It's almost as if people derive personal satisfaction from poking holes in Groupon's success (or any startup, for that matter). Groupon has no viable business model, people will get tired of Zynga's games, Twitter can't monetize, Facebook will be killed by Google+/is useless/the ads on it aren't worth anything, etc. Every time one of these things gets pointed out, people show up and start high-fiving each other, say they've been saying this all along, etc.
I really don't understand this part of human psychology. We cheer entrepreneurs on, until they see a massive success, at which point we feel compelled to point out that their achievement is meaningless and we knew it all along. Are people really that jealous?
I think the subtext to a lot of Groupon hate is the suspicion that their success is going to come at the expense of honest but smaller players.
It's legitimate to be concerned that an insolvent Groupon could leave thousands of small businesses without promised rev share from promotions. It's legitimate to be concerned that an over-zealous sales team will make one-sided deals that favor Groupon and shaft the small business owner.
And it's legitimate to be concerned that practices not publicly disclosed, along with obviously goofy accounting, could mean that IPO investors could be buying shares in a shady, radioactive concern.
I saw Andrew Mason be asked, point-blank, if his business was sustainable. The brittle, curt, brief response, when compared to his otherwise exuberant, voluminous presence, left me pretty startled – and planted the seeds of my personal skepticism.
To me, the many people looking askance at Groupon have no beef with their success. The beef seems largely about the source of that success.
I'm pleased for success which is built on providing real value to real people.
I'm not pleased at, say, Bernie Madoff's success. (Over 15 highly successful years in business, and only one unsuccessful one!) IMHO, he wasn't providing real value to people and his apparent success was only due to fraudulent accounting. According to Wikipedia, Madoff's brother invested $32,000 and received profits of $16 million - an impressive rate of return. Am I a nattering nabob of negativity for poo-pooing this "success"?
I believe Groupon is in the Madoff category, or close to it...
The point is that its not real success, its fake success propped up by massive funding rounds and there are numbers to back it up. Note that their ARPU (for customers) is less than their marketing cost. Fixing this # before growing is what Clayton Christensen is talking about when he says "impatient for profit but patient for growth". Groupons unit economics suck and they're not getting better.
Revenue and subscriber growth
The median number of Groupons sold to each Groupon customer (someone who has bought anything): 1.
The median number of Groupons sold to each person on Groupon’s mailing list: 0.
Subscribers and acquisition cost
Percentage of mailing list who has purchased even one Groupon: 20%.
Cost per new list subscriber: $5.37.
Cost per new customer: $24.08.
Real revenue per subscriber: $3.43.
Real revenue per customer: $17.55 (less than acquisition cost — keep in mind most people buy only 1).
Real revenue per Groupon sold: $10.49 (less than acquisition cost).
Amount spent on marketing, full year 2010: $241.5 million.
Amount spent on marketing, first half of 2011: $345.1 million.
There are certainly cases of naysayers besmirching companies and entrepreneurs. There are also cheerleaders who get sucked into hype and think every new thing is going to change the world forever.
The truth of course is somewhere in between. You can't judge people or what they say on whether it's positive or negative but on the merit of what's said.
I for one have been critical of Groupon [1], even before the S1 filing. Large funding rounds to pay out early investors prior to an expected IPO are always a red flag for me but it goes way beyond that: dodgy accounting practices (ie treating customer acquisition as an extraordinary cost), account risk, the payment model that encourages last-ditch efforts by failing businesses to stay alive, the fact that Groupon's model in reality suits very few businesses, customers aren't particularly loyal or valuable and so on.
As for Twitter, my personal opinion is that Twitter is one of those phenomona that is magnified in the Valley bubble. Outside of the Valley, it seems it's used to follow celebrities and most people don't know about it. I believe their own user figures are exaggerated (Twitter publishes figures on registered accounts not N-day usage like Facebook and others do). Also the 140-character limit and the huge reliance on third-party clients present huge barriers to monetization.
I can't say I've ever said anything negative about Zynga. They produce games that operate (very well) on human compulsion. All they really need to do is keep introducing new games and refreshing the old. The one huge danger for Zynga has is their almost total reliance on Facebook.
As for Google+ (disclaimer: I work for Google), I like what we're doing here but success is by no means guaranteed. The biggest problem for Google+ (IMHO) is that people are tired of using social networking not that people are tired of using Facebook. I also believe that Google does a much better job of respecting user data and privacy and it would be good for the Internet as a whole if Facebook where not to be a monopoly on identity and social networking. None of that guarantees success. Or failure for that matter.
I also think the value of social search is completely over-exaggerated. The biggest innovation in the early days of the Internet was that suddenly you could find information from everyone in the (connected) world, not just your circle of friends and whatever print publications you had access to. The idea that we want to go back (even in part) just seems backward to me, especially given that most people consume information rather than produce recommendations.
What makes Google so successful in advertising (compared to any other company on the Internet) is intent. The act of searching for something means you want to find out more about it, find where to buy it maybe, etc. Let's face it: advertising in almost all other sites is an intrusion and a distraction that doesn't match out intent (of, say, sharing photos, posting updates or whatever).
