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A Dollar of Groupon Copyright © 2011 Edward Lang. All Rights Reserved. 1
A Dollar of Groupon Takes a Dollar Off Your
Property Value (And a Dozen Neighbors)
How Discount Deal Sites Depress City Economies
Easy Ways to Encourage Local Competition
Ed Lang, Chief Economist, Community Sustainment Coalition, [email protected]
First published February 3, 2010. Updated June 10, 2011.
See Author’s “Mea Culpa” – Page 10
Abstract
Economic hardship has visited many
American cities, with reductions in property
values, commerce, and tax base leading to
layoffs of teachers, law enforcement, and
other civic roles. At the same time a new type
of Internet website has become popular –
Daily Deal sites (DDs) represented by
Groupon and others (1). Other papers (2)
have debated the negative effects of DDs on
merchants; we examine
another, much larger
problem: DDs represent
a large potential loss to
local economies, as they
divert keystone cash-
flows from local retail
commerce to out-of-
state firms and create a
downward spiral in local commerce, property
values, and tax base. We’ll show that these
problems do not occur in other types of
Internet commerce. We suggest a simple
solution: communities should encourage the
creation of local discount websites that
compete with or eliminate the national DDS’s;
such local sites are trivial to start, fit into to
the local community as naturally as a local
newspaper, provide better customer service
and quality, and will naturally dominate once
local residents are educated about the impact
on jobs and property values.
A Dollar of Groupon 2
Introduction
The latest Internet craze is the daily deal site.
The two biggest competitor – Groupon and
Living Social (here called DDs) – have grown
to combined valuation approaching $US 18
billion in a few years. It seems that every
large Internet competitor from Facebook to
NBC, plus hundreds of small competitors,
have joined the fray.
Even by the standards of the Internet, it’s an
extraordinary gold rush. There's only one
problem--the gold all these enormous
companies are chasing so frantically may very
well be somebody else's gold.
Perhaps this is the reason that daily deal sites
have become so popular so quickly. There is
nothing more attractive to investors than a
business which takes little effort and yet
siphons a lot of money out of someone else’s
pockets. This of course is perfectly legal, and
would be considered good business by any
investor who aims to maximize their
investment.
However the results for local communities
are potentially devastating: large amounts of
economic value and economic control, which
in the past had recycled in a sustainable
fashion in the local economy
providing jobs for local
residents, are now siphoned
from that local community.
Cities that are already
economically struggling in
recession are drained of
cash just at the time they
need it most.
Daily Deal sites are an
unsustainable business
model.
Pressured City Revenues
Cities from San Jose to Atlanta are already
facing steep tax reductions. The DDs now
represent potentially millions of dollars more
lost annually.
Fortunately there is a straightforward way
for cities to prevent this, which doesn't
require taxation, political approval, or any
other complex process. Cities can recover
these funds by enabling local
entrepreneurs—newspapers or perhaps web-
savvy teenagers— to create a competitive
local business which will automatically re-
direct these diverted funds back into the local
economy.
Quite simply, communities can “take back”
community advertising.
Community Advertising in the Past
Let's take a moment to understand how
community advertising has worked in the
past, and how web-based discount sites are
changing the picture.
For the past century, local towns and cities
have been relatively self-sustaining; local
residents provide services and value to each
other at fair prices.
Advertising these
goods and services --
what economists call
intermediation
between the
business and the
consumer – was
handled either by
local advertising
sales teams or by
newspapers, flyers,
or signage which
A Dollar of Groupon 3
provided sites for coupons, discounts, and
promotions by local businesses.
If the owner of a pizza parlor had a Tuesday
half-off special they would advertise that
special in the local newspaper, or hire
teenagers to walk around the town to post or
hand out flyers. Local businesses have been
using these methods for decades.
Advertising at the local newspaper or the
local yellow pages cost 10-20% of the cost of
goods for any store; but regardless of the
percentage, more important was the fact that
almost all that money would be recycled back
into the local economy: paying the salaries of
the teenagers delivering the papers, the
newspaper editors, or the rent on the
newspaper’s offices. One way or another,
most monies were local, recycled endlessly
through the local economy sustainably.
