Groupon: A Good Deal for Anyone?

Daily deals swept the nation during the recession, but did they really provide any of their customers sustainable value?

Groupon was founded in 2008, offering online discounts for local businesses in the Chicago area. Merchants were able to access new customers without paying any marketing fees they’d see with other online and email marketing programs [1]. As companies evaluated against CPM rates for online marketing efforts, there was a strong appeal in Groupon’s proposition that merchants did not have to pay unless their offers generated sales [2]. Customers, on the other hand, gained access to compelling discounts and getting exposure to new products and services that they may not have been willing to purchase at full price [3]. Groupon would generate margin by serving as the platform between local merchants and customers.

Monetizing Daily Deals

Groupon pushed merchants to offer steep discounts to ensure compelling deals. Customers often received products and services at a 50% discount with Groupon taking half of the balance as commission, leaving the merchant with only 25% of the full stated value [4]. For restaurants, one of the most popular deal categories, merchants often ultimately sold meals far below cost [5]. Most deals were offered in unlimited quantities, resulting in huge influxes of unprofitable new customers that merchants struggled to convert into repeat customers willing to pay full price [6]. Merchant profits might be further eroded as regular customers were replaced with coupon driven customers; if a restaurant were full of Groupon-bearing customers on a Saturday night, it might turn away full-price customers unable to get a table [7].

Vulnerability to Competition

From the beginning, Groupon was aware that its model was extremely imitable and viewed scale as the largest barrier to entry they could create, leading them to pursue aggressive market and category growth [8]. Other daily deal sites like Living Social, Amazon Local, and Google Offers popped up to compete in the space. At the height of the daily deal craze, there was even a company called Groupon Clone which sold “build your own Groupon” software [9]. Increases in the number of competitors made it more difficult to attract new Groupon subscribers, driving up the company’s customer acquisition costs and making it more difficult to offer a differentiated set of deal offerings [10]. The novelty and excitement factor of the daily emails was eroded over time as customers saw the same sorts of products and services offered repeated across various platforms, leaving many to perceive the emails increasingly as spam rather than targeted, exciting offers.

Really a Tech Company?

In December, 2010, Groupon turned down a $6B buyout offer from Google [11] and, less than a year later, went public at a valuation of nearly $18B [12]. Both NPR and the Wall Street Journal declared it the largest tech IPO since Google went public in 2004 [13, 14].

The rapid growth of email subscribers and web traffic made it easy to label Groupon as a technology-driven model. It was surrounded by tech companies garnering high valuations as they scaled to a point where marginal costs would come down low enough for unit economics to make sense [15]. Groupon, however, struggled to decrease marginal customer cost and rather found themselves spending more on customer and merchant acquisition over time. Customers became overwhelmed by the number of deals offered to them on a daily basis and bought more, while Groupon found itself facing increasing merchant churn as deal-level profitability came under more scrutiny from companies who had previously offered discounts. As a result, Groupon saw increased costs as the business scaled and never realized the expected lower marginal costs. In the end, Groupon was a sales & marketing company that used the internet to connect businesses willing to offer discounts on their products and services with customers not willing to pay full price them.

While competition certainly played a huge role, I believe these costs in sales & marketing ultimately proved to be the greatest stumbling block in Groupon’s growth. They created a business model in which they sought to serve as an online platform to connect merchants and customers and to extract value by facilitating transactions between them. Their operating model, on the other hand, relied heavy on personnel-heavy sales tactics to generate deal listings, incurring high costs in pursuit of offering customer value, while offering no sustainable competitive advantage.

Aggressive sales tactics and margin extracted from merchants resulted in high churn that increased deal sourcing costs. A focus on locking in exclusive deals from larger merchants that could surfaced to more geographic markets would have lowered deal acquisition and market-entry costs, allowing for more modest commission charges to be imposed for the same net profit extracted from transactions. Combating imitation entrants from entering the market would have been difficult in any scenario, but social media integration (e.g. share the great new deal you purchased with your friends on Facebook) and framing purchases as gift-certificates great for both self-purchase and gift-giving might have built up stronger brand equity and made it harder for competitors to gain traction.

