Groupon Unmasked

You don't have to avoid Groupon, but by all means, test it.

Can this novel couponing concept be adapted for grocery? Time will tell.

As someone who has spent a considerable chunk of his professional life thinking about couponing, I couldn't help but be amused at how the rapid rise of Groupon has focused marketers' attention on this obscure corner of the marketing firmament.

To recap, Groupon came out of nowhere two years ago to dominate the emerging "daily deals" space on the Internet.

Groupon is an innovative approach to discounting — it's almost a "prepaid discount." Consumers receive offers, typically one per day, via e-mail. The offers are deep discounts on specific items or services, primarily offered by local retailers. A typical offer would be something like "Save 50 percent — $60 sushi dinner for two for $30 at Bob's Sushi."

A participant actually "buys" the offer, charging $30 to his credit card and receiving, via e-mail, a certificate or "coupon" to bring to Bob's. When the participant goes to dinner at Bob's, he orders the sushi dinner for two, presumably consumes it with a friend, and when the check arrives, the certificate covers the dinner, and the consumer covers any incidentals that weren't included. The economics of the deal are pretty simple: At a typical restaurant, food cost is about 25 percent, which means the hard cost of the $60 sushi meal is $15. And it just so happens that Groupon gets to keep 50 percent of the revenue it generates, so on the $30, Groupon gets $15 and Bob's gets $15, covering its food costs and allowing it to break even on the deal.

The marketing premise is also simple: For no hard cost, Bob's brings in a new customer, serves him dinner and possibly makes some money on incidentals — especially drinks — and then has a new customer who returns and buys more sushi. The concept is pretty appealing to a merchant, but it's built on two key assumptions.

First, the economics of Groupon work only if the user's purchase is incremental to the merchant. If the Groupon user is occupying a table that could be filled at full price, that changes the economics significantly. And if the Groupon user is a current customer who's using the Groupon to subsidize an already planned purchase, the economics really go upside-down. The zero-profit diner makes sense only if he's leveraging existing infrastructure, not if he's reducing other revenue.

Second, profitability is dependent on the user's not only having a good experience, but also coming back and paying full price. If that doesn't happen, there's no payout to participation with Groupon. Successful Groupon executions need not only to redeem, but also to bring the redeemers back at full price.

Groupon has focused its marketing and sales efforts to date on local merchants, which typically lack the tools to systematically measure the effectiveness of Groupon against the two aforementioned issues. If you ask the merchants, the response is clear: "We don't know." The amazing thing about Groupon is that it's grown as large as it has without it or its customers figuring out whether and how the product works. Over the next few months and years, the answers to these questions will begin to appear, and the long-term role of Groupon will become clearer.

This is why food retailers need to pay attention. It's clear that Groupon as it currently operates doesn't offer an appropriate product for food retailers, but the company is creating Groupon for Grocery (full disclosure: Groupon's implementation partner in Groupon for Grocery, Incentive Targeting, is a client of mine). Groupon for Grocery will need to deliver against those two key issues mentioned above.

You don't have to avoid Groupon, but by all means, test it. While you're at it, insist on clear measurement criteria and evaluation processes. Getting experience with an exciting new approach isn't just getting experience, it's also seeing whether it works.

David Diamond is an independent consultant to leading retailers, manufacturers and service providers in the grocery industry. He can be reached at [email protected].