So count me as being negative on Groupon. I think of all big IPOs for some years, it is the dodgiest and it strikes me that they're trying to cash out before the bubble bursts. To attribute my reaction as some flaw in human psychology that simply wants to drag others down however is rather dismissive of the arguments I make and those made by many far more erudite than I.
"The biggest problem for Google+ (IMHO) is that people are tired of using social networking not that people are tired of using Facebook."
I think this is true to an extent. But I would refine it even further, because the distinction matters: People are tired of using social networking sites. Walled gardens. Neo-portals. Whatever you want to call sites like Facebook, of which Facebook is simply the most prominent and successful example. (Also, I would be careful to distinguish that, by "people," we really mean "some people." Clearly, not everyone is as sick of social networking and/or Facebook as we might like to think.)
Some elements of social networking will always be useful, and people will probably want to continue using them. But I question whether everyone will keep wanting to use a central destination/portal for all their social networking needs.
This could be a very good thing for Google+. But only if Google+ resists the temptation simply to build a new Facebook, and make the Google+ site the core of the Google+ experience. That's not the way to go. And Google doesn't need to go there, because it can monetize its user activity in so many other ways. Google+ still has room to evolve into a distributed, decentralized social networking experience -- wherein social networking is a feature, and not a destination.
Of course, that sort of experience might still be a ways off. And it still raises the thorny question of who owns the central pillars in the social platform, like user identity and the social graph. (Though, if the history of social networking -- and even of email services -- has anything to tell us, it's that users don't necessarily mind rebuilding identity/credentials and graphs all that much, up to a point).
Could be jealousy, but I think another side of it is those of us who saw the DotCom bubble can still be pretty cynical about web-based business models.
What's your point? We shouldn't be poking holes in faulty business models? I don't think that's a good idea. Groupon is quite embarrassing, the Pets.com of web 2.0 for sure. On top of that, the founders are greedy crooks.
I think Twitter is in a far better position...it has taken me a while to realize this, but the truth is that they don't need a business model, really, they can just sell their data to people who do have a business model (like Google). Twitter will sell when it can get a really good bidding war between FB and Google, and maybe MS too. Now, they may screw it up and only get a few million, but this is still going to be a huge success by non-silicon valley standards.
Be careful of summing together reactions from different people as if they represented a single common or average reaction.
There are loud critics of each your examples... but very few people, other than the relentlessly negative, are likely to be sour on them all. The fact that there are enough naysayers to fill any given comment-thread or link-aggregator is just evidence of the breadth and opinion-diversity of the audience now commenting, and that our modern filtering systems especially promote dissent and controversy.
(I say this as someone who thinks Facebook has great prospects, Twitter has challenges but will probably figure something out to justify its recent valuations, Zynga may be questionable on social-value grounds but will likely remain a strong business... and yet there's something fishy about Groupon, from its top-level accounting to its street-level dealings with small-businesses and customers, that makes me think by 2013 Groupon could be considered Chicago's Enron.)
The satisfaction is that Groupon was using some pretty weird accounting measures to claim profitability, but was backed down to use usual accounting measures, which show they are scarily in the red.
The vast amount of advertising they've done probably didn't endear them to geeks, either.
Let's remove the emotional out of the equation (jealousy, envy, etc).
Groupon has had success (I won't say massive b/c I can't quantify massive). The reason people are poking holes in their business viability is strictly due to their recent SEC filings for an upcoming IPO. Companies that do well on the stock exchange are those that are able to show profitability. Do some business on the exchange miss on earnings/profit margins? 100%. It is probably a 50/50 coin flip on whether or not a company is going to hit their earnings reports.
Why people are "attacking" Groupon is because of their somewhat odd use of CSOI (which is vastly different from adjusted CSOI).
To run a business that is publicly traded, you have to show that costs are in order so that you can reach probability. Groupon has had somewhat exploding costs to grow quicker than their competitors (fine by me). But using history as an indicator of profitability in the future is what has everyone in a tizzy about Groupon's business viability.
Some of us have a healthy suspicion of large companies. I've seen so many lose their way, forget employees and customers are individuals and grow arrogant and lazy. For me its not jealousy or resentment at success, just a preference for successful companies that operate at human scale.
Are we defining massive success as finding more investors to give them money or making money? Maybe as an employee the two are equivalent but as an investor you're really hoping for the latter.
> and we knew it all along
Agreed on this. Think of a tech company that doesn't exist, say DEC. Were they a success or a failure? The answer of depends on when you ask the question. Is Microsoft currently a success or a failure? What about 10 years from now?
It reminds me of the person in the gym who, circa 2001, declared he'd been "predicting the stock market would fall for years". :)
Few can tolerate the success of others in large doses, especially when they are involved in the same activity and have achieved less. It's not unique to entrepreneurship nor technology.
> It's almost as if people derive personal satisfaction from poking holes in
Yes, many hackers/engineers like fixing things. The first step is to identify the problems.
It's almost as if people derive personal satisfaction from playing apologist for anything, no matter how crazy or unadvised.
