation through a traditional travel agent, that agent would have had to have been registered as such, with all the legal frameworks in place for the protection of the client.

Does Groupon see itself as an on-line travel agent? I would have thought not. (“Limitation of liability: Although tough control mechanisms are in place, errors on the website may occur. Groupon is in no way responsible for any damage or loss incurred due to errors made by The website contains links to other websites. Groupon is in no way responsible for the content provided on these websites.”)

Third – your inventory. I’ve always believed that a discount sale is a way of getting rid of excess inventory – and that’s OK as far as it goes for shops that hold physical items of stock. But when your inventory is the beds in your establishment, and that number remains the same every day of the year (whether they’re sold or not) – how can you ever have an excess of inventory?

There’s a very definite difference between yield management (the practice of pegging your price to demand) and offering massive discounts via targeted marketing campaigns. There’s too much evidence to suggest that if you’re prepared to offer a 50% discount on a bed night – you’re perceived as having been too expensive to begin with.

And the people who are prepared to take advantage of a massive discount are generally not the people who’d stay with you at your rack rate. No matter what time of the year. As Patrick Lefler wrote in ‘Will merchants still feel the love for Groupon a year from now?’ “the greater risk is that existing (and profitable) customers somehow migrate to Groupon which would then strip the business of its primary source of profits. Similar to what happened to the American auto companies who offered discounts to lure new customers but didn’t erect high enough barriers to prevent their existing customer base from taking advantage of these same discounts, the risk here is that profitable customers become conditioned to wait for sales and discounts – reluctant to ever pay full price again.”

So no, Simon – for my money, and as far as tourism products are concerned, I think that Groupon benefits only Groupon. I wouldn’t have it as part of my marketing arsenal.

Mind you, that’s just my personal opinion – it would be interesting to hear what other readers have to say… go here to post your comments.

THIS JUST IN: As I was about to post this mail to you, I received an alert from The Daily Maverick that I just had to share: Sipho Hlongwane’s article about Groupon – ‘Dear Groupon, you should have taken the $6 billion from Google, boys.’  It kind of casts some serious doubts on the company…

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