Indeed, sustainability is what made these
communities exist in the first place; a town
with an unsustainable economy, where large
amounts of cash flowed elsewhere, would
cease to exist. One can go back through
history and find many examples of such ghost
towns.
It has always been a normal function of city
leaders to work for the sustainability of their
local economies, by attracting new business,
trying to keep business from moving, and
encouraging local residents whenever
possible to “buy local” and keep money local.
This is not just a slogan but an essential part
of survival.
We propose that city leaders will want to
focus their energies on the problem of DDs, as
an immediate and near-term risk to this
survival.
Daily Deal Sites Take Hold
In the past few years something new has
risen. The local newspapers have begun to
fail, under pressure from the Internet-based
new outlets, and from Craigslist.com (3). In
their place, there have been many varieties of
discount or coupon-printing websites, and
most recently the Daily Deal sites.
Daily Deal Site
Money paid to site, not merchant
Site takes 20-50% cut
Little of money is recycled locally…
most goes out of state.
Using our prior example, the owner of a pizza
parlor would offer a “deal” on the Daily Deal
site. Customers pay the site directly. The site
keeps 20-50% and pays the merchant the
balance at a later time.
The 20-50% going to the DDs flows not back
into the local economy or the local
newspaper, but goes instead to hundreds of
miles away.
Thus a large part of the transaction flow in
the community is now being removed from
the local community. The DDs can pull
millions of dollars from the local economy—
money that will never return. The net result
is a relentless downwards spiral in the
economic activity and assets. Transactional
control of that local community is put into the
hands of people who have no local stake in
maintaining that community. A human link
which has maintained community health for
hundreds of years is severed.
A Dollar of Groupon 4
0 to 15 Billion in 3 Years? Really?
3 years ago, Groupon was worth essentially
nothing. Today, it is widely valued at $15
Billion dollars. That is an extraordinary rise.
Many successful entrepreneurs work for
decades and hire thousands of engineers to
create many breakthrough products before
achieving such a value. What has Groupon
created that justifies this value? Did they
invent a cure for cancer, or a new source of
clean energy? No. They are an advertising
site with clever writing and an attractive
online interface. They pioneered a new
format—true—however this function was
provided in the past by others.
Venture capitalists say: “they have a very
simple business model” – which translated
into normal speech means – they do little but
make a lot of money doing it
More important, Groupon and other Daily
Deal sites now have opened access to what
had been closely-guarded local economies.
“It’s an open secret in the daily deal
community” said one participant at a daily
deal conference “that Groupon is highly
valued because they have finally cracked
open hundreds of billions of dollars worth of
local community transactions… and
developed a formula to outsource and
centralize the processing of those
transactions with a very healthy slice for
themselves. Naturally we’re all going to jump
into that gap and try to carve out a piece for
ourselves.”
When asked about the effect this would have
on local economies the commenter said
unapologetically “Don’t know. That’s not
really my focus. My focus is to make money.”
No wonder that other Internet firms, hungry
for more profits, are leaping into the daily
deal business, hoping for their share of local
money – inevitably (and this part is never
mentioned) at the expense of the local
economy.
Economic Loss Multiplier
Some cash-flows in local economies are more
“important” than others. Such keystone
businesses not only affect their own local
participants, but have a multiplied effect on
successful commerce in the rest of the city.
Loss of local control of these keystone
businesses can be an dangerous condition –
as non-local players, who have no stake in the
continuation of the community, can get hold
of a crucial business and either inadvertently
or intentionally crash the local economy.
Local advertising, via newspaper or flyer, has
long been a keystone business. Best
estimates of the dollar value to the
community, of a dollar lost to this keystone
industry, are as follows:
Community Value Lost For Each Dollar
Spent on “Non Local” Daily Deal Site
Respondent 1 4 Respondent 2 8 Respondent 3 10 Respondent 4 25 Average 11.75
Table 1: Estimated multiplier to local economy
of $1 dollar lost to out-of-community advertiser.
Asked at ICMA San Jose 2010 Conference
We see that each dollar spent on Daily Deals
leads to a loss of between 4 and 25 dollars of
asset value to the local community. Or we
might say “a dollar spent on Groupon takes
a dollar off your own property values and
the values of a dozen neighbors.”
