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 . 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 . 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 . 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 . For restaurants, one of the most popular deal categories, merchants often ultimately sold meals far below cost . 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 . 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 .
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 . 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 . 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 . 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  and, less than a year later, went public at a valuation of nearly $18B . 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 . 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.
- 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.
- 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.
- Bhajarja, Nishant, “Why are Groupon and LivingSocial Failing?,” https://www.linkedin.com/pulse/why-groupon-livingsocial-failing-nishant-bhajaria, Accessed November 2016.
- 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.
- Girotra, Karan et al. “Can Groupon Save Its Business Model?,” https://hbr.org/2013/12/can-groupon-save-its-business-model, Accessed November 2016.
- Carlson, Nichollas.
- 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.
- Griffith, Erin, “Counterpoint: Groupon is Not a Success,” http://fortune.com/2015/03/20/groupon-success/, Accessed November 2016.
- Mason, Andrew.
- 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.
- 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.
- Agrawal, Rakesh.