That seems to be the key figure missing from the Groupon discussion. If they are buying loyal users and customers, their mad-dash growth strategy would seem rational. If their retention is poor, it would seem more like a Ponzi scheme.
You can then look at the model and realize Groupon have been screwing their own customers.
It's a shame as I think the core concept of the business is pretty sound in my book, but I was astounded when I found out the Groupon were taking 50-100% of deals. Just seemed like short term gain for long term loss. I thought that at least they'd be making crazy profits, but it turns out they're making a loss! That was what truly astonished me. They don't even have any physical good, they're selling other people's products for free and they're making a loss. Jeezus, what a royal screwup.
The discussion of the model here this last day has explained how/why they dug themselves into this terrible hole.
If, and tbh it's still an if, groupon unravels, it'll be quite a few years before this model will surface again. Which is a shame as done in moderation it seems a sound one to me and a win for all involved.
(1) repeat customers to the merchants, which they obtain via groupon.
(2) merchants who use groupon and do repeat business with them.
melvinram was talking about (1), mattmanser was talking about (2).
Customers pay you. You pay producer. That makes you a merchant. You get a really, really good price from the producer? And sell it really cheap to your customers? That makes you a discounter.
I know it's 2011 and we live in the future, but it's not a new paradigm, and it hasn't reversed any relationships as we normally think of them. Discounters have existed forever.
Exactly. The semantics is what the words actually mean.
If I say the sky is blue, and you assert the sky has no color, you're not actually contradicting my assertion you're disagreeing about the meaning of the word 'sky'. That's arguing semantics instead of addressing the point.
Isn't the point that it brings customers in the door albeit at a loss? Hopefully, the future value of the customer is more than the loss on the initial deal. I think that's what your getting at with your subsequent sentences. I am not in the retail business so this is just conjecture but it seems to me that it's almost impossible to operate one of these deals at a profit. Basically, you are renting Groupon's sales machine and hopefully you convert a big percentage of the customers the deal brings in. I would also guess few retailers have the ability to present value the customers future revenue correctly and I'm sure Groupon will (if they haven't already) offer tools to measure that and justify the ROI of their deals.
Depending on the number of customers. most, if not all, fast-food restaurants will probably be able to make a profit of a 50% deal. These businesses thrive on large numbers of customers, and their profits scale extremely well. It is also relatively easy to win over new customers if you are more convenient, providing a reasonable opportunity to gain repeat customers (ex: Dominos does a deal and people find it delicious and cheap).
This is a much harder category to map a profit on a Groupon deal. These restaurants have a much more rigid number of customers they can serve on any given night. For a popular restaurant there is to use Groupon as they can already fill the seats and it is not a good value for them. For unpopular restaurants, people will attend but it seems unlikely these will be repeat customers. They are already bargain hunters, and it will be hard to wow these customers enough to return to your restaurant repeatedly.
ONE TIME USE ACTIVITIES
These deals have a similar problem to the sit-down restaurant. These are fun the first time, but repeat visits are much less compelling and it will be challenging to permanently pique the interest of bargain hunters. (ex: Deal on a boat tour)
REPEAT USE ACTIVITIES
Repeat activities seem like a reasonable set market for Groupon. These activities suffer from the same fixed-sized problem, however they stand a reasonable chance of retaining customers. Deals such as training and introductory courses are explicitly designed to attract new customers, and a Groupon top get them in the door seems fairly reasonable.
No matter what activity the Groupon is for, the number of customers who take advantage of the deal is a key component. Economy of scale is true for every business, and the more customers who take advantage of any given deal will directly affect the profit in involved with any given transaction
So far, the results have been mixed, with about 20% of the Groupon users signing up for additional months of shop access. That's better than the other steep discounted deals we've offered.
So, for a business like TechShop, Groupon works really well. We'll be working with them again.
I unsubscribed after I kept getting deals I had zero interest in. It seems once in a while they'll get a "big deal" from a well-known merchant to get people back in - but 99% of the deals I've seen from Groupon are utterly useless.
