Tag Archives: Living Social

Why the Group Buying Model Never Turned Me On

I remember learning the ropes at The Houston Chronicle during the newspaper’s heyday. We were killing it. I never had direct revenue insight but I think I remember hearing the number $500 million in revenue a few times around the office. It was in the late 1990s and the only wrong we could do is go up 7% on our rates instead of 9%.

I remember the company line what to tell our advertisers about rate increases: “The price of ink and paper continues to climb and we have to adjust our rates to reflect these increased production costs.” The truth was we were the only game in town. In fact, I still have an old softball team jersey we used to play in a media tournament  around Houston that proudly announced on the back “the only game in town”.

Something else was going on during these good times. I wasn’t smart enough to see the Craig’s List phenomenon but I did play close attention to Google. I was fascinated by these changes. Above the surface something was bubbling up. I remember taking out a large advertiser to a nice steak dinner to tell them about their rate increase…I mean the increase of the cost of ink…and she dropped her fork, looked me straight in the eyes and said “it is only a matter of time before these rate increases and the gouging of your best customers will come back to bite you. We will have a choice and we will not choose you.”

I knew deep down she was right. They signed anyway. They paid more for less circulation. I was already capped on my sales commissions but I’m sure an executive got a bonus.

What does this have to do with group buying? I learned some important lessons that I still carry with me from those daily newspaper days. I learned that for a sale to be a good sale, three things need to happen:

1. The company selling needs to make a profit.

2. The salesperson needs to win.

3. The customer has to win.

If one of these elements are missing. It’s a bad sale. Period.

In my opinion, the group buying phenomenon fails these tests in many ways. I’m not speaking as an investor (I don’t have nor plan to buy any group buying stock). I am also not coming from a sour grape competitive position. I admit I was concerned about the phenomenon when it first came but as time has passed I see them as less of a competitor.

What I wanted to answer and have been contemplating for a few years is should I build a similar program? My company has over 1000 small businesses doing traditional advertising with us that I could try to convert over.

I want to share my opinions and thoughts about these programs. I am coming from an experienced small business advertising salesperson. I know Main Street business owners. I love them. I also run a fast growing company so I know P&Ls and cost of sales. From a business perspective, I think it is a loser for many reasons. But that isn’t what this post is about. Much has been written about Groupon’s difficulty turning a profit. Whether they can or not is a bigger problem than I want to solve here.

I want to answer the three questions I believe make it a worthwhile sale:

1. Does a company like Groupon win if the sale is made? YES!

For example, if a company sells a product regularly for $50 for $25 then the group buying company usually gets $12.50 (plus other fees). If they sell 1000 of these, that is $12,500 to the group buying company and they don’t have to deliver the product! Brilliant!

2. Does the salesperson win if the sale is made? I’m starting to wonder.

I believe they probably do but I did notice something in an article today about a former Groupon salesperson suing their company for overtime wages. What struck me is that when I did the math, it appears the salesperson may only be making $32-$40k a year. Maybe they were a poor performer. But that seems crazy low to me when you consider some of their deals generate huge gross margins.

In the example above, if a company sells a product regularly for $50 for $25 then the group buying company usually gets $12.50 (plus other fees). If a salesperson sells one a week (which I would assume is WAY below quota), that is $650,000 in annual sales at around a 5% cost of sales. That’s very low. I’m not sure these sales are good for the salesperson.

(By the way, from a business perspective this opens a whole new set of problems for me on the chances of a Groupon like business being a profitable company one day. I really thought part of their problem was cost of sales.)

3. Does the customer win? Yes! No! Yes! No!

This is a mixed bag – but it eerily reminds me of the newspaper glory days. I have heard of and talked to businesses that it has worked for. They have learned how to negotiate with these group buying companies to get better splits, get sooner expiration dates,  and jack up the “original” price to make the deal better for them.

I have also heard from businesses that have called it a disaster. Some of these have been cases where small businesses have used this model poorly and went out of business. And other cases where customers who buy the offers were at risk to get burned.

To me this type of product doesn’t pass the 3 question test. Which is why at my company the deal is off.

3 Comments

Filed under Uncategorized