When you're a small business, the perception of your brand is everything.
So why would you risk that by discounting the value of what you provide?
That's the question Groupon and its shareholders must learn to answer if they want to halt the company's decline.
For a while, Groupon—or at least the media—could blame creative financial reporting or suggest that Andrew Mason wasn't the most mature CEO on the planet to explain the discounter's tumble.
With those excuses gone, the real reason behind Groupon's challenge is exposed: the company's business model doesn't benefit its customers.
The company offers consumers online discount coupons from local merchants. Participation from consumers has slowed somewhat since the company began offering these programs in 2008, but that shouldn't be the primary concern for Groupon.
More importantly, Groupon has been around long enough that the results are in and its customers—small businesses—don’t like the double whammy they see: the math doesn't add up and the discounts do nothing to further the business.
Say you want to promote your $30 signature meal through Groupon. The offer goes online for 50 percent off, or $15. Groupon gets half of that ($7.50) plus a processing fee which can add up to 7 percent, leaving you with $6.98 to provide a $30 experience.
Add in additional staff, supplies and potential lost revenue from seats that may have been occupied by full fare-paying customers and you'll see a loss on each coupon that’s redeemed. Groupon manages the monetary transaction with the consumer and pays you after the promotion ends.
For the consumer, this may not be such a bad deal. View the online discounts, pick one that fits your needs and visit that establishment for cheap coffee, dry cleaning or yoga class. But why would a small business want in on the Groupon model?
Because small business owners have a passion and particular skill for doing something they believe brings value to the marketplace. That expertise isn't necessarily in marketing, so getting customers in the door—at any cost—is appealing. There's a misperception among naturally optimistic entrepreneurs that people will return once they see you in action. In reality, a very small percentage actually does return when they come to you in the first place because of a discount.
Another myth is that any promotion to your target market is good exposure, even to those who don't take advantage of a particular offer. Problem is, the visibility you gain is that of a discounter. Not the way to grow a brand.
When Groupon becomes the connecting point between a brand and its consumers, the wrong message is sent: "Hey consumers, look at us. We're in business, and our services are worth half of what we originally priced them at."
Discount programs don't build consumer engagement or brand loyalty. Consumers don't see a value in the brands for which they are clipping online coupons, they see only the discount, a deal. They may build up an affinity to the Groupon brand, frequenting its site to jump from one bargain to the next, but that doesn't translate into any allegiance to your brand, the one footing the bill for the promotion.
No discount has ever propelled a brand to greatness (think Apple, Disney or Harley-Davidson). That's not to say Steve Jobs didn't cut any deals when his business was considered small, but the idea of being a discounter was far from his mind at any time in his tenure at Apple.
It costs less for a business to retain existing customers than it does to attract new ones, and Groupon offers run the risk of hurting your brand by offending repeat customers—the best customers to have—who aren't receiving discounts all the time.
People want value from a brand more than they want a discount. When Groupon figures out a way to provide shared value to all parties connected by its online promotional engine, better results will happen for the company and its customers.