20 ms·

Groupon has no viable business model

191 points by bretthellman 15y ago

badalyan 15y ago
But as far as an investment goes, Groupon is looking about as profitable as giving away your merchandise for 90% off
bhartzer 15y ago
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.
- suking 15y ago
  "Their business model is profitable" Dwight Schrute: False, they are losing $ [unless you don't count marketing ;-)].
  - iqster 15y ago
    I don't get the Office reference. Do enlighten me please ...
gfodor 15y ago
Despite the fact the author is probably right, his lack of discussing a little company called Amazon makes it hard to take him too seriously.
eggbrain 15y ago
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.
- ceejayoz 15y ago
  > 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.
  - eggbrain 15y ago
    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.
    - yid 15y ago
      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.
      - mseebach 15y ago
        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.
        18pfsmt 15y ago
        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.
acak 15y ago
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.
- fragsworth 15y ago
  Or maybe Groupon declined the offer because they knew they couldn't scam Google once they started their due diligence.
  - jimmywanger 15y ago
    http://li82-18.members.linode.com/google-deal-said-have-25-billion-reverse-breakup-fee http://li82-18.members.linode.com/google-deal-said-have-25-b... That breakup fee would have been paid right after due diligence.
    - suking 15y ago
      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.
      - jimmywanger 15y ago
        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.
        suking 15y ago
        Scared of due diligence ya think?
- pbreit 15y ago
arturadib 15y ago
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. Maybe that's what Groupon is doing too.
- gallerytungsten 15y ago
  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.
  - jerf 15y ago
    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.
hop 15y ago
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.
- yid 15y ago
  You seem to disagree with the author, but ask yourself if they should still be posting a hefty loss with those numbers.
- recoiledsnake 15y ago
  > 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?
  - pbreit 15y ago
    It was in return for turning down the $6b Google offer.
    - recoiledsnake 15y ago
      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?
      - pbreit 15y ago
        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.
nsimplex 15y ago
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... Edit: formatting.
spanktheuser 15y ago
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.
- nhangen 15y ago
  Well, to be fair, I'm more apt to buy something after reading positive Amazon reviews, so in that sense, the network effect is important.
- mseebach 15y ago
  > 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.
  - 15y ago
swah 15y ago
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!"...
- PotatoEngineer 15y ago
  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.
coenhyde 15y ago
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.
- OpenAmazing 15y ago
  let the businesses come to them 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.
  - a5seo 15y ago
    this is dead-on... local = massive sales expense. 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.
  - coenhyde 15y ago
    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.
  - 15y ago
arsh 15y ago
I think Steven Blank was right about Customer Development methodology.
jellicle 15y ago
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.
- tptacek 15y ago
  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.
  - jellicle 15y ago
    > 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.
pbreit 15y ago
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.
coffeemug 15y ago
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?
- deleted 15y ago
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- davedx 15y ago
  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.
- danilocampos 15y ago
  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.
- cletus 15y ago
  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. [1]: http://news.ycombinator.com/item?id=2870186 http://news.ycombinator.com/item?id=2870186
desireco42 15y ago
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.
URSpider94 15y ago
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.
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mathattack 15y ago
Here's where I struggle... 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.
- lorax 15y ago
  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.
daxmiller 15y ago
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.
ck2 15y ago
Neither does the yellowpages and they make a small fortune still.

191 points by bretthellman 15y ago

But as far as an investment goes, Groupon is looking about as profitable as giving away your merchandise for 90% off

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.

suking 15y ago
"Their business model is profitable" Dwight Schrute: False, they are losing $ [unless you don't count marketing ;-)].
- iqster 15y ago
  I don't get the Office reference. Do enlighten me please ...

gfodor 15y ago

Despite the fact the author is probably right, his lack of discussing a little company called Amazon makes it hard to take him too seriously.

eggbrain 15y ago

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.

ceejayoz 15y ago
> 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.
- eggbrain 15y ago
  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.
  - yid 15y ago
    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.
    - mseebach 15y ago
      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.
      - 18pfsmt 15y ago
        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.

acak 15y ago

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.

fragsworth 15y ago
Or maybe Groupon declined the offer because they knew they couldn't scam Google once they started their due diligence.
- jimmywanger 15y ago
  http://li82-18.members.linode.com/google-deal-said-have-25-billion-reverse-breakup-fee http://li82-18.members.linode.com/google-deal-said-have-25-b... That breakup fee would have been paid right after due diligence.
  - suking 15y ago
    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.
    - jimmywanger 15y ago
      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.
      - suking 15y ago
        Scared of due diligence ya think?
pbreit 15y ago

arturadib 15y ago

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. Maybe that's what Groupon is doing too.

gallerytungsten 15y ago
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.
- jerf 15y ago
  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.

hop 15y ago

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.

yid 15y ago
You seem to disagree with the author, but ask yourself if they should still be posting a hefty loss with those numbers.
recoiledsnake 15y ago
> 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?
- pbreit 15y ago
  It was in return for turning down the $6b Google offer.
  - recoiledsnake 15y ago
    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?
    - pbreit 15y ago
      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.

nsimplex 15y ago

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... Edit: formatting.

spanktheuser 15y ago

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.

nhangen 15y ago
Well, to be fair, I'm more apt to buy something after reading positive Amazon reviews, so in that sense, the network effect is important.
mseebach 15y ago
> 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.
- 15y ago

swah 15y ago

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!"...

PotatoEngineer 15y ago
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.

coenhyde 15y ago

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.

OpenAmazing 15y ago
let the businesses come to them 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.
- a5seo 15y ago
  this is dead-on... local = massive sales expense. 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.
- coenhyde 15y ago
  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.
- 15y ago

arsh 15y ago

I think Steven Blank was right about Customer Development methodology.

jellicle 15y ago

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.

tptacek 15y ago
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.
- jellicle 15y ago
  > 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.

pbreit 15y ago

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.

coffeemug 15y ago

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?

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davedx 15y ago
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.
danilocampos 15y ago
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.
cletus 15y ago
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. [1]: http://news.ycombinator.com/item?id=2870186 http://news.ycombinator.com/item?id=2870186

desireco42 15y ago

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.

URSpider94 15y ago

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.

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mathattack 15y ago

Here's where I struggle... 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.

lorax 15y ago
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.

daxmiller 15y ago

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.

ck2 15y ago

Neither does the yellowpages and they make a small fortune still.