> I really don't understand this part of human psychology. We cheer entrepreneurs on, until they see a massive success
What's a massive success though, a bubble supported entirely through hype and start-up capital?
Where is the real success, as in, the expected belief to be able to continue to turn some money into more money in the future, as a result of providing value to customers? Maybe if you thought about what a sustainable business model was you'd understand why the apparent lack of one is such an issue with other professionals in field.
If they weren't soliciting investment I doubt anyone would care but as long as they are we should be thankful for the wisely cynical.
The long-term problem is simply this: Groupon isn't adding value to anyone.
For customers, Groupon adds almost no value. A great marketing deal will get publicized anyway - there are hundreds of websites devoted to coupon/code sharing. So if a business wants to offer 50% off, they could spend five minutes mailing a couple of these sites, and there would be plenty of publicity for their deal.
For almost all businesses, Groupon adds negative value. It costs money to fulfill these deals. "Losing money on every sale" is not a way to build a real business. The customers are the worst possible: solely money motivated, never going to do repeat business, and all coming in a giant surge which your business is not likely prepared to cope with... that's absolutely the opposite of the kind of customers you want.
Groupon has been able to paper over these problems with creative accounting and venture capital. This will not last forever.
It is simply not true that a "great deal" will get publicized by itself, or that any pre-2009 channel for publicizing great deals was effective for most businesses. I find this comment facile. Small businesses die all the time because nobody discovers them.
I don't know about Groupon, but it's flat out wrong to say that small businesses don't have the problem Groupon claims be addressing. They clearly do have the problem.
> It is simply not true that a "great deal" will get publicized by itself
I said spend five minutes emailing. If I'm selling widgets for $25 when the usual, accepted price in commerce is $100 (which is the standard Groupon deal, right?) and I spend five minutes emailing the widget fanatics mailing list, I guarantee that a LOT of people will discover my offer to sell widgets for $25. The deal will spread all by itself given a very minimal amount of priming by the business owner.
It won't spread if I'm offering to sell widgets for $99 instead of $100. But $25? Yes.
> I don't know about Groupon, but it's flat out wrong to say that small businesses don't have the problem Groupon claims be addressing. They clearly do have the problem.
No, no businesses have a problem of not being able to find customers to buy things at prices well below the store's cost. If I buy wine at $10 per bottle and instead of selling it at $20/bottle, I decide to sell it at $5/bottle, I assure you I will find plenty of customers. And that's what Groupon is offering - the "opportunity" to find customers who are willing to buy your products for below what it cost you to put them on your store shelves.
A useful service would be to find customers who are willing to pay full retail price for your products. That's a service that retailers would and should pay money for. That isn't what Groupon is offering.
Repeating the same wrong statement doesn't make it more true. You can make the absolute best cupcake in Chicago, but if you don't promote your business, it won't matter how far you discount them. Nobody's going to know you exist.
People persist in these weird economic analyses of "daily deals" sites as if they have anything to do with the economics of breakage or marginal cost. That's not the point of daily deals. The point of daily deals sites is that they're promotional channels, and that they're more effective than local advertising, which is a notorious black hole.
>A useful service would be to find customers who are willing to pay full retail price for your products.
The intent is that once you try and if the businesses treats the customer well, they would pay full price the next time. It is the businesses who don't understand this, that don't end up reaping the benefits.
"It costs money to fulfill these deals. 'Losing money on every sale' is not a way to build a real business."
I've been looking over the Groupon/etc. deals in my area. There's a reason why almost all of the deals are either low marginal cost - gym memberships, classes of various sorts, cruises, and theater and movie tickets - or they are small businesses where the major business cost is rent and employee time, time which is presumably not being currently filled with work - massages, acupuncture, spa trips and other beauty services.
I don't think this is true. The fact that so many people are using it is proof to me that it provides value. I can safely say that Groupon provides value to me.
I can't say that it provides value to any business',as I'm not a business owner, but that's not what you said above.
I might have missed something, so apologies if this is readily available. Where are you getting the information that "For almost all businesses, Groupon adds negative value?" Is there any actual data on how businesses who use Groupon, in general, feel about it?
Thanks! This study looks very small, but still came back with a healthy majority claiming that not only did it not harm them, but that they wanted to sign up again. It also says groupon's internal statistics (maybe they're lying, I guess) conflict with that data, and that 97% of respondents want to do another deal.
This article is also a bit older, so maybe things have changed. But I don't think it's fair to say that this article buttresses your claim that most business owners feel as if they are being hurt by these deals.
Groupon's modus operandi is that the business is (usually) making a loss or zero/negligible profit from the deal for the opportunity to generate future (post-groupon) business from those customers (or their friends).
Spending no money at all might either be worse (they've lost more than they earned) or no better (zero sum) than buying the coupon depending on your future intentions.
Or do you mean that you've returned and purchased again from those places?
In our case, we haven't returned. Whenever she gets her hair cut now, she finds somewhere that's on offer, which is a specialization of the bigger point, that she nows uses GroupOn with the expectation that there will be a deal on something she wants...
