Saturday, May 8, 2010

The Groupon Dilemma

One Great Deal Per Day
Groupon has experienced tremendous growth because it offers one fantastic deal and one small "side deal" per day to a group of people in selected cities around the country. Yet, Groupon's existing business model only allows for growth in the form of attracting new customers in existing cities or expanding to new cities to attract new customers. Eventually, Groupon will run out of new cities in which to expand, so it needs to find a new way to grow. The solution? Sub-segmentation and targeted offers.


Segmented Markets Aren't Good Enough

Groupon currently segments its customers by geographic location. Essentially, the company has two key business principles:

  • Offer one featured deal per day on the website, based on the city in which you live.

  • Encourage customers to sign up to receive one email per day about the deals of the day.
Herein lies Groupon's dilemma: The company knows that a certain percentage of its customers will not be interested in its deal every day. To make more money, Groupon could increase the number of deals it offers per day. But, it can't do that because its customers put a high value on seeing just one big deal per day.

The solution comes in a targeted daily side deal in which customers are given targeted offers based on their interest sub-segment.


Targeted Side Deals

I suggest that Groupon immediately begin offering targeted side deals to customers based on their interests. They can derive their customers' interests by looking at their past purchase behavior. For example, I have purchased rounds of golf from Groupon in the past, so I would be put into the "sports" sub-segment. Other sub-segments would be "spa," "restaurants," and "theater," as examples.


Groupon would still offer one big deal per day to everybody in Chicago, but the company would send targeted side deals via email to each of its customers, based on their sub-segment. By doing this, Groupon does not sacrifice the appeal of one big deal per day and it actually makes each side deal more relevant to its customers -- it gets the best of both worlds.


The Lesson

Segmenting and targeting your customers (whether it's based on location or other demographics) is simply not enough to prosper. Businesses must form customer sub-segments based on actual customer behavior. Then, targeted marketing communications can be created for each sub-segment. Customers receive highly relevant messages from companies and respond more frequently to those offers.


Add This To Your To-Do List

Form some sub-segments of your customers based on their purchase behavior. Will the sub-segments be based on frequency of purchase? Amount of average purchase? Type of products purchased? Decide what's best for your business. Then, design specific messages for customers within those sub-segments, send them out, and measure your results. Repeat the process by improving the sub-segments and messages and you'll be well on your way.

There's never a lack of ideas.


Thanks to Professor Ed Malthouse and Northwestern University's Masters Degree in Integrated Marketing Communications program, of which I am a current student, for inspiring this post.