Archive for the ‘business strategy’ category

Is Groupon Overrated?

January 2nd, 2011

I realize that Groupon is officially the fastest-growing company of all time, that its members  (of which I am one) are raving fans, that its founders are scarily bright and innovative people, that Google reportedly recently offered to buy the company for $6 billion, and that Groupon’s owners felt that price was well below what the company is worth.  I also realize that I will probably look like a fool for saying the following:

I don’t think Groupon’s success is sustainable.

There–I said it.  And I might well be the only person on the planet to have said it.  But, in the event that you haven’t dismissed me as a small-thinking, shortsighted Luddite and surfed to a more coherent blog, here’s my reasoning:  I just don’t think that Groupon’s business model makes financial sense for enough of the businesses that use their services.

Most of these businesses offer savings of approximately 50% to Groupon members; whatever price the member pays, Groupon and the business split the proceeds 50/50.  Thus, if the product or service normally sells for $20, the member pays only $10 and Groupon and the business each take home $5.  In other words, the business’s take is one-quarter of what it normally makes.  If their gross margin is 50% (meaning that the cost of the product or service is $10), they’ve lost $5 on each and every sale.

The theory, of course, is that the business will gain so much exposure to new customers from the Groupon promotion that they’ll generate enough incremental profit in the long term to more than cover their promotional losses.  But is that theory valid?  If you try a new product or service, how likely are you to buy it again at double the price you just paid for it? I’d say the odds are pretty low, unless the product or service is dramatically superior to other options.  And let’s face it; most industries are populated by “me-too” competitors that rely more on low pricing than superior performance to induce customers to choose them over all other options.  As soon as a lower-priced alternative comes along, their fickle customer becomes a former customer.

Thus, other than for a truly one-of-a-kind product or service that will knock the socks off the people who try it, it’s hard for me to imagine that a Groupon promotion will lead to enough future sales at full price to offset the losses generated by all the sales done at the bargain-basement Groupon price.  If I’m right, the value of Groupon is a fraction of what virtually everyone else seems to think.

Of course, given that Groupon’s business model was surely vetted by the folks at Google–not to mention Groupon’s founders, investors and managers–it’s very possible that I’m missing something.  If anyone knows what that is, I’d love to hear from you.

Until then, consider me the original Groupon un-groupie.