To be honest, Groupon’s failure came as no surprise to me. As a business consultant, I knew two things that were going against it.
Firstly, while it may seem counter-intuitive, but not all customers are worth having as customers. An often overlooked aspect in running a business is to factor the time and effort of serving a customer into the Cost of Goods Sold (COGS). This is because some customers are unnecessarily demanding and unless you are offering your product or service at a tremendous mark-up, the time and effort (read as cost) some times does not work-out. For example, if you are operating a clothing retail outlet and your mark-up is the traditional 30%, assuming your price point is $20, that gives you gross profit of only $6. Thus, if you have an extremely demanding customer that requires your service staff 1 hour to close the sale, you would have in effect lost money as your staff’s hourly wages would likely be in excess of $6.
Secondly, another often overlooked aspect of running a business is understanding that your pricing will inevitably select the type of customers you serve. In this instance, if you offer your product or services targeting the cost conscious customer, what you are likely to get are customers who are very frugal and hence demanding to get the full value for their money. And, since they are already on a budget, you are extremely unlikely to get any follow-on sales. Similarly, if you price your product or service at a premium, you then select the opposite spectrum of customers who demand more simply because they are paying more. In Groupon’s case, the participating companies chose the former and their experience validates the unprofitability of this segment of the market.
Hence, while discounts are useful to drive sales, businesses must keep these two factors in mind to prevent any unintended consequences.
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