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Footnotes:

  1. Mason, Andrew “GROUPON: From the Ashes of a Dead Startup to a Billion-Dollar Company in 2 Years,” http://www.businessinsider.com/groupon-from-the-ashes-of-a-dead-startup-to-a-billion-dollar-company-in-2-years-2011-6?op=1/#e-points-tipping-point-feature-combined-with-group-buying-deals-turned-into-a-billion-dollar-business-idea-6), Accessed November 2016.
  2.  Carlson, Nicholas, “INSIDE GROUPON: The Truth About the World’s Most Controversial Company,” http://www.businessinsider.com/inside-groupon-the-truth-about-the-worlds-most-controversial-company-2011-10, Accessed November 2016.
  3. Bhajarja, Nishant, “Why are Groupon and LivingSocial Failing?,” https://www.linkedin.com/pulse/why-groupon-livingsocial-failing-nishant-bhajaria, Accessed November 2016.
  4. Agrawal, Rakesh, “The Rapid Rise and Fall of Daily Deal Web Sites,” https://www.washingtonpost.com/news/innovations/wp/2013/11/22/the-rapid-rise-and-fall-of-daily-deal-web-sites/, Accessed November 2016.
  5. Ibid.
  6. Ibid.
  7. Girotra, Karan et al. “Can Groupon Save Its Business Model?,” https://hbr.org/2013/12/can-groupon-save-its-business-model, Accessed November 2016.
  8. Carlson, Nichollas.
  9. Levine, DM, “10 Baby Groupons Make Their Own Plays,” http://www.adweek.com/news/technology/10-baby-groupons-make-their-own-plays-131205, Accessed November 2016.
  10. Griffith, Erin, “Counterpoint: Groupon is Not a Success,” http://fortune.com/2015/03/20/groupon-success/,  Accessed November 2016.
  11. Mason, Andrew.
  12. Peralta, Eyder, “Groupon: The Biggest Tech IPO Since Google,” http://www.npr.org/sections/thetwo-way/2011/11/04/142021592/groupon-the-biggest-tech-ipo-since-google, Accessed November 2016.
  13. Ibid.
  14. Ovide, Shira, “Groupon is the Biggest Internet IPO Since Google,” http://blogs.wsj.com/deals/2011/11/03/groupon-is-the-biggest-internet-ipo-since-google/, Accessed November 2016.
  15. Agrawal, Rakesh.

 

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10 thoughts on “Groupon: A Good Deal for Anyone?

  1. Grace – Great article on Groupon. I was a very early user of Groupon for all the reasons you listed above – it offered me great services at a discount. I was able to go to wine tastings, pizza making classes, and spin classes all at a steep discount, which made it affordable to me as a recent grad from college. However, as Groupon scaled I started getting overwhelmed with options for goods/services/experiences I had no previous knowledge about. Trying to comb through all of them was unmanageable and I was therefore more interested in shopping on something like Gilt City, which only has a few options at a time at better known or trendier places. In the end I think Groupon’s scale hurt itself as you mentioned and inadvertently, has become the “Walmart” of online discounted experiences. I don’t think anyone can say Groupon was a failure though – yes it did drop 90% of its value by 2015 but it completely revolutionized the way of selling on the internet in the process and IPO’ed for $18M.

    The way forward seems unclear as they try to pull themselves out of the ashes – I’m wondering what you think would happen if they drastically cut the number of items on their website? Or what if they cut down on the categories of items they sold (i.e. no longer offering goods and only services)? Lifebooker tried something of the sort with only offering beauty services and ended up going out of business. Could Groupon be more niche more successfully as they try to rebuild themselves or will they be the “Walmart” forever?

  2. I too initially loved Groupon – until it started to drive me absolutely crazy and I sent all emails automatically to spam.

    I think your point about ‘targeting’ was absolutely key. To my memory, there was no way to even filter for preferences (correct me if I’m wrong), so to Lindsey’s point above, people weren’t able to say wine-tastings-only or spin-classes-only. I think if it were launched now, it might have been able to take advantage of the more sophisticated software (perhaps, to your point about posting on social media, partnering with these networks) to source data and come up with highly personalized, narrow-geography, timely recommendations, that would push a notification to your phone rather than send an email.

    But I also think your point about technology vs. personnel-heavy sales would ultimately still be the killer for a company like that, unless they could automate deal sourcing a bit more. And it’s hard to see, on a global scale, how that could work. RIP Groupon!

  3. Very interesting article about Groupon! I’ve used it several times in my life and I recognize that it offers great deals for customers. In one hand, I agree with you that more than a tech company Groupon is a sales and marketing company. They have created a model in which companies can find a good trial and promotion mechanism which is very easy to use. In the other hand, I do think that they don’t have many barriers of entry and their business model is very replicable and not sustainable in the long term. Only in Mexico City, as of today, I know 4 companies that do what Groupon does. As a result, my question for Groupon’s leadership team is: How are you going to evolve your business model to make it sustainable in the long term? Can’t wait to see what this smart people will do. In the meantime, I’ll get a Groupon!