If groupon don't make profit, nor the merchants it is surely bad for the company and it's investors
A few weeks ago LivingSocial publicly predicted that they'd surpass Groupon by January 2012. They're currently in ~40% of the markets that Groupon reaches and have ~40% of the revenue, so that's an aggressive goal. But (non-Ponzi) Amazon's backing lends it a lot of gravitas.
Even though they operated at a loss while taking investment, they weren't using the investment to pay out older investors. They had a solid plan for generating profit, which Groupon doesn't seem to have.
Supposedly, they've been having a good deal of trouble getting repeat customers, they need to find new shopkeepers each round to make up for the last time. Hence why people are calling it a Ponzi scheme.
How does capturing more merchants drive their costs down, when they have to pay significantly more for each one?
Amazon had the answer of vertically integrating as much of the supply, warehousing, and shipment to drive costs down. Groupon doesn't have any way of driving costs down. That's the problem in my mind.
Scale is THE moat in this arena.
"Yet they haven't shown any way that scaling will reduce costs much."
This is simply Parkinson's Second Law: expenditures rise to match income. Hence the IPO. They need as much cash now as possible in order to scale as fast as possible to build that moat as big as possible to fend off the barbarians.
As the cost of getting more quality customers goes up you'd expect their costs in that area to proportionally decrease. And at that point, if they've defended their dominance in the deal-of-the-day market then they'll become massively profitable else if they're in a decent 2nd place then maybe Microsoft will buy them out for $5 bln more then they're worth, else they'll end up going the circuit city route.
If customers who arrive at a store through Google Offers are more likely to return to the store in the future without a coupon than customers who arrive at a store through Groupon, then stores will prefer Google Offers as a way to obtain loyal customers. And if stores prefer Google Offers to Groupon, then Groupon collapses. From the point of view of the merchants, this is all about getting repeat customers who will make up for the loss that they are taking on the coupons (or, in some cases, betting on customers spending enough in addition to the coupon to make a profit on the one sale).
The moat that Groupon needs isn't scale, it's loyal merchants who will offer coupons on Groupon repeatedly - which will get users to use it. If it can't get that, then it will burn out once it runs out of new merchants.
Who does the client go with? Much like with any other advertising the one that delivers the best value. Value here is defined as # of new customers divided by the lost revenue. This will ultimately be driven by scale -- if Groupon can sell more tickets they can offer a proportionally lower margin and will be more attractive then competing services.
However, you're completely right that clients would go with whichever service offers the best value and best range of coupons, and that scale offers an advantage there. I would add that it is highly unlikely that subscribers would only subscribe to a single service. With the marginal cost of subscribing being so low (just signing up with an email and then looking at the deals when they show up, as I understand it), the increased variety of coupons would almost certainly sway the majority of subscribers. At that point, it would become a fight over which service can find businesses offering the cheapest or most desirable deal, in which scale gives the advantage.
In group on's case it is group on as well as merchants are taking up losses and both believe repeat customers will eventually get them significant ROI. Now you may question whether offering of group on is good enough to make that happen or not. But growth like this needs investment.
Another question is - Can group on defend itself against competitor, given that entry barrier is not big. I mean does group on sign any exclusive agreement with merchants? I dont think so. So there only entry barrier seems to be the large sales force which may not be enough to sustain this kind of growth.
And last think - Group on's acquisitions in emerging markets like India. How much growth can group on expect from it? eg group on has acquired a very small player, sosasta and now trying to turn that around and into the biggest deal site. If groupon can pull this off, they will be bigger much bigger than their current valuations.
Isn't the whole point of an IPO to allow everyone participate, therefore letting the market decide?
If you don't like Groupon's numbers, don't buy the stock. Simple enough.
I'm seeing a lot of: "Think of the poor regular investors when it pops!" sentiment. Are not these investors rational people acting on the same information we all have?
