Image by dominiccampbell via FlickrTodays we consider the other side of the Groupon social shopping business model namely the merchants themselves.
Its clear from all the hype around Groupon that social shopping is a cash cow --- for Groupon but how is for the merchants?
The challenge with the model as far as we see it isn’t making money for Groupon, but making money for its customers, the recession-pinched merchants giving away their products and services at a loss. The web is full of stories of merchants who have had negative experiences and have sufferred the consequences of suddently having too many customers (looking for a bargain).
Lets be honest for those of us that understand regional and local advertising we know that building sustainable partnerships with low-margin small businesses is hard; it probably involves some level of shared risk, with pricing based on long-term profits rather than short-term revenues. Groupon and the other social shopping 'me-toos' can do this if they want but currently the 50% revenue share is probably too expensive for the merchant in the long term.
We worry that the merchant is vulnerable in the current model despite the cap 'control' element and the payment on success model. They still have to finance the deep discount. And as we know discounting doesnt bring loyalty it brings thrill seekers on a once only basis. Might be good for getting customers to the door and short term cash flow but not for longer term profits.
Its here in part that we see an opportunity for local media companies. They understand small businesses having traded with them for many decades. They understand better than anyone the dynamics and realities of low-margin business and they well placed to fashion an equitable commercial agreement on a more sustainable basis.
One suggestion could be to develop activity that combines traditional classified ad formats with deal of the day activity. This sounds sensible to us as it covers revenue generation and the need to develop return customers and customer relationships.
Footnote: we had heard that Groupon was curremtly only able to service 1 out 8 requests from merchants wanting to use the deal of the day service. There is obviously lots of demand out there and therefore a big opportunity for local media owners to do what they know how to do - namely deliver a tip top service business and readers alike for the long term