I have said this before and I will say it again. Groupon were idiots to leave money on the table and walk away when they were working with Google. They will never be able to get that much free cash ever again.
First, they did take quite a bit of money off the table. Second, they are on target to do a $25+ billion IPO (ie, 4x the Google price). Doesn't sound idiotic to me.
I can say that my site is IPOing for 50 billion...until I actually raise the amount, it's just a dream. Same with groupon...yes they want to raise that much...but it's just a pipe dream at this point
What are you talking about? Groupon's IPO could occur in a matter of weeks. Bankers have been selected. Road show planning is under way. Barring a global economic meltdown, Groupon is likely to IPO for $20-30 billion. Unless your site is Facebook, Twitter or Zynga, I don't think your comment has merit.
it wont be hard for them to IPO on a small float at 20-30B valuation... what will be hard is for VC's and employees to sell at that valuation once the lockup expires.
The viable business model for Groupon is to shed 90% of it's 7500 employees, improve business satisfaction and let the businesses come to them. This may be hard now that Groupon has such a bad reputation amongst businesses.
Groupon was too enthusiastic to become big rather than good. I understand why they thought it was necessary and to some degree I agree that it was the correct game to play but I think they have destroyed their chance of retaining the customers (businesses) they acquired during their growth.
Seriously they need to downsize quickly and fix their customer satisfaction (taking a smaller cut would be a start). It would be rough but at least they might turn a business loosing a $100 or so million every quater into a profitable business.
I have a feeling though what's in the hearts of Groupon's leadership is not the desire for a profitable business but a pump and dump.
That will never happen. That's the fundamental problem with "local". Small businesses and mom-and-pop shops need to be called and convinced. They need their hand held. They aren't studying lean marketing practices or split testing their offers.
Look at the head counts for ad sales vs editorial for any local publication (newspaper, magazine, newsletter). If you want to sell to local businesses, you have to call them.
elon musk tried to create one such company, Zip2, back in the late 90's. cost of sales ate it alive.
reachlocal, profitfuel, etc has been successful by making their companies into freakish sales-driven machines. the core competence of any "local" is maximaizing sales effectiveness.
Absolutely true. Reminds me of the yellow pages sales team. They had to show up to get the ad and coax it out of people who had success. Also, a small business advertising publication that I was affiliated with had the same issue. You couldn't run it remotely from another city. You had to be on the street collecting the ad copy from the pizza shop. And you were lucky if the owner was there for the "appointment" as well.
I don't bite. Sure it's difficult, but if Groupon was a good experience for the business then it would sell its self. Groupon wouldn't be the $6 Billion monster it is today but at least they might be making some money.
I'm not terribly impressed with this article. It rehashes the thinking of HN and other bloggers without adding anything new - other than the HBR logo at the top. I guess that's important for people who let HBR tell them what to believe. And the following point just seems completely wrong to me:
>> And unlike the very few successful companies that scaled before they were profitable (think Facebook or Amazon), Groupon's business model does not benefit from significant network effects.
Can someone explain how Amazon's consumers benefit from network effects? Amazon is a great business, but it's not more valuable to me because other HNers shop there. And then there's Google. Another company that experienced tremendous growth and unprofitability before finally turning on a fountain of cash. They would also seem to be a case where there's no obvious network effect fueling their growth.
There's good reason to be dubious about Groupon, but I'm pretty disappointed by the quality of the debate in many cases. Groupon's business model is really simple. They'll be OK if the life-time value of their subscriber base exceeds the money spent on customer acquisition (ok, and some operating costs). There are plenty of useful metrics we can use to forecast their likelihood of success. Data like offer quality, merchant churn, subscriber acquisition costs, revenue per customer, unsubscribe rates will determine their fate. Everything else is just a sideshow.
> Can someone explain how Amazon's consumers benefit from network effects?
Volume. Marginal cost of fulfilling 100,000 orders/day <<< Marginal cost of fulfilling 1,000 orders/day.
GroupOn's claim to scale is that you need eyeballs to convince businesses to put on good deals, and you need good deals to attract eyeballs. Also, there's a land grab going on. If they allow a competitor to become entrenched, taking him on later is going to be difficult, as I'd guess breaking someone else's eyeballs/deals loop is even harder than creating it in the first place.
These are economies of scale. I object to relating them to network effects. Network effect, if the term is to have any meaning at all distinct from economy of scale, should relate specifically to value added by edges joining nodes, where those nodes are customers, suppliers or partners etc., and the edges are something the company enables.
Aparently, network effect is not a buzzword for economies of scale. Well, I guess Amazon gains more a/b juice from customers, which lets it target you with better suggestions. But I doubt that's really what they meant.
Actually I agree, that's why I put "groupOn's claim to scale". They clearly mean economies of scale when they refer to Amazon, so that just adds to the sloppiness of the article.
Can someone explain how Amazon's consumers benefit from network effects?
