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The Best Groupon Deal Ever: 86.2% Off On GRPN at NASDAQ (statspotting.com)
126 points by npguy on Nov 10, 2012 | hide | past | web | favorite | 72 comments

Every article and comment I read on this topic seems to assert they're doing badly because they're in a business with "no barriers to entry".

Building an email list of millions of people seems like a formidable barrier to entry to me. Particularly so when the CPC cost for anything even vaguely daily-deal related has shot through the roof over the last couple of years and is in the $5-$10 range per click now. It usually takes several - several tens of clicks to convert to an email subscription, depending on landing page.

Not to mention the cost of hiring and organizing thousands of salespeople nationwide.

I don't recall precisely, but I believe that LivingSocial & Groupon are still far bigger by market share than the rest of the players put together... that's not what you get in a space where barriers to entry are low.

This explains why Groupon & LivingSocial have roughly maintained their market shares:


I think the primary reason for their "downfall" was not lack of barriers to entry (there were none at first, but once industry is established, there are as you mentioned), but a much smaller market overall. i.e., the "group coupon" model was very popular for a short time, much more so than its long term steady-state usage.

Sure, it's hard being the first, but after Groupon became popular people started actively looking for other deal sites. It became very easy to throw up a site and gain a lot of traction. I helped one of my clients do just that and they continue to see a lot of traffic to this day.

How exactly did you get that traction? Curious as to what I'm missing... doesn't look so easy to me.

Verticals and localization. I believe there are 50 Groupon clones in Turkey alone and you can find a deal site in every single niche you can think of.

In Malaysia, there are over 80 groupon clones at some time ago.

In Russia too: everyone (and his dog) makes these sites.

I thought their biggest problem was that they do not provide any advantage to the merchants. I have read numerous articles about how the merchants greatly regretted their decision to give groupons but not one about how great it turned out for them.

The email list is the easiest part - just copy Groupon's. By the very nature of the business they publish a list of everyone they deal with. Scrape it.

This is why Groupon isn't worth much though. There are no legal, ethical, or technical reasons for not contacting everyone who uses them and offering them a better deal.

The beautiful thing about e-coupons is that they don't cost anything to issue so there's pretty much no risk to the merchant for trying another company. The only lock-in possible in this industry is customer satisfaction through value, which Groupon is notoriously bad at.

Is this one of those Groupon deals you only buy once because either, you realize it wasn't worth it, or a few weeks later its on again even cheaper?

Deals are in theory the most attractive segment of a given market. It would be highly enlightening to know as to why Groupon is running at such a loss. The way I see it - Deals are a win for the customer and the merchant (and Groupon too). If that's the case, then why is Groupon struggling so much? Is there a flaw in their strategy that someone can point out? Or, is it so that the Deals space is overlooked by the merchants?? An in-depth analysis would greatly help everyone.

I think it comes down to a few factors:

1) Their sales and marketing expenses are incredibly high.

2) I think the kind of deals Groupon does only work for some merchants - those with high margins, new businesses, and those that are really good at upselling once the customer gets in the door. There have been a lot of highly-publicized accounts of merchants who felt like Groupon deals ended up being very bad for them. The big hit the merchant takes sort of limits the amount and frequency of repeat deals.

3) A ton of competitors have sprung up, since there is a fairly low barrier to entry. In addition to some of the nationwide competitors, there are a lot of local companies like newspapers and tv stations that already have good sales networks and have been copying the Groupon model. This increases Groupon's sales costs and probably squeezes their margins since they may have to offer the merchant a bigger cut to compete.

I think it's a good concept and by being the most well-known business in the space they have a pretty significant advantage, but I also think it is a challenging market to be in and they are probably still overvalued.

"1) Their sales and marketing expenses are incredibly high."

I see this point being made in pretty much every Groupon related analysis. Why is it so expensive, and why isn't anything being done to cut down on these costs? I'd think that once customers have been acquired, the cost of maintaining them is a fraction of the acquisition cost; so the outlays on sales and marketing should decrease (from my admittedly layman perspective.)

I think that Groupon's customer churn has always been huge, one of the reasons many investors though it was not a good bet.

That points to a bigger flaw in the Groupon model, namely that most businesses who try a promotion end up coming out disappointed. There are a number of reasons for that - bad planning on the retailer's end, excessive promotion fees for Groupon, and so on.

Until Groupon solves this problem, I don't see an optimistic future. Building a product your consumers loves leads to repeat users and growth. Building something retails hate leads to Groupon.

Also, LivingSocial has turned out to be not nearly as valuable as Amazon thought. I don't know if that means this is a terrible business, but it certainly implies that it's a very tough one.

It's strange to see both 1 and 3. If the expenses are inherently incredibly high, then there couldn't be a low barrier to entry. Why are groupon's expenses so high, then?

