Is Groupon dying? And is Gilt Group already dead?

Dappered Classics: The Potentially Fatal Flaws of Gilt Groupe and Groupon

Originally Published 1/31/11.  Now seems like a good time to revisit being that Groupon’s IPO happened on Friday the 4th.  For more on the IPO, go here.  For more on what’s causing Groupon to raise some eyebrows, go here.   Click here to make your own Oregon Trail Tombstone

In early December, the guys at Groupon said no to Google.  Specifically Google’s offer to buy their daily deal business for $6 billion.

Billion.  With a “B”.

For a company that’s made a mint on convincing businesses to get on their knees and sell what they do for peanuts, Groupon very well could have missed their opportunity to cash out when someone was ready and willing to OVER pay for their company.  Groupon should have got out while the gettin’ was good.  And the gettin’ will never be that good ever again.

Groupon and websites like it are starting to run out of businesses who want to play along.  The noticeable increase of undesirable brands, unproven businesses, and weak deals on these flash sale sites might very well be a sign that the era of the half priced deal is quickly coming to an end.

How Flash Sale / Daily Deal Sites Work

Flash sale sites use the same basic formula. Offer something that appears to be worth a full retail value, slash the price in half or more, and offer the discounted deal for a very limited time.  The ticking clock puts pressure on the potential buyer to purchase because they don’t want to “miss” the deal.  They all do this, and it’s a proven strategy.

The point of difference for these sites is in how they motivate customers to share the deal.  Sharing perpetuates the popularity of not just the deal, but the flash sale site as well.  Groupon won’t activate a deal until a certain number of people promise to buy in, virtually turning the members who really want the deal into un-paid marketing agents.  Living Social rewards customers with a free deal if a certain number of their friends purchase it as well.  And Gilt Group (plus the wannabes) offer store credit to their members every time a member gets someone else to sign up and make a purchase.

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Effective forms of motivation for sure, but all of these deep discounting deal sites suffer from the same fatal problem.  They’re middle men whom established, well liked businesses and brands see as a short term solution.  Whether it’s a heritage retail company looking to offload un-purchased clearance items on Gilt Group, or a popular restaurant attempting to create a spike in foot traffic via Groupon, selling what you do or make for half off retail is a survival mechanism.  It’s a cup of afternoon coffee vs. a good night’s sleep.

These deals aren’t that great of a deal to the well liked businesses.  They’re costly, and long term use devalues their product or service.

Why it’s getting old for participating merchants

A lot of businesses barely break even, or worse yet, take a loss with these half off deals.  It’s the extra exposure to the deal site’s massive customer database that makes the revenue hit worth it.  It’s a strategy to get new customers in the door or old customers to return.  Once that happens it’s up to the business to convince the customer that what they make or do is actually worth full price.  Fail to do that and you’re right back to where you started, offering more half off deals which your customer base will soon come to expect.  At that point when the drastic deal becomes expected?  It’s curtains.

The popularity of the national sites has also led to an explosion of regional copycats, usually run by the local paper or one or two of the TV stations in a given city.  Combine the efforts of the big dogs like Groupon and Living Social with the local versions, and all of a sudden every moderately successful business in an area has been approached about doing some kind of deal.

Daily deal websites are running short on businesses who want to play ball.  And how can you blame the business community?  If playing ball means marking your retail price down by half, then giving the facilitating website a cut of the sales… that’s a real crappy game of ball.  I wouldn’t want to play all that often either.  No wonder it’s become nothing but new businesses looking to make a splash and unknown brands looking to offload product.

Add on top of that the (slow) turnaround of the economy, and the business owner or brand isn’t over the barrel anymore.  They can run their own 20-40 % off sales and keep all the cash flow for themselves.  One of the easiest places to find proof of eroding flash sale site participation is in what brands are and are not showing up on the most popular fashion flash website, Gilt Group.

I half jokingly “grounded” Gilt Group’s Giltman.com back in December because of a long string of disappointing sales.  No appearances on Dappered until 2011.  I still check in a few times a week, but not every day like I used to.  The brands are barely recognizable, the selection is crap, and there’s rarely anything I’m personally interested in anymore.  It took a free shirt giveaway to get them another mention.

Gilt used to be an exciting place to go and find mainstream name brand stuff in any size and at a reasonable price.  It feels more and more like an outlet mall of no names every day.

Is the flash sale / daily deal website dead?  Not yet.  But it’s not looking good.

Especially when one of the biggest just spit in the face of Google.

Wrong?  Right?  Somewhere in between?  Make your case for Gilt and/or Groupon in the comments section below.  I’m more than willing to be swayed.