Thursday, 6 June 2013

The Branding Challenges of Groupon: A "Sticky" Situation

A colleague, a senior official at a leading governmental IP body, said it best to me several years ago during a pleasant luncheon conversation. "Forget patents and copyright", he declared, "the ultimate source of long-term IP competitive advantage is the strength of the company's brand. At the end of the day, branding is where it is at." I took these thoughts to heart when, several years ago, I considered the Groupon phenomenon. Two years to the day (June 6, 2011), in light of the rejected multi-billion dollar acquisition offer by Google and on the cusp of the Groupon IPO, we opined ("The Groupon IPO: Where does IP fit in?"), here, that Groupon faced an uncertain future, despite all of the interest in the company.

Many of you will are probably familiar with Groupon, here, whose business model rests on signing up participating merchants and service purveyors to offer their goods and services on the basis of the deal-of-the-day, in the belief that the customer will then return for more at full price. Our thinking at the time in questioning the business model was that the company faced the prospect that its marketing and advertising costs would never reach the necessary economies of scale and that low barriers to entry made the prevalence of competitors likely. As a result, the company would find it difficult to develop a "sticky" brand, whereby a critical mass of customers would develop an ongoing affinity to the brand that would translate in customer loyalty.

In other words, in the absence of any other material source of IP right that might confer a competitive advantage, the company was left with the slender reed that it could develop sufficient goodwill and reputation to enable it to stand-out in what promised to be a crowded field. Based on what we saw, we were skeptical that the goodwill and reputation of the Groupon brand would ever achieve the kind of brand stickiness that is essential to its long-term business success. We maintain this position—Groupon made be widely covered as a media item, but it has failed to achieve the hoped-for degree of customer loyalty. If "branding is where it is at", Groupon faces a daunting uphill battle.

When I wrote these words, I did not take into account that there might also be material collateral damage to the company's partners, namely those numerous entities that provide the discounted offers that serve as the foundation for the company's activities. It turns out that not only has the company found it difficult to build the "sticky" brand necessary to create the requisite customer loyalty but, as suggested in a recent podcast rebroadcast of an interview heard on Bloomberg radio, the company's lack of success in creating a "sticky" brand may also have a deleterious affect on the company's business partners. The position expressed was that the discounted offers available through Groupon do not result in increased customer loyalty with the discounting entity. Rather, the customer is inclined to cherry-pick the offers, enjoy the discount and move on. No customer "stickiness" here.

But, from the branding point of view, that is not all. The opinion expressed in the podcast is that the participating company, by being associated with the Groupon offer, does not merely fail to increase its consumer custom: its participation in the Groupon program actually impairs the value of its brand. Not only does the participating company fail to increase its customer base materially but it creates a class of one-off customers who may have formed a negative view of the participating company. In the aggregate, therefore, not only has the Groupon business model been challenged to meet the challenge of my colleague's exhortation—"branding is where it is at"—but it threatens to inflict collateral branding damage to its business partners.

This conclusion must nevertheless be tempered by the recognition that it merely reflected the opinions of a single interviewee and no empirical evidence was brought to support the position. (Perhaps there is an eager graduate marketing student out there who wishes to take on the topic.) In any event, the Groupon tale does counsel companies engaged in business models that are largely bereft of other forms of IP protection to confront the remaining threshold IP questions—can I develop requisite brand loyalty and does my business plan affect the reputation of others?  From the point of view of the potential business partner in such a novel business plan, the question becomes—"have I sufficiently considered the implications to my company's name and brand?" The ultimate competitive advantage of both companies may rest in successfully providing a solution to these questions.

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