When you finally turn a profit and investors simultaneously dump your stock to an all-time low, you have a problem. Groupon is the king of local couponing, but is its deal already as sweet as it can get?
Groupon wasn’t the first local-deal site, but it took the model to the masses. Buyers prepay for a discounted product or service, and when those purchases hit a threshold, Groupon splits the revenue with the merchant and the deal is on. Local businesses acquire customers, customers get a deal, and Groupon gets paid.
Despite quarter after quarter of losses, Groupon passed on a rumored Google buyout and worked that model into a $12.7 billion IPO only 18 months into its existence.
But life since the IPO has been rough. Competitors such as LivingSocial moved in on Groupon’s turf, quarterly losses kept coming, and some dodgy accounting was revealed. And though Groupon finally turned a profit this year, the resulting rally was short-lived when its stock hit an all-time low last week on news of weakness in the European market.
But Groupon’s problems go much deeper than the eurozone, all the way to the heart of its business model, for two main reasons:
1. It’s a bad deal for vendors. Using Groupon costs nothing upfront but can turn out to be very expensive for vendors. Groupon takes a 50% cut of sales that typically already discount 50%. Some businesses (see GrouponWorks.com) absorb the hit just fine by selling high-margin add-ons and sparking return visits. For others, a 75% revenue hit is awfully rich, even for a loss leader — and especially if the discounts go to existing customers or folks “just passing through.” Meanwhile, Groupon doesn’t share any customer information with vendors — not even email addresses. And many merchants worry about projecting weakness and cheapening their brand.
2. The pie is shrinking. The barriers to entry in daily deals is terrifyingly low. That’s why the competitors keep multiplying, from LivingSocial to Amazon Local and even the local newspaper. Consumers have a finite amount of disposable income, and they’re loyal to the deal, not the brand. Many vendors rotate identical deals on multiple sites for maximum exposure.
While dedicated to the business, he’s also kind of a wild card. He admitted to drinking too much beer during a meeting in which he said Groupon needed to “grow up.” He’s the public face of a public company, but he posts videos of himself doing yoga in his underwear:
The financial turmoil of the earnings restatement forced Groupon to bring in some financial heavyweights, including David Henry, CFO of American Express. With any luck, Henry and company can help guide Mason’s passion into productive expansion.
Groupon has cash on hand, though a large chunk of it is earmarked for vendor payouts. The ongoing economic slowdown will affect the entire market, but Groupon will have to fight hard to maintain differentiation. Ultimately, it’s likely to become the biggest fish in a much less important pond. It could easily end up as no more than an obscure division of some much larger, more diversified company.
Can this company be saved?
Groupon has access to a ton of customer data, including payment information. It also have some powerful applications, like Groupon Scheduler, that could be used for broader purposes. If Mason can find new ways to leverage these assets across other products and services (for example, cross-selling full-priced flights or shore excursions at the point of purchase for a discounted cruise), it could build out a convenience-based commerce system and open up new partnership opportunities and compensation structures. If it sticks to online couponing, though, right now is probably as good as things will ever get.
Cormac Foster is a writer, consultant, and skeptic who finds enterprise technology more exciting than he probably should. Before coming to ReadWriteWeb, he spent time as an analyst at Jupiter Research (now part of Forrester), a writer at CNET and a business analyst. He's consulted with and written for dozens of tech companies, including Avocent, Research in Motion, Trend Micro and Veracode. You can follow Cormac on Twitter at @CormacFoster or email him at email@example.com.
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