Further there are many parties incented to pump hot stocks so they can profit from the fees and possibly from pump-and-dump: investment banks, current investors, soon-to-be investors, etc. I enjoy hearing both sides of the discussion here, and I do feel bad about people being misinformed and taken advantage of, even if it's ultimately their choice whether they buy in to the bullshit.
The major question: is it bullshit, or not? Sounds like HN is undecided
Company IPOs, people buy or don't buy for tons of reasons, the company executes on their plan, and the market adjusts.
Trying to label a company a ponzi scheme seems like little more than sensationalism to me.
That said, I would never invest in Groupon, simply because I don't use the product ever.
That said, I would never invest in Groupon,
simply because I don't use the product ever.
Another important thing to remember is that Amazon actually figured out its business model later. For a while, it was pretty much just a dot-com that was hemorrhaging cash. I remember reading articles for years predicting that Amazon would go belly up any day. It wasn't until they cut costs and really dialed in their operations that they became a "real" business, and this didn't happen until years after they went public. Although I guess that they did always focus on making customers happy - they just eventually figured out how to do that without going bust.
1. "Will I make money on this offer even after the discount and after Groupon takes their cut?" The answer here is NO for a large majority of merchants, which should lead to question...
2. "Will I attract enough new customers from this deal to account for the lost revenue of operating the deal at a loss?" The answer here for most merchants is "I have no frickin' clue".
Since almost no small business operates at 60-80% margins - the deal discount for most deals plus Groupon's cut is somewhere around this amount - its highly unlikely that the answer to the first question is "yes" for a significant portion of Groupon's merchants. As a result, its my opinion that the eventual success or failure of Groupon is highly depending on whether or not they can do two things:
1. Prove that the answer to the second question is "yes"
2. Prove that the answer to the second question is "yes" more often for them than for their competitors (otherwise they will experience decreasing margins as the space is flooded with competitors)
Don't get me wrong, your point on stagnation isn't totally missed, but do we really still need eternal growth to be "successful?"
And there are some analysts who argue that Amazon's "profits" are fictional, with all kinds of losses disguised as investments and hidden in other financial vehicles.
Recall that even today, Barnes & Noble is simply unable to sell you a book as cheaply as Amazon does, either in store or online, even before sales tax.
On the other hand, the Groupon business model has always been borderline. (I remember my parents buying these coupon books with deals like half-off steak dinner on Tuesdays before 8PM. How many of those companies are still around?) Furthermore, its been tried before on the Internet, although never at this scale. Nobody's quite said it, but it really does seem like the underlying idea is "Facebook has created The New Economy! What possibly could go wrong?"
We know much more now about online business, growth (long and short-term), scaling, value of users (and their cost of acquisition), logistics, all sorts of relevant business benchmarks/analytics, etc. Enough at least that many are concerned about Groupon in a more justifiable context than Amazon circa 2000.
I'm not sure.
1.)Merchants can be certain that Amazon and Google will have the money to pay them. Groupon on the other hand does not have any profits and is burning through all their revenue to grow.
2.)Google, Facebook and Amazon has a larger user base.
3.)Merchants can get a better deal from Groupon's competitors
as they try to lure/woo them from Groupon.
Groupon is on very shaky ground the other players are not. The fact is, in 2000 Amazon did not have a number of very profitable businesses copying them. Amazon could grow, figuratively build a moat without being attacked, Groupon has no such luxury.
"The essence of that critique is that Amazon is just buying customers, and that once it runs out of the money to do so the Ponzi scheme will collapse."
That makes no sense if you ask me.
That may work while the economy is bad, but don't expect merchants to give in so easily once the economy improves. Groupon will have to either take less of a cut from the deal or offer a worse "deal" to the consumer.
Wasn't regarded as a big success though: http://allthingsd.com/20110207/groupon-back-peddles-after-vi...
BTW, I think that's exactly what Groupon's competitors will do and are doing. Heck, all they have to do is steal Groupon's previous merchants now that the trail has been blazed.
Amazon is a great company now but anyone who invested when that article was written wasn't made whole until 2007.