Ask an informational question, get what I hope is an informative answer. Amazon's network helps me as a buyer of products because I see recommendations based on the behavior of other buyers ("Customers who bought this product also bought . . . "). To me, that was one of the coolest things about Amazon in the early years, when it was by far the most interactive website (other than discussion forums) that I regularly visited. It was full of new information each day, about cool products I had never heard of through other channels (and I browse brick-and-mortar bookstores and search online library catalogs A LOT, but still learn about many new books from Amazon). Now that Amazon sells more products than just books, these network effects are even better. Today, an Amazon recommendation ("Customers who bought items in your shopping cart also bought . . . ") can span product categories that I didn't even know existed. I can't search for information like that--I don't know what search terms to use until I've heard of the new product. Amazon has gained many, many sales from me precisely because of the large network of users who use it.
> Can someone explain how Amazon's consumers benefit from network effects?
I mostly agree with you but if I had to think of a few things that I benefit from due to Amazon's size:
- cheaper prices due to size, in terms of book discounts, shipping discounts, etc
- recommendations
- book reviews
- faster shipping due to amazon.ca, co.uk, etc, as opposed to having to get everything shipped from amazon.com
Is the business model really so nonviable? Companies are coming to Groupon willing to give them exclusive coupons for their businesses, and Groupon gets to take 50% of the money from every Groupon bought.
I thought the only reason they were unprofitable was the issue of scale -- they were blowing large amounts of money trying to become as big as possible, as fast as possible. Once they are the 500 pound gorilla on the market and the majority of businesses go through them, I can't see them being as bad as they are now.
> Companies are coming to Groupon willing to give them exclusive coupons for their businesses, and Groupon gets to take 50% of the money from every Groupon bought.
Companies are not likely to be willing to give up 75% of revenue all that frequently, and there's a limited number of companies willing to do it even once in any given area.
In Rochester, NY, Groupon seems to have already blown through the low hanging fruit. Now we're getting tooth whitening and batting cage tokens as offers.
Great point. I have also noticed the decline in Groupon quality recently for my area.
That being said, once you are the 500 pound gorilla in the market, will people really have a choice but to go through you? I don't like ebay, but I deal with it because that is where everyone is. There must be some point where the hassle or loss of income is overcome by the potential benefits of advertising through Groupon. Even if that means they may have to tweak their % taken some, I could still see them being wildly profitable.
The choice there is not to go through anyone at all. It's not like all businesses wanted to hold flash 75% sales and just didn't know how before Groupon.
I'm not a business owner, so I can't talk authoritatively on the subject, but I think there's something in the combination of wide audience and well-known number of pre-paid vouchers that make GroupOn more attractive than old-world sales marketing. Then there's something in their skimming 50% off that's quite less attractive.
I'm not sure this is well-known, and it doesn't appear to be given the comments here, but Groupon offers a self-service option (i.e. not "featured") where their take is just 10%. I feel that is a relevant, and often overlooked, option for those businesses with typically lower margins.
I don't do deals myself, but I find the trend interesting.
Disclaimer: I work for a sustainable deal site for local businesses.
One factor that hbr is not mentioning is business owners (national and local) that participate on Groupon, for the most part, are having bad experiences. Obviously this depends on the industry (sky dive plus all around, coffee shops down all around) but not all industries can live off of 25% of their goods sold. I know many local business owners who ran a Groupon and promised themselves that they will never Groupon again because of the poor customer experience, and the large financial loss per Groupon.
The scale part is what worries me. I don't think Amazon needed as much money as Groupon needed to scale which is the biggest worry. At some point, the financial well will dry up on Groupon.
When that happens, I don't know what will become of Groupon. Maybe they should have taken the purported Google deal of a buyout for $6 billion :).
> business owners (national and local) that participate on Groupon, for the most part, are having bad experiences
My understanding is that Groupon's satisfaction rate is well above 50%. It seems that everyone forgets that, at worst, this is an advertising expense that guarantees revenue and foot traffic.
It is 100% dependant on industry. Ask any retailer if a Groupon makes sense when they depend on the margins their products produce.
The only way it makes sense is if they are able to get large volume discounts on whatever they are trying to sell.
Just running some #s here.
Local clothing ship buys jewelry for $5/piece and marks it up to $15. Groupon takes 75% of the $15. Groupon takes $11.25 out of the $15 and you just lost $.25 on the entire deal (not including expenses to find that piece).
Sure that same retailer could mark the piece up to $20 but groupon takes $15 of that and you break even. A $5 piece probably couldnt be sold for anything higher than $20...
I will agree that it generates foot traffic but most smaller businesses I have talked to who have done a Groupon or thought about it have had negative experiences or choose not to do it because of a scenario similar to the one above I portrayed.
A tire-kicker who has no intention of ever becoming a customer in the future, and just wants their 'deal' - no one wants those customers. Groupon doesn't seem to offer any way to segment or market your message/deal to subsets of people differentiated on any other signal besides those customers that "want a deal".
At $0.25 per, it really does not matter. Even at higher costs, the customer mix would need to be pretty horrible to compete unfavorably with traditional advertising where you very well might get zero custo,ers for your outlay.