A Dollar of Groupon 5
Downward Spiral For Merchants
In a growing economy, such losses would be
masked by overall growth, but more
important, in a growing economy healthy
local merchants would not be forced to use
DDs at all.
Perhaps it is no coincidence that DDs
succeeded at the same time as a severe
recession. In a better economy it is unlikely
merchants would be tempted to give away
control of their transaction.
The result is a downward spiral. As the local
economy is drained of cash, it is more difficult
to attract new customers and thus more likely
that shop owners will turn to a powerful
Daily Deal site – in turn creating even more
losses. It’s a downward cycle in which only
the Daily Deal sites win.
1. Recession-pinched local merchant
needs customers, does “daily deal”
2. Deal succeeds but 20-50% of
proceeds are taken by “out of
state” website (in past this money
would have gone to local
advertisers or newspapers)
3. Overall wealth of community is
reduced…lower property values,
tax base, summer jobs, schools,
civic functions
4. Local residents, facing lower pay
and property values, cut back on
purchases
5. Even more desperate, local
merchant does more daily deals to
get customers
6. Even more cash from deals flows
out of town, causing even more
depression of local values
Other Internet Sites Don’t Cause
Same Problem
When discussing these issues, a common
objection is: “Well, if that’s the case, then this
means all Internet commerce (for books
shoes, or whatever) depresses the local
economy…however we know that internet
commerce doesn’t depress local economies,
therefore DDs don’t depress local economies
either. “
In fact, DDs function quite differently from
other types of internet commerce,
Comparison with Craigslist
For example let’s consider Craigslist.com.
Craigslist changed local communities
dramatically – it largely wiped out local
classified advertisers. However it’s
essentially free and takes no cash from the
local ecosystem; thus the effect of Craigslist is
neutral for local economies—bad for local
newspapers but good for local residents—or
A Dollar of Groupon 6
in some cases positive since it facilitates
buying and selling between locals. DDs
however are a diametrically opposite case:
they replace local advertisers with a model
that is higher cost and siphons money out of
local ecosystem. The effects on local
economies are disastrous. Craigslist.com is a
highly sustainable business – it is likely to
continue for decades, since it adds much and
takes little – while DDs are inherently
unstable and will almost certainly disappear
unless they recognize and repair these
problems in their business model.
Comparison with Amazon
Although Amazon.com in theory competes
with local booksellers, the net effect on the
local economy is minimal; Amazon sells
books so cheaply that the money paid to their
corporate offices is more or less identical to
the money that the local bookseller had
already been sending out to publishers to buy
the books for resale. This is bad for the local
bookseller, who lose a higher profit margin,
but good for local residents, who keep that
profit margin in their pockets. One might
argue the desirability of keeping commerce
local for other reasons, or we might argue
that Amazon’s very small markup represents
a net drain on local communities. But on the
whole, from a purely monetary standpoint,
Amazon and many other online commerce
sites are neutral to local economies; shifting
dollars between local residents, but taking no
more out of the local community than before.
DDs again are the opposite case. They replace
what was previously a local service, and
removes an enormous amount of cash-flow
that was for hundreds of years a locally-
recycled flow.
The “4 Dangers” of Daily Deals
Why are large national brands so enamored
with Daily Deal model? Perhaps because it
transfers significant financial control into
their hands. From a local merchant’s
perspective, this is a dangerous and
unhealthy transfer of control.
Community Advertising Model (1870s-2007)
Daily Deal Model (2007-?)
Customer pays local merchant directly, so merchant is in control of cash. No one else is party to the transaction. Local advertisers are paid for the ad, or a percentage of the deal “after the fact” – they don’t control the transaction.
Divert DDs re-route the transation into their own accounts. 100% of transaction value is paid to Daily Deal site instead of local merchant. Danger: As DDs gradually gain financial control of local commerce, they can begin imposing onerous terms, increase delay till payment, and/or replace with their own lower cost brand.
Local merchant is paid upon providing service or product. They are in control of all-important cashflow.
Delay Instead of being paid immediately, the merchant must wait to be paid. During this delay time, DDs makes significant revenue on “float” fees, while merchant loses.
