The Groupon Paradox
How its coupon business could eventually cripple the merchants that rely on it.
Thanks to Groupon, merchants may face a similar, but perhaps even more damaging, fate. Prices are likely to erode as consumers come to expect deals. They will wait for sales to buy, and merchants will find themselves competing ever more fiercely. Meanwhile, merchants' brand power will be eroded as consumers look to Groupon (as they do to Orbitz), rather than to the merchants themselves, for the best deals.
The logic is simple: Merchants are encouraged to use the deals to attract new customers, who in theory will return at full price. But, in what seems to be an increasing number of cases, customers come for the deals and then leave for deals offered by other merchants through Groupon. So the number of "new" customers attracted by cheap prices increases, and the number of loyal customers decreases as shoppers prefer to become "new" again for whoever offers the best deal.
Over time, merchants are likely to lower the level of their discounts (they can't afford to do otherwise). But Groupon and its ilk will continue to offer an effective way for new merchants to enter the market and attract new customers. Overall, this newly efficient market will be tough on both incumbents and new entrants.
All to the good, most people will say: More consumers get good deals, and bad companies have a tough time staying around or getting established in the first place.
But that same trend is likely to affect Groupon itself. As the market becomes more efficient, Groupon will have to work harder to keep its edge. Its sales force is training thousands and perhaps millions of merchants to use e-mail marketing and coupons. In the long run, they will figure out how to do it for themselves, and Groupon and its competitors are likely to offer self-service, just as Google does for search ads. Merchants may well use intermediaries to reach consumers, but they are unlikely to continue to hand over such a huge share of the revenues.
In other words, the market is working faster and faster, and it's getting harder for anyone to stay ahead for long, whether it's Groupon's merchant-customers or Groupon itself. For my money, Facebook has a stronger position than anyone in the market. If it can extend its power to daily deals, its competitors had better watch out.
This article comes from Project Syndicate.
Esther Dyson, chairman of EDventure Holdings, is an active investor in a variety of start-ups around the world. Her interests include information technology, health care, private aviation, and space travel.
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