In the example given, it's really $1.25, but even at $0.25, I'd still disagree. That's just the cost of getting someone in the door. If your sales process is just people browsing in a physical location, possibly that's OK. If it requires a lot of interaction with staff, that's cost that needs to be factored in.
Should that be factored in to the groupon price? Absolutely. Will most people know to do that (and goes groupon counsel people on how to do that)? Based on most groupon horror stories, absolutely not.
Those horror stories are actually somewhat scary for a business owner. Not being able to dictate what time your discount starts?
If people have a bad experience with the Groupon at your store, the store gets inflicted with tons of bad reviews due to long lines, long checkout times, etc etc etc. While in theory this sounds like a good problem to have, its not and won't provide a sustainable stream of customers (i.e. majority of these customers come once, have an awful experience because of the aforementioned problems and never come back).
While my sample size is small (~15 biz owners) I saw it first hand at a restaurant in Somerville. My buddies and I stayed for 3 table turns around us. I overheard everyone that was there because of Groupon and every single table had no intention of coming back. They didn't mention the cause, but I am assuming it was slow service because the place had a 1.5 hr wait (normally 15mins).
As I said in the comments field of the article, in response to a VC acquaintance's post...
A "land grab" strategy implies there is a means to lock out competition, and a strategy to defend and retain the land that is grabbed. So, one has to ask, what is Groupon's retention strategy for all this wallet-share they are grabbing?
Vendors and customers who are of the mindset to avail themselves of a Groupon-like service are driven by the value of the deals. There is no inherent loyalty to the voucher provider, or automatic lock-in of mindshare. If vendors and consumers can get a better deal from someone else, they will.
So, while Groupon, LivingSocial and the rest may currently enjoy decent margins, what prevents them from being locked into a race-to-the-bottom of razor thin margins as the markets saturate? To my mind, having the largest list of emails to spam with targeted offers is not a sufficient defense against this. It just slows the attrition.
So, then the question is, if there is nothing that prevents a race-to-the-bottom, aren't the companies that maintain the highest operational efficiencies (and profitability) - not the ones that grab fastest the most of the ultimately indefensible lands - going to be the ones that prevail, in the end?
And, let's not forget, this land grab strategy is/will be failure unless Groupon can actually raise the capital required to actually stay in operations and see through to fruition.
> So, then the question is, if there is nothing that prevents a race-to-the-bottom, aren't the companies that maintain the highest operational efficiencies (and profitability) - not the ones that grab fastest the most of the ultimately indefensible lands - going to be the ones that prevail, in the end?
Yes, yes, yes. As the OP correctly notes, this business model does not generate positive network effects for subscribers and, in my opinion, for merchants either (i.e. the larger the list of subscribers the smaller percentage of high quality sales leads generated). I think Groupon was scaling under the assumption that their business model was social and that network effects would be generated somewhere down the road once they were at scale. As we have seen, in mature Groupon markets where they are locally at scale, this has not occurred.
From my outside perspective, it seems that Living Social might be in a more sustainable place than Groupon (although I might be biased as I'm in their home market of DC). They generated some goodwill by taking a smaller cut of deal revenue than Groupon and, anecdotally, do a better job at maintaining good relationships with their merchants. Their deal quality (i.e. range/quality of merchants) has also been consistently better than Groupon's in my experience.
The question is whether this is a fad or not. Companies always try new marketing tricks. The type of marketing that stays is the marketing that benefits the company.
This type of group buying is relatively new and lots of companies (small and large) are testing it out. They're willing to chance making a bad decision to see whether it works or not. The question isn't whether Groupon is getting a decent cut, but whether companies are going to see this as a long term part of their business in the same way that other marketing techniques are. Businesses might find that they try it out, lose money, don't get repeat business, and it becomes another thing that no one uses in a couple years.
Groupon's business is that it has a mailing list (basically) of people looking for deals. That's the service they're offering businesses. At what point do deals of 50% off or more need such publicity? So, even if they become the 500lb gorilla and group-deal marketing isn't a fad, how likely is it going to matter? I'm not saying that it doesn't matter, but truly great deals tend to be spread (I'm remembering an Old Navy one that half my friends posted on Facebook).
Beyond that, there's a danger in marketing to people specifically looking for deals - and specifically people looking for deals that don't require much hunting. Companies spend a lot on price discrimination (getting people who will pay more for a product to do so). Companies use coupons that people willing to pay more will ignore or forget about, they sell different editions of products to get the back of your head saying, "I can't tell a difference, but am I going to be disappointed if I buy the cheaper one?", etc. If Groupon becomes so popular, there is also the risk that the deals will become easy to the point that you aren't getting extra marginal business to people who might not buy your product, but rather lowering your average price since so many people are on it. In fact, using a less-known deal site might be beneficial since it could grab the people who really wouldn't pay full price while flying under the radar of those who are just casual deal people.
