
Groupon has no viable business model - bretthellman
http://blogs.hbr.org/cs/2011/08/groupon_doomed_by_too_much_of.html#.TktWMsm2TwY.facebook
======
coffeemug
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?

~~~
jellicle
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...

~~~
pbreit
Comparing Groupon to Madoff is a bit of a stretch.

~~~
pbreit
Why the down vote?

------
jellicle
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
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
> 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.

~~~
tptacek
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.

------
coenhyde
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
_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
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.

------
spanktheuser
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.

~~~
mseebach
> 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.

~~~
barrkel
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.

~~~
stonemetal
Amazon benefits from network effects by hosting reviews. When I am thinking
about buying something I often go to Amazon first because of the reviews.

------
eggbrain
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.

~~~
phereford
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 :).

~~~
pbreit
> _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.

~~~
phereford
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.

Just my .02

~~~
pbreit
25 cents to get someone through the door is the best deal on the planet.

~~~
mgkimsal
It _really_ depends on who that 'someone' is.

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".

~~~
pbreit
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.

~~~
mgkimsal
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.

~~~
phereford
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).

------
nsimplex
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.

------
pbreit
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.

------
badalyan
_But as far as an investment goes, Groupon is looking about as profitable as
giving away your merchandise for 90% off_

------
acak
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
Or maybe Groupon declined the offer because they knew they couldn't scam
Google once they started their due diligence.

~~~
jimmywanger
[http://li82-18.members.linode.com/google-deal-said-
have-25-b...](http://li82-18.members.linode.com/google-deal-said-
have-25-billion-reverse-breakup-fee)

That breakup fee would have been paid right after due diligence.

~~~
suking
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
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
Scared of due diligence ya think?

------
bhartzer
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
_"Their business model is profitable"_

Dwight Schrute: False, they are losing $ [unless you don't count marketing
;-)].

~~~
iqster
I don't get the Office reference. Do enlighten me please ...

------
mathattack
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
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.

------
gfodor
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.

------
URSpider94
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.

------
hop
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.

~~~
recoiledsnake
> 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
It was in return for turning down the $6b Google offer.

~~~
recoiledsnake
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
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.

------
arturadib
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
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
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.

------
daxmiller
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.

------
swah
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
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.

------
desireco42
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.

------
arsh
I think Steven Blank was right about Customer Development methodology.

------
ck2
Neither does the yellowpages and they make a small fortune still.