A Dollar of Groupon 7
Almost all monies, for advertising or coupons, are recycled back into local community as rent, wages, or local purchases. Local economy is therefore “self sustaining” – the basis of all community health for hundreds of years.
Drain Large amounts of cash are removed from local economy, causing long-term declines. DDs take an extraordinary percentage (20-50%) of the transaction. Most of this is taken out of the community, is not paid in local rent or wages. Community economy gradually declines. “Downward spiral” as local decline reduces purchasing power of locals, requiring merchants to resort to more and more drastic daily deals to attract ever-decreasing customers.
Historically local merchants have benefitted from a “local trust” mechanism. Local customers instinctively prefer to buy from local merchants (again, they know that this protects the local economy).
Distract DDs gradually replace local products with their own national brand.
With DDs, the customer slowly begins to transfer their “trust” from the local merchant to the Daily Deal intermediary. DDs can gradually replace the local merchant completely with a nationally-promoted brand. Local merchant loses completely.
Multi-City Price Wars.
Merchant and Consumers Both
Lose, Daily Deal Site Wins
Another common defense of the DDs model is
“They get a lot of customers, sometimes from
other cities, to try out a new store.” This
produces the illusion of competition in which
– it is claimed – the consumers win a lower
price. But again, the controlling fact is that
such discount “raids” will never remain small
scale; they will always escalate into price
wars. DDs take a significant cut of the
purchase price out of that region, which
means that economy in the effected cities and
the region will decline mandating ever-more-
extreme discounts.
Merchant in City A:
Runs daily deal, attracts customers from
City A and City B. Daily deal site takes 20-
50%.
Merchant in City B:
Having lost local customers, they run their
own daily deal to “win back” City B and City
A customers. Daily deal site takes 20-50%
Daily Deal Site
Seeing price war, calls both merchants offer
even more discounts. Daily deal site
continues to drain money from region,
further impoverishing both cities.
Open competition between merchants is good
for consumers. A price war provoked by an
outside party, where that outside party is
taking a “cut” of each battle, is bad for all.
A Dollar of Groupon 8
As Sites Proliferate, Local
Damage Increases
It’s important to remember that non-local
DDs in small numbers aren’t a problem;
Groupon by itself has little impact. However
as of this writing, there are 400 daily deal
sites including some of the largest media and
internet sites. These competitors will be
flooding local markets with advertising
dollars to persuade local residents to
“convert” away from local purchasing. Once
the dike is breached, an ever-increasing
amount of local funds will flow out of town.
In a preliminary calculation we estimated the
effects of such sites on cities from 60,000 to
500,000 population with widespread use:
Annual Economic Loss Estimated For One
to Six Non-Local Daily Deal Sites (DDs)
City 1DDs 2DDs 6DDs 60K population
-0.5% -0.9% -2.7%
150K population
0 -0.5% -2.2%
500K population
0 -0.5% -1.4%
A Simple Solution
The solution is simple: Communities should
(and inevitably will) create their own
“Groupon clones”. This is similar to printing a
local newspaper or “pennysaver” advertiser,
already routine for cities of any size, except
that in this case it’s an online website.
Perhaps the local teenagers could run it—
their internet skills and enthusiasm will make
it successful. Technically it’s a trivial
exercise; such sites can be set up and running
in a matter of hours.
Vendors That Help Set Up Local Sites
There are many firms that will enable such a
local site setup – here are two randomly
pulled off the Internet (this does not is does
not constitute a endorsement in any way… a
little research will locate a dozen more):
Applaise.com – “Will help you set up
local franchise site in any city,
requires minimum 10% contribution
to local schools. Provides technology
and ‘entertainment value’ in the form
of short promotional videos made by
local teenagers mixed with celebrity
promotions.”
Localtowndeals.com – “provides a
turn-key technical solution with a
daily deal website that anyone can
run. Provides not only website
template but training and support to
get you started.”
Local Discount Site is Equivalent of
Local Newspaper
Having a local Daily Deal website is like
having a local newspaper -- it makes sense
and indicates that the community is vibrant
and controlling its own economic future.
The key is to use local peer pressure and civic
pride to push the national sites out of town.
