Southern Italy, known for good weather and great food, but not so much for innovation, is in the coupon business as well. In fact, they have been in this business for a longer time than any daily-deal site on the web and should have far more experience. More experience is usually a good thing as it can make a business more stable. Still, their coupon business now failed miserably.
School books in Italy are supposed to be free for the first years, basically for elementary school. The costs are born by the city administration. In Foggia, Southern Italy, the city sends coupons to the families for that purpose. Parents then go to the book store and exchange coupons for books. The book store owner exchanges coupons for money with the city administration, the circle closes. That is how it is supposed to be. Now the city ran out of money and still sends out coupons. This is not only stupid, it is unfaithful. The city’s trust capital, built up over the years, was destroyed in a second. Book store owners of course do no longer accept those coupons anymore. Coupon business failed.
This example forces me to view differently about Groupon, LivingSocial and other daily-deal businesses. The essential question is where in this circle is value created? Is value created when you sell the coupon or when the actual business, the exchange of goods or services, is performed? If you think in terms of sustainability, only the latter can be seen as value creation. With every customer a business adds, it not only adds revenue but builds up trust, reputation and a reason to exist. Coupons alone might add immediate revenue, but not before the coupon buyer has turned it in and received the discounted good or service, any trust, reputation or sustainability can be added to the business. When Groupon or LivingSocial launches a very popular deal, like LivingSocial’s Whole Foods deal recently, its success is largely due to the business’s existing trust, reputation and standing among customers and not due to the daily-deal site’s excellence in execution.
Coupons are often abused as an alternative form of financing on the back of the customers – you don’t have to pay interest to a bank and even better, if coupons are not redeemed, you collect interest (at least virtually). That is why coupons are so popular among business owners. Still, sustainable value is not created when another set of coupons is sold, sustainable value is created when you make a new customer actually happy, when your business gains trust, reputation and respect. Following this logic, selling coupons, even to masses of people, is per se not a value-creating business. It can play a supporting role for small business owners for customer acquisition, but it is certainly not worth 50% or more of the total deal, as Groupon and others want to make us believe. Big businesses have started to realize that and are asking for a more appropriate share of the coupon deal. Small business owners will increasingly follow.
Groupon had to adjust its revenue and IPO expectations already several times. It is not that they do worse than before, it is a somehow natural adjustment. While they will sell coupons which could result in billions of value, the selling itself does not create a billion dollar business. Strangely investors do realize this only now.