The Slow Glass of Online Discounters

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(Originally published February 24, 2014, in Capital.)

If you want to see how some companies here seem blind to reality, take a look at the discounting business.  There are plenty of examples.

Indeed, it was just about two years ago when I was told by an industry executive here that well over 100 online discounters had sprung up in Romania.  Impossible, I thought.  But maybe it’s true.  It seems every day I discover a new website offering coupons for a confusing collection of random retailers and restaurants.  There’s even a site that aggregates these sites.

Almost none will survive – not in the way they are currently structured. And for those few that do, most will do little more than simply limp along.  If you owned a business, is that all you’d want?

It’s not that retailers using discounts will ever disappear.  But the online discounting industry here is stuck in a flawed business model.

So far, I see no evidence that any of them have solved any of the three most challenging aspects of the business:

• Competition is easy and differentiating is key.
• Reaching the right demographic is costly and deal fatigue is real.
• The price-based industry is commoditized so customers have no loyalty.

These challenges aren’t new.  Consider the old standard-bearer of the industry, Groupon.  As a Forbes columnist wrote a year ago after the company fired its CEO, Groupon’s “original business plan to sell online coupons is not one with a future.”  Yes, indeed, that should be clear to anyone who understands discounting and consumers.

Almost immediately as it sought to go public, Groupon disclosed it was having a hard time keeping customers.  And retailers were unhappy as results were unpredictable and customers showed no loyalty.

So Groupon has struggled.  Its shares now sell for one-third of their high – $31 a share – which they hit immediately after the company’s IPO nearly two-and-a-half years.  And they might still be below $3 (where they traded exactly one year after going public) if it had not transformed its business by buying up some retailers and moving deep into ecommerce.

Think that experience is unique?  Then check out LivingSocial, which appears on the verge of collapse.  “The social-coupon model doesn’t work.  The social-coupon model never worked,” a columnist for Bloomberg correctly opined just last month.

Yet what do we see here?  Basically, company after company still using that original concept.  Not everyone employs the Groupon payment mechanism, but the basic approach and messaging remains blindly the same.

I’m sure many are only hoping to survive until they are bought, but for most, those days are gone and will never return.

Yes, witnessing business here is sometimes like watching the world through Bob Shaw’s classic science fiction invention called “slow glass,” which causes light to move so slowly that you are able to watch the past.

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