Monthly Archives: April 2011

6 cases when it makes sense to run a Groupon

There has been a lot of discussion of late on the pros and cons of running Groupon offers for businesses. Here are five cases where running Groupons make the most sense:

  1. You have a new business. If you’re a brand new business and don’t have existing connections in the market, Groupon can help introduce you to your local community. A good example of this is the Globe, a pizza place in Portland that recently opened in a troubled location. A new business also avoids a significant cost that many businesses forget when doing the Groupon math: margin lost on existing customers who instead use a Groupon, turning a full-price sale into a 75% off sale.
  2. Your business has a subscription model or high lifetime value. This category includes gyms, yoga studios, flight schools. Many of these businesses already regularly run introductory specials, such as the first month for $30 (regular price $120). Converting a onetime flight lesson into thousands of dollars in ongoing schooling makes a lot sense. In cases such as gyms and yoga studios, the incremental cost of serving customers is small. Even in these cases, you need to be sure to cap the deal at a manageable number. You don’t want overcrowding that frustrates your loyal full-price customers.
  3. You have fake pricing to begin with. Many businesses have fake pricing. If you shop at FTD, furniture stores, mattress stores or the Gap and pay full price, you’re a chump. The regular discount levels at these sorts of outlets run 30%-50% off. Starwood Hotels offers a 50% off certificate that you can buy with 1,000 Starpoints. But the discount is valid only off the “rack rate,” not the prevailing rate. In 12+ years, I’ve only found the “discount” to be valuable once or twice. Even then, it amounted to 5-10% off the regularly offered rate. If you have fake pricing, Groupons can work for you. But don’t push it too far — FTD wound up not smelling so good when Groupon customers discovered that in order to use their discount, they had to go to a special site which had even higher prices than FTD’s regular site.
  4. You have a third-party really footing the bills. Magazines and newspapers fit into this category. The real goal here is to sell eyeballs to advertisers. For newspapers, auditors will count it as paid circulation if the customer pays even one cent per issue.
  5. You are running an event with excess capacity. If you have an event like a theatrical performance, concert, etc., with a fixed cost of production and you’re unlikely to sell out, Groupon or other deal providers can help fill the audience.
  6. You are going broke anyway. A Groupon can be the ultimate Hail Mary. With Groupon, you get your share of the deal within 60 days. Maybe the extra cash flow will help you smooth over tough times. If it works, great. If it doesn’t, well, you were going out of business anyway.

PayPal + Where set to take on Square

eBay announced today its purchase of Where, a mobile location service. Where has been in the mobile location space for a long time — well before today’s media darlings. (See my initial Where story from 2007.) While others have sucked up much of the media oxygen, Where has been the little engine that could, hitting 4 million unique users per month.

It has a large installed base of users across not only smartphone platforms like iPhone and Android, but also featurephones. Where has gone through a number of incarnations, including a local portal, local platform provider, mobile ad network and buddy finder. Its current consumer product offers a wide array of location-based services. Where has also been experimenting with Groupon-like deals.

The combined resources of Where and PayPal would give eBay a terrific way to attack the multibillion-dollar untapped local opportunity that Square has been gunning for.

As I’ve written before, payments processing isn’t the end game for Square — it’s an entry point into the much more lucrative demand-generation space.

Payments processors generally take between 1% and 3% of the sale. Demand generators, like Groupon, are currently taking 50%. (I expect that this will drop dramatically, but there’s still a lot of room in between.)

At its current pricing, Square is likely to be losing money on each transaction because it no longer charges a fixed rate per swipe.

Square’s merchant offerings are excellent. It offers a dead simple way for small and micromerchants to take credit cards. Its recently announced presence in Apple retail stores makes signing up for Square even simpler than it already was.

But we haven’t seen much activity on the consumer side. Consumers get an elegantly formatted receipt, but there’s no other mechanism for interacting with them. (Square is undoubtedly amassing a mailing list to do this in the future.)

A combined Where and PayPal would give eBay the ability to offer both payments processing and demand generation. With an existing base of more than 4 million users, Where is a good way to prime the pump. Local merchants who take PayPal could be highlighted in search results. They could have ads placed automatically across Where’s ad network.

The key thing to remember about local merchants is that they are incredibly pressed for time. A simple, integrated offering would have tremendous appeal.

Have doubts about eBay’s ability to succeed in mobile? Erase them. They’re already claiming to generate nearly $2 billion in mobile purchases a year.

See previous coverage of Where.

Disclosure: I have consulted for Where in the past. I know the team, including Walt, Dan and Ivan. Congratulations, guys!