Is Customer Retention the Achilles Heel of Groupon’s Business Model?

Is Customer Retention the Achilles Heel of Groupon’s Business Model?

Groupon is a very profitable company with an interesting  business model.  There is no questioning  that.  The question is how long those  profits will last if they can’t deliver to their customers.  Companies dish out big bucks to get business  through Groupon.  Why doesn’t the social  promotions site take their obligation more seriously?

Revenues topped $750 million in revenues within two and half  years of its inception.  Groupon’s  services span four continents and reach nearly 40 million subscribers.  Yet, a closer look at Groupon’s business  model suggests its customer retention strategies fall short.

According to a study by Rice University, Groupon retains a small percentage of its customers.  Forty  percent of responding companies claimed they would not consider using Groupon  again.  Why are so many companies so dissatisfied  with their experience?  The founder of  Groupon boasts that almost all of the companies they’ve worked with are pleased with their social promotions.  His claims  don’t seem to hold water when compared with other studies.

Only a little more than half of the companies in the Rice study actually profited using Groupon.  Although Groupon charges a hefty premium for its services (about 50%), the real concern is the lack of business satisfaction.  Businesses would probably be thrilled to pay a premium to Groupon if they saw results.

Businesses using Groupon are partially responsible for unsatisfactory results.  If Groupon was interested in developing a business model that encouraged long-term relationships with retailers and service providers, it would flush out these problems:

If Groupon was interested in building long-term relationships, it would do more to make help these companies make money.  Companies often don’t know what to expect with Groupon.  Groupon would do well to educate them on the process.  These companies would be more likely to become repeat users of Groupon’s services if their social promotions were more successful.

Groupon could dramatically improve its customer retention rate by helping these companies succeed.  Frederick Reichheld found that the cost of acquiring new customers was roughly five times higher than servicing existing ones.  Groupon’s business model is flawed in its inability to maintain longstanding relationships with its customers.

What could Groupon do to help its customers improve profitability and develop a model that will improve business for themselves and their customers? There are a couple of things that it could explain to them:

  1. Businesses need to understand the importance of employee engagement.  Most customers using the Groupon model are only marginally interested in the services.  Employees often are annoyed with them, because they tend to be poor tippers and low-volume buyers.  Combining the two is a recipe for disaster.
  2. Businesses would be better off spreading deals out over time.  If businesses were to offer smaller promotions over a few days, customers would be forced to come back.  This would give companies more time to build a rapport and encourage repeat business.
  3. Companies need to be realistic.  Many customers are flaky and only interested in saving a few bucks.  Businesses would be more satisified with Groupon’s business model if they knew what to expect.

Groupon does not seem to have taken the interest in customer profitability.  Their dismissive attitude may come back to bite them down the road.  Apparently it already is.

The lesson companies can  learn from Groupon’s business model is that businesses must work on building long-term profitability for their customers to encourage repeat business.  When customers fail to profit from your relationship, they are unlikely to seek a long-term relationship.

This post was written by Kalen Smith.


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