It's expensive to setup and run a car factory, but while it's expensive to run massive call centers they are fairly cheap to setup. Thus, low barrier to entry.

1) Newly funded companies have fresh pots of capital to invest in online marketing. The auction dynamic of most online marketing tools means a new entrant drives prices up for everyone. 2) Other new entrants have local advantages (existing salesforce, merchant relationships) which are harder for Groupon to counter. 3) New entrants often heavily discount in their launch phase, further hurting Groupon competitively.

Mismanagement can cause 1 as well.

Frankly, I think ya'll hit the nail on the side, but not collectively on the head. Take a little from column A, little from column B, and we can see the real problems with Groupon. As one commenter said, they only work for certain merchants with high markup. This is why there's so many Chiropracters and massagers on these deal sites. Trouble is, all those services are once a year kinda things. Thus, you get one massage on Groupon or Amazon or whatever, and then next week they;re hawking another massage, are you gonna get it?

Combine this with the fact that Groupon is reknowned for being slow to pay merchants. That's fine if yer paying back Wal-Mart, who has lots of money, but for small businesses that use these services, 3 months waiting for payment can be crippling. Read about Groupon's payment policies. They're assholes. Slow assholes.

And finally, none of this was ever proprietary or complex. Groupon had no firewalls or sandbags against competitors, and frankly, the way it treats its client businesses, it was bound to be fucked eventually.

My folks have a boutique ad firm in a small town. For the past year, they've gotten calls EVERY DAY from Groupon-like services, or even Groupon aggregators who act as middlemen for these services. It's a hugely growing market but never once has Groupon been at the table for one of these calls. They're being eaten alive.

Thank you for your valuable insight. All of your points are pretty valid :)

They seem to have a high acquisition cost for deals. Many merchants have already been burnt by them - they often make a hefty loss, so acquisitions get harder. You could also argue that most of the merchants using Groupon are already businesses on the downturn, so they will only use Groupon once and not see any gain from it since their business was unpopular to begin with, and the only way customers would be somewhat satisfied with the experience is at a price discount the business simply cannot survive on.

Perhaps Groupon could do some better segmentation of their users. They must have quite a lot signed up, so why not offer many more deals overall, and each user gets the three deals he is most likely to buy. Also, you take a much smaller portion of the revenue so the business can survive. This way, Groupon would earn more through increased volume (it is kind of unprofessional to send a customer a similar deal six times a month - if I didn't buy it before why waste your reach to show it again to me?) In essence they would be a highly-tailored ad agency getting a small commission on a huge number of sales.

I think part of it is that groupon got started at a time of peak desperation for retailers. They were desperate to try anything. They may still be desperate, but wiser.

>They seem to have a high acquisition cost for deals.

Thanks for the reply, I kind of agree with you on that one.

> Deals are a win for the customer and the merchant (and Groupon too).

Not necessarily, it only would work if you can get repeat customers. There are many groupons that my wife sees that she would never have done if there wasn't a significant discount. These "cherry pickers" are what cause companies to lose money and make a Groupon not worth it. There was a blog/article by a woman who owned a Chicago yoga studio who was told she should do a Groupon. You can see her point of view at http://blog.tulayoga.net/2011/08/why-i-wont-do-groupon.html

The loss is tiny and indicates profitability is in sight. GroupOn currently has a market cap of about 1.8B, which seems reasonable for a company that size, though perhaps still a bit on the high side given how low their margins are likely to remain.

They went through their childhood years thinking they were going to take over the world, and not too long ago Google offered $6 billion for those dreams. No wonder investors still had some hopes that this was something more than an ordinary business of an ordinary scale. It's not.

If anyone would like to keep dreaming, AMZN was running over $300 million losses on a ~$600 million revenue every single quarter around the year 2000.

Amazon is still smoke and mirrors. E.g. Current P/E is -- I am not making this up -- slightly under 3000.

But, like Milo Minderbinder, they'll make it up on volume.

That P/E is somewhat misleading, because it is heavily skewed by the loss they reported in September (interestingly, a big chunk of that loss can be blamed on a huge writedown of their investment in LivingSocial). Prior to that, their P/E was in the 200-300 range - still probably kind of high, but much more reasonable than the figure you quote.

there's nothing reasonable about a 200 PE unless you think their earnings are going to rebound significantly.

think about it - that means that it would take 200 years of earnings to be worth their market cap (not factoring in uncertainty and all that)

300 is still 10x reasonable.

Don't groupon deals actually hurt a lot of small merchants?

I remember reading some articles back in the day about the profit margins for merchants participating in groupon 50%+ off schemes (i.e. slim to negative) and that people would turn generally up to take advantage of offers but not become repeat customers.

