Yesterday I was very surprised to read that Pelago the creators of the social location sharing app Whrrl had been bought by Groupon. I was even more surprised by the news that they were shutting down the Whrrl application with effect Apr 30th.
Groupon Not A Location Fit
While some people have applauded this move, I doubt it has a real chance of either improving social location marketing for consumers or marketers. I have several reasons why I believe this. Firstly, deal of day sites are cluttering the market – Groupon was unique, it is no longer and while it is still the giant in that space its a space that has a short life, which leads me to my second reason. Local businesses can’t maintain deep discounts. While some large retailers have seen some big wins through Groupon, smaller retailers and food & beverage outlets are not seeing the same returns. For some it actually damages their brand.
Read Write Web posted yesterday that this acquisition puts apps like Foursquare on notice. I couldn’t disagree more. Groupon is under the mistaken idea that location will save it from being just another coupon business. However, given that businesses that offer coupons are usually doing so to attract new customers, while businesses that use social location marketing are targeting their existing customers with rewards, the two are very different. As any business knows it is much harder to attract new customers than it is to provide excellent service and therefore keep existing customers.
Groupon Doesn’t Deliver
The fact that the Groupon model doesn’t work is not supposition, Rice University conducted a study last year and found:
Groupon promotions were profitable for 66 percent of the businesses surveyed; however more than 40 percent of the respondents indicated that they would not run such a promotion again. Among the service businesses (restaurants, educational services, tourism and salon and spa) restaurants fared the worst; salons and spas were the most successful.
So more than a third of businesses who tried Groupon didn’t make a profit from it. Add to this that businesses who get involved in deep discounting usually find that they actually over discount initially and can offer lesser discounts and achieve the same impact. Which means that online “deal of the day” sites become nothing more than the same coupons that are handed out at stores or arrive in your mail box on a daily basis – 5 – 10%, which is bad news for the consumer as well.
Groupon And Whrrl
What I find most amazing about this is that Groupon is shutting down a good app. It is the only one in the space that had built in consumer segmentation, segmentation that was completed by the consumer, which made it a marketers dream. Of course maybe Groupon is going to include those mechanics in its new app, but why not simply blend Groupon’s features into Whrrl?
Groupon faces class action lawsuits over its method of advertising its deals of the day. Some states are claiming that these deals in fact constitute gift cards which cannot expire. So merchants really have to think twice about whether offering coupons through this site is a good business model or whether instead, they, like RadioShack did recently, reward their existing customers and see a 3.5x spend per customer.
Will Groupon really be able to compete?