The worst thing might be if the government decides that Groupon is selling gift certificates. Gift certificates are regulated including things like expiry dates. Right now, there's the possibility for me to spend $20 for $40 of goods and forget to redeem it within the (usually) short redemption period. That might change as Groupon gets bigger or one Groupon user decides to sue over the expired "gift certificate" and a judge sides with them. In fact, at least in Massachusetts, Groupon the gift certificate law would seem to apply since it includes merchandise credits and "and any other medium that evidences the giving of consideration in exchange for the right to redeem it for goods, food, services, credit or money." I haven't looked over Groupon's filings, but that seems like it would impact on their business - either by taking more money from them or the business depending on who keeps the revenue from non-redeemed cards. And even if it's the business, that means a change in how willing businesses are to sign up. I'm sure businesses are keeping track of how many sold to how many redeemed.
I'm not saying that Groupon is terrible or won't become valuable. However, there are pitfalls. "Group buying" might be a fad. Businesses might not find it in their interest to give Groupon half of the revenue or might find these lazy deal-hunters not in their interest. Larger size could become a hindrance as the larger they get, the more it will affect average sales price rather than just marginal sales price. And the government or courts could affect their business model. New things come with risk, but when the founders start taking a lot of the cash they receive as investment for themselves (rather than for the business), it's a bad sign for me. They're signaling that they see their business as risky enough that they want to make sure they're covered if and when it goes belly up. They aren't holding their wealth in Groupon stock; they're holding it elsewhere.
Amazing! I'm guessing 99.9% of Groupon users don't know this. I also can't imagine why Groupon is so generous in this respect, relative to other companies (even if it's clearly the "right" thing to do).
Actually some of the others do this as well. I believe that facet exists because of many States gift card laws. Yet another area that Groupon et al may hit issues with in the future.
Two numbers. In my mind that is all what is needed to determine if Groupon is the next Amazon, or if their business model is sustainable; and they are far more telling than the silly financial metrics they were throwing around:
1 - % repeat customers.
2 - % merchants who would like to repeat.
I have seen people try to guesstimate them from the financials, or throw around wild guesses based on a sample of anecdotal evidence. Nothing convincing so far.
Also Groupon and other daily deal did publish some of these in the heydays of daily deals, but no continuous updates (I think the most recent claim by Groupon was early this year)
I am sure Groupon keeps a close watch on these metrics, why aren't they releasing it? That in itself is very telling...
This is a good example of why MBAs frequently make lousy entrepreneurs. So much in this article is wrong. First, Groupon actually does have more network effects than a simple retailer like Amazon (save reviews). Shoppers go where the deals are, merchants go where the shoppers are. Bigger lists mean better targeting. Etc. That's why Groupon has continued to dominate despite the plethora of clones.
But the bigger problem is the implication that Groupon will not adjust its economics in the future. Groupon could slash SG&A, sales and marketing to become wildly profitable and still grow quickly. It's actually quite amazing how long Groupon has managed to take a whopping 25% cut. This is likely to diminish as discounts become smaller and merchants negotiate better terms. But still healthy enough to support a very large business.
> businesses should become profitable before they become big
The opposite is true of most or all of the big internet businesses.
> Groupon's fundamental problem is that it has not yet discovered a viable business model
Taking a 25% cut of sales is a fantastically viable business model.
> I have no problem letting investors finance my cheap consumption. But as far as an investment goes, Groupon is looking about as profitable as giving away your merchandise for 90% off.
These statements are just wrong. Merchants are financing your cheap consumption. Who is giving merchandise away for 90% off? Where does that come from?
I am far from a Groupon apologist but so much of the "analysis" on the company is so bad. Comparisons to Pointcast, Pets.com or Webvan are totally unfounded. This company is generating massive cash flows.
It's interesting that a smart company like Google almost paid $6B for them.
Did they not understand the business model well enough or did they just want it to bolster other services (like payments) despite it not being profitable?
How Google Offers goes should tell us. Maybe they've found a way to make the model work.
Even if Youtube is not profitable, Google has gained a lot of power over the online video format (see also Webm), justifying the buy.
Google aims to organize all the information in the world. Video is a large part of that and that should only grow.
The same take I have on the $6B offer. Controlling a large space of the growing local/group buying market is valuable to Google.
And just imagine Groupon coupled with Google Adwords (Adwords could upsell their clientele a Groupon offer) or Google Adsense (temporary offers could show on the entire content network). Or Groupon coupled with Google Base/Google Merchant Center. Or Groupon coupled with Google Maps. The true power would come from the collaborations and the future growth where Google would have secured a place.
No matter the hard business model, social buying/local offer sites are clearly here to stay.
Paying $6b for a $20-30b company seems smart to me. The Groupon model is insanely profitable once you trim SG&A, sales and marketing (useful for hyper growth, not useful for sustenance).
I'm guessing there was some pretty big performance (possibly profit) incentives for the founders and they knew they had no chance of hitting them. So their next option to cash everyone out and make a ton of $ was IPO.
From what I heard they were bucking for a breakup payment of 5 billion - that would have been within an order of magnitude of what the Groupon investors would have liked to have.
Their business model is profitable, but is it sustainable? How many merchants, after they have tried Groupon, will be likely to use Groupon again for advertising? Not bloodly likely.
