The Problem(s) with Groupon

Daily deals are the current darlings of the Web. Groupon, the leading daily dealer, is looking at a valuation of $3-4 Billion in a possible acquisition by Yahoo. I think that would be a bad investment. Groupon is certainly doing well now but I see some problems on the horizon, or already here, that could make the company vulnerable.

1. It's too easy to do. The software isn't hard to do and there are already many competitors popping up locally and nationally. Remember MySpace? All a competitor needs to do is be Facebook to Groupon's MySpace. Also remember that TiVo saw its market share destroyed by DVRs provided by cable/satellite companies. There is no reason Facebook, Foursquare and many others can't play in this space.

2. It's a bad deal for businesses. Although I expect Groupon to start bowing to competitive pressure in this area, they usually take a 50% share of the Groupon offering. So if I'm offering you a $100 gift certificate for $50 and the Groupon takes half I'm left with $25. Is a $75 loss worth acquiring a new customer?

3. Cannibalism.
Once Groupon does the rounds on all the local businesses what happens then? Well they start back around. So now companies have an increased risk of cannibalizing their own customers. Essentially giving their existing buyers a huge discount on services or goods they would have paid for anyway.

4. User Fatigue.
I'm not saying people are going to get tired of saving money but they will get tired of receiving emails they don't want. Why won't they want the emails? Since Groupon will be forced by businesses to be more competitive with other daily dealers that will mean the coupons will not be as good (smaller discounts) which will lead to users tuning out. I realize that as their list grows they only need a small percentage opting in for each Groupon but I would argue that they will see declining returns as their lists top out (there are only so many people in each city).

5. Customer Service. This is perhaps the biggest complaint with Groupon. Since there are often hundred to thousands of people getting a Groupon it creates a real customer service issue. What's a business to do? Staff up for the tsunami and then have an HR problem downsizing when it passes? Not staff up and then have disgruntled customers who have a bad experience, tell everyone about it and never come back?

In Groupon's defense they have the opportunity to head off many of these current and potential problems. They also have the cash to do it. It will be interesting to see if they can turn into a sustainable, real company or be remembered as an interesting Web trend that couldn't make the turn.