  4. Great post! As the commenters above mentioned, the appeal of Groupon absolutely diminished from a consumer perspective with the overabundance of options (with no objective or customer rating information) and a relatively blanketed approach to targeting of specific deals to consumers. For me though, I’m less concerned with consumer adoption and more concerned with merchant usage. Given the way Groupon deals were structured, my understanding is that the merchants that chose to use Groupon were almost desperate to increase sales. By offering lower-quality merchants on its site to achieve scale, Groupon loss the interest of many consumers who were looking for a deal but who knew that the coupons being offered were not actually of good quality. In speaking from personal experience, I’ve shifted my coupon purchases from Groupon to Gilt City because it feels like the site does a better job at curating its merchants to offer real value to consumers. To survive, I think Groupon should re-evaluate its merchant strategy and re-think its deal strategy to attract higher value coupons for consumers. I do worry that Groupon’s brand has already diminished considerably in the consumers’ mind, but this might be the only strategy that offers value for all.

  5. Great article, Grace! I had never really thought about how this kind of business model could hurt businesses in the long run and even lead to losing regular customers. I still don’t know what exactly differentiates each competitor’s business model, but I am surprised to see that Groupon can take a 50% commission on prices that are already so heavily discounted.

    I’d be curious to hear your thoughts on Groupon’s business model shifting from hawking daily deals to serving as more of a marketplace[1]. Do you think Groupon can carve out a sustainable path here given that there are already so many competitors in the space, from Etsy to Amazon? And why do you think Alibaba would take a stake in Groupon[2]?

    [1] Dan Blystone, “Can Groupon Make a Comeback in 2016?”, Investopedia, 13 January 2016, http://www.investopedia.com/articles/investing/011316/can-groupon-make-comeback-2016.asp, accessed November 2016.
    [2] Olga Kharif and Spencer Soper, “Alibaba Gets New Learning Opportunity with 5.6% Stake in Groupon”, Bloomberg, 12 February 2016, https://www.bloomberg.com/news/articles/2016-02-13/alibaba-gets-new-learning-opportunity-with-5-6-stake-in-groupon, accessed November 2016.

  6. What an interesting read! What strikes me about Groupon’s business model is that as an intermediary – connecting customer demand to supply across various categories, it really was serving two different customers. It had a customer promise to both the end-user of the product/service (the person buying) as well as the provider of the product/service – much like uber! Unfortunately it seems that Groupon focused too heavily on the customer promise to the end-users vs. the merchants which led to the struggle to sustain their business model. There doesn’t seem to have been a strong enough merchant value proposition for merchants to continue to use the platform, which increased their costs of merchant acquisition, and to NR’s point above this resulted in lower quality merchants being featured on their site. This results in lowering end-user demand, which continues to drive down the merchant value proposition – a death spiral! I’m curious to see what their next move will be to reverse this trend.

  7. Interesting article and a great read, Grace! I definitely think that GroupOn has a particularly unique business model. It’s interesting how they are able to offer scale to potential merchants so that they can source new business, although at a sacrifice on their margin. GroupOn has always been interesting to me in the sense of cannibalization though. In your article, you discuss how people using GroupOns at a restaurant could limit other full-time customers from entering, i.e., it would limit other high-value customers from participating.

    However, I think that another scenario also unfolds in addition to what you’ve described – the customer actually would have eaten at that restaurant for full price but instead gets the same product for a discounted price. What that suggests is that GroupOn could actually be providing discounts to customers who would’ve paid full price anyway, but instead they are getting a deal, and the GroupOn is actually leading to a lower-price version of the same customer cannibalizing the version that would’ve paid the same price.

    I’m curious to what extent this dynamic holds, but if it does to a high degree, I feel that GroupOn may find trouble building out a sustainable business. If they can’t prove to merchants that their business is accretive and adds value to the merchants that are giving away considerable margin to participate on the site, GroupOn will have a hard time staying around.

  8. This is a really interesting post, thanks for sharing Grace! I’m interested to see how Groupon will combat these negative effects of having too many options… One way to do so could be to geo-target more closely, only showing people deals that are very close to them. Currently you can select your city, but it still shows a large number in the city and surrounding area. Maybe they could have a mobile app that shows deals as you approach certain stores, or maybe that could be overwhelming so only when you “checked in” somewhere.

  9. Cool stuff. It’s interesting to hear how many Groupon deals sold by restaurant merchants were sold below cost. Given that these deals could cannibalize the restaurant’s existing customer base (and not necessarily lead to core customer conversion), it is surprising that any restaurants would still go with this deal. Maybe it’s just an indicator of how competitive certain marketplaces are out there and how companies like Groupon can come along and take advantage of that.

  10. Great article Grace. The varity of options available to consumers today really is immense! When users are faces with such an array of possible actions, it has been shown that no action is often taken. Given this, do you think promo codes will be a threat to the Groupon model, as they are applied at the final moment a user is making a purchase?

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