Advertisers/merchants keep going back to Google AdWords because they're getting ROI. There's not much ROI from Groupon.
Everything you say about Groupon today applied to Amazon in the late 90s. They were accused of being a pyramid scheme. They were accused of bad accounting because they counted free shipping as a one time expense. They were never going to succeed. Fast forward 15 years and Borders is going out of business, Barnes and Noble is in retreat and Amazon moved beyond books to retailing everything - including the cloud.
My nature is to be a cynic, and I roll my eyes when people make up new metrics. I look for cash rather than an opinion on earnings. Even Generally Accepted Accounting Principles can be gamed, let alone non-GAAP metrics. But maybe this time they're right.
This isn't to say Groupon will succeed, but there is some precedent. Maybe they are more Amazon than eToys.
Agreed to a certain extent. The real question you have to ask is "If they hit their scaling targets, would it be successful", for Amazon, the answer was yes (thought there were significant doubts whether or not they could hit their targets). For Groupon, people question if they could be successful even if they hit their scaling targets.
BTW, people also questioned AOL for shipping all those CD's and counting it as an investment instead of a marketing expense.
Those who are saying that this article parrots what HN has been saying must not be reading very carefully.
The author states that entrepreneurs should be patient for growth and impatient for profits. This flies exactly in the face of much of the teachings of PG and other lean start-up advocates. Instead, they advocate that start-ups should grow like hell to gain market share and mindshare, and focus on creating value ("something people want"), not profits. Profits, according to the lean start-up playbook, will come later, when the founders decide on the best way to monetize the value they've created.
The HBS piece aligns with PG's statements in one way -- the focus on keeping overhead low. I'd argue that Groupon is actually doing this -- their investments are going into buying deals, not paying for corporate jets.
He forgot to mention Groupon brought in $878 million in the second quarter of 2011, 10x more than they did a year ago at $87.3 million. And $334M of the $1 billion of venture capital money went to buying stock from early investors, not pouring into the company.
> And $334M of the $1 billion of venture capital money went to buying stock from early investors
Isn't that a different way of saying that the early investors are cashing out(to the company too, not even other outside investors) at the current valuation? That raises more questions, why would they cash out if they think the valuation is going to go up?
I still don't get it. If the offer was turned down, it would be because they think that either the offered price was too low, or because they think they can do better on their own(thus make even more money later). Why would any of those scenarios need a 'gift' from the company like this?
Well, yes, Groupon thought the offer was low and that it could do better on its own. And so cashed out some investors and employees in return for delaying a complete exit.
I think such finance practices are deceitful and shouldn't be allowed.
But re: biz model viability, remember it did take Amazon seven years to turn in a profit. Everyone was nervous, but Bezos was determined to build brand reputation before making money.
I think a key difference between Groupon and Amazon is the opportunity cost. Amazon spent tremendous amounts on warehouses and inventory, among other hard costs. Groupon has mostly burned through their money on customer acquisition.
Amazon spent a lot of money on developing an online shopping system that has a high degree of reliability, ease of use, and functionality. Groupon's web functionality appears to be something that cloners can copy pretty easily.
This past week, I saw that my local "alt-weekly" newspaper was launching their own Groupon clone. If they can do it, it obviously doesn't cost millions; thus, the barrier to entry is low.
Even worse for Groupon, potential competitors, such as the alt-weekly, already have sales staffs; their salespeople can sell the "daily deal" proposition as an add-on to their advertising offerings. They already know the local market, which is another advantage in competing with the out-of-town giant that has to learn it.
One need not really go too far to justify Amazon vs. Groupon, because Amazon is an outlier. If you're trying to convince that I should invest in your business, and your best argument is that you might be able to be as good as Amazon if I just give you a chance, my wallet will be closing tighter, not opening. You're throwing the Hail Mary. Good luck to you, but you'll be doing it not with my money. Hail Mary is an exciting play on the football field when it works, precisely because it usually doesn't.
I don't want to comment on Groupon's business model per se, nor whether the concerns expressed are truly valid.
However, there appears to be a meta-concern brewing, which I summarize as "... people suspect there's a high tech bubble that is going to crack at some point. If/when this happens we'll all need a poster child to point to that helps explain and summarise the why/how/who/when of the bursting of the bubble." Perhaps Groupon is the leading contender to fill this role.
I can't understand why this isn't making tons of money: connect two parties and charge something for this, and keep your costs very low. I wonder if the Brazilians clones are doing ok, they seem to be.
Also, in the beginning everyone thought "Oh boy, I wish I had had that idea!"...
The trick is the sales process: finding companies who are willing to give what amounts to a 75% discount. This is the part that's so expensive in Groupon, and what's eating into their profitability the most.
must be slow week when people 'write' these articles. this is such a flame bait.
I wish my small biz doesn't have success like groupon. there are issues with how they do business etc, but they are both greatest and biggest deal makers for small biz.
I really don't understand this part of human psychology. We cheer entrepreneurs on, until they see a massive success, at which point we feel compelled to point out that their achievement is meaningless and we knew it all along. Are people really that jealous?