This can be as simple as spreading the word
to local PTAs, church groups, and chambers of
commerce—that non-local Daily Deal sites
are harmful to property values and local jobs.
Urge locals not to patronize local shops that
use non-local sites (not difficult, because shop
owners are wary of DDs in any case.) Local
sites will perform better because local
knowledge will provide better deals. It’s the
optimum business model for deal sites.
A Dollar of Groupon 9
Potential Local Earnings and/or School
Donations
Assuming a community aggressively sets up
it’s own local DDs, what is the cash potential
for the venture and for donation to local non-
profit causes? In this example we assume:
A city of 100,000 population
20% donation to the local school
system—which shows local citizens the
economic advantage of using such a
local site instead of larger and
potentially more aggressive
competitors.
The site provides both local daily deals
and local “coupon discounts” (4)
20% of citizens spend $100/year for
daily deals, and $40/year for coupon
discounts
An added 10% of citizens spend
$50/year for daily deals, and $20/year
for coupon discounts.
Just as in any business venture, results
would vary depending on the local
entrepreneurs and customers.
Annual Earnings and School Donation.
Local Daily Deal Sites per 100K
Population. $ Thousands.
Adoption Daily Deal
Coupon Total School
20% of residents spend 100/40
2000 800 2800 560
20% of residents spend 100/40, 20% spend 50/20
3000 1200 4200 840
Don’t Need Legislation or Protests
It is not necessary to pass laws, stage
protests, or send hate mail. The people who
started Groupon and such sites aren’t bad
people; they are simply young
businesspeople who have invented an
amazing new concept and don’t realize the
negative effect it can have on a large scale.
Locals can simply co-opt this new concept, as
communities have done many times before.
Small Towns Must Protect Their
Economy From Technological Losses
There are a dozen upcoming new
technologies, such a mobile commerce, which
will present similar traps for local merchants.
Communities must learn to co-opt these
technologies in a local fashion. A city that
cannot protect its economic boundaries may
find it is no longer economically viable. It’s a
simple matter of survival – local survival
against technologies that naturally aim to
drain off local value on a large scale.
Again it is easy to block these sites, but this
requires positive action by local leaders.
Conclusion: Maintaining a Healthy
Free Market
Finally we should remember that the success
of the economy of the US and other free-
market societies has long depended on open
competition and “playing rules” that ensure
the best results for all. Although the Daily
Deal model is legal and does provide value,
the large-scale model is not necessarily
healthy for communities. It is absolutely
appropriate for local communities to create a
less predatory, more sustainable local
alternative which provides the same valuable
service without the negative side-effects.
A Dollar of Groupon 10
Notes
1. Currently there are 400 daily deal
sites and growing. At best estimate,
95% of these are national – and
therefore potentially a drain on local
economies.
2. Benjamin Edelman, Sonia Jaffe, Scott
Duke Kominers (2010, Dec 17). To
Groupon or Not To Groupon: The
Profitablity of Deep Discounts.
Working paper. Harvard Business
School.
http://www.hbs.edu/research/pdf/1
1-063.pdf
3. Although Craigslist.com has
eliminated many local classified
advertisers, including newspapers,
the effect on local economies has been
nil since Craigslist gives it's service
for almost no charge.
4. The daily deal type of site is the focus of
this paper, however another business
model – the printing of local persistent
coupons such as “5% off this Tuesday at
Bob’s Grocery” – is also a candidate for
a local website. Yet another is location-
based mobile marketing. Local
websites can combine various types of
discounts so residents can go to a single
local site consistently. This local effect
will offset the added confusion of
having multiple products. Major Daily
Deal site are already beginning to
include these other product/discount
categories.
Mea Culpa
This paper has received a lot of criticism,
most of it deserved.
People have said the paper was rushed, full of
unsupported claims, and harsh – all true.
However there is a justification. The “local
daily deal” business model has significant
problems which are being overlooked. The
daily deal model could evolve into a more
“sustainable” approach, which will not only
better protect local consumers and
merchants, but ultimately proves more
profitable for daily deal providers.
This paper was posted hastily because there
was a need to get the word out quickly, even
before better research can be completed.
I hope that readers will ignore the many
failings of this paper and it’s author, and
appreciate the ideas instead.