Olin Business School at Washington University Marketing Expert Says Groupon Business Model is Flawed

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Groupon's current popularity may lead to an unsustainable long-term business model, according to commentary from an Olin Business School marketing expert.

While Groupon is popular at the moment, the company’s business model may not be sustainable over the long term, says a marketing expert at Olin Business School, Washington University in St. Louis.

“The only way for businesses to justify the ‘loss leader’ promotion that Groupon uses to acquire new customers is to hope that the acquired customers return to the business in the future and pay regular, profitable prices,” says Seethu Seetharaman, PhD, the W. Patrick McGinnis Professor of Marketing.

“I doubt very much if this is happening,” he says.While Groupon is popular at the moment, the company’s business model may not be sustainable over the long term, says a marketing expert at Olin Business School, Washington University in St. Louis.

“The only way for businesses to justify the ‘loss leader’ promotion that Groupon uses to acquire new customers is to hope that the acquired customers return to the business in the future and pay regular, profitable prices,” says Seethu Seetharaman, PhD, the W. Patrick McGinnis Professor of Marketing.

A Groupon promotion is not profitable for a business unless it drives repeat traffic, as Groupon takes 50 percent of the money collected from Groupon sales, Seetharaman says.

“I suspect for the vast majority of businesses, Groupon is a money-losing proposition,” he says.

A report released this week by Rice University finds that only 19.9 percent of Groupon buyers returned for a full-price purchase.

“Groupon has not invested much in customizing deals to individual customers, so there is no ‘stickiness’ built in to the customer relationship, unlike Amazon or Netflix, which have built customer loyalty for the long haul,” he says.

Seetharaman also argues that employee morale in service establishments, like restaurants and hair salons, may be hurt if Groupon traffic makes the employees’ work life tough with the sudden spurt in traffic from Groupon shoppers.

“Those shoppers are probably more price conscious, less courteous to employees and may not tip well,” Seetharaman says.

In other words, the business owner’s incentives are not necessarily well-aligned with the employees’ in offering Groupon promotions.

Seetharaman says that Groupon is onto a money-making model for now, “even if their clients have nothing to show for it.”

“As long as businesses keep fooling themselves that the Groupon promotion works, Groupon will keep doing well,” he says. “Since there are far more businesses in a large U.S. city than available promotion slots on Groupon per year, this model seems sustainable for a few years."

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