I've used Groupon many times to get deals. I know the majority of the costs are in acquiring new merchants and that's probably why they're hurting so bad. Why hasn't someone setup a site that allows merchants to do deals without the need for a huge sales team? If merchants can login and just do a deal, wouldn't that take away a lot of Groupon overhead is spent on?

They did, years ago. No one used it.

I think there's a few reasons:

1. Groupons have to be sold over the phone to merchants in order for Groupon to get the margins and volume it wants.

2. Local merchants just don't have a lot of time to spend learning software and monitoring stats. They can talk to a sales rep over the phone more easily than set up a deal themselves.

Another problem is controlling the quality of deals that merchants add. The whole selling point of Groupon (and similar "deal" services that have sprung up) is that they aren't just the run of the mill coupons you get in the mail every week - they are generally big, interesting deals.

If Groupon sent you 100 deals every day that were "buy one get one free" or "$1.00 off" or whatever, it wouldn't be very interesting and they'd likely lose a lot of subscribers.

So, policing the quality of deals and working with merchants to make sure they are offering a deal that fits with what you are doing is going to be a significant source of overhead no matter what.

sounds like they could use or try similar logic to HN karma, voting etc... to automate some of this... imagine if each purchase of a coupon was a vote and the karma collected by a vendor gave them more freedom in posting new deals...

not bad...

...the self-serving issue is the big issue though. Local merchants at this point in time still don't do web-based self-serve solutions much or at all. Maybe that will change as the world becomes internet-savvier in general, but it's where we are right now.

Requiring a human employee for individual sales works for Best Buy and McDonalds, where labor is cheap. I wouldn't think that scales to higher cost sales professionals.

I would assume that Groupon could build something like that tomorrow, if they really wanted to. However, the overhead isn't necessarily in the process of creating a deal - it is in finding local merchants and convincing them to give you a big cut of already-reduced prices on things in return for more customers.

Sales and customer acquisition are usually a lot harder (and more expensive) than throwing up a website and hoping customers find it.

They don't necessarily have to have a sales team to convince merchants to put up deals. Maybe advertising can do that. Maybe they can outsource the sales people. Since all they're doing is convincing merchants it's a great idea, it doesn't matter where the call comes from as long as it's representing Groupon.

Also, they can do things like yelp does with stickers at merchants places. A lot of places have the "Find us on Yelp" stickers and I doubt Yelp went out to find & convince them to do that.

I haven't spent too much time thinking how I could make Groupon better but I don't think it's really that far out there to find a better/cheaper way of acquiring customers.

I would assume that Groupon has thought of most of these ideas, probably years ago, but let's not underestimate the power of the hype cycle. If you are literally the hottest startup in Silicon Valley as they were a couple years ago, the last thing you do is anything that could jeopardize growth. Now that they are public it's a very difficult retreat back to a leaner, more innovative mindset.

I had an idea of Reddit style local deals.

Merchant submits deal to their local section, when people buy the deal it would rise in the section.

better yet, reddit + kickstarter

you don't have to buy the deal to make it rise, just pledge to it; then when a minimum pledges are made it goes frontpage where the rank is determined by further buys

Clever title. I will write a note to myself that if I am ever offered ~$6 billion for a startup I create, that I will happily take the offer.

Poor bayesian thinking. Facebook was probably offered similar amounts. And Google. If you're offered $6b for a startup there's probably a 50% shot you're worth much more.

Dude... $6 billion. How much more can you possibly need?

If that were the case you'd accept $10 million. The thing is you don't need it, but your VCs do. And if your startup is worth $6 billion, you've probably taken enough off the table that you don't even need that. So at that point why not just maximize?


There's a lot of speculation that the deal fell apart because Groupon's business was rotten deep down, and that Google either had already realized this or was about to have to be told.

I suspect with the accounting irregularities and the stuff I see lately as deals - laser eye surgery? toenail fungus removal? - that the $6B would never have gone through.

The laser eye surgery I received through a deal was first rate. I felt I got a steal for the price I paid and the excellent care.

The merchant talked me out of purchasing through Groupon when I called for details and honored the coupon price after I had the free screening. Everyone 'won' but Groupon

That's interesting since they doubled there money not paying Groupon, but still getting the customer.

It was an interesting sales pitch - they said something like 'it can take awhile to get the money refunded from groupon (1 month) if you don't pass the screening, but it is very unlikely you are not a candidate - you can pay through Groupon and get full refund if things don't work out, or you can pay at the front desk'.

I chose the front desk as easier all the way around. I was shocked that the dollar amount I was quoted included tax (I'm in California).

As for cost/profit - it sounds like base cost in the facility is around $300 / eye, as this is what I was quoted as a 'redo' if it wasn't working well at the 6 month period. so $1800 - $600 = alot of 'profit' from a customer. the overhead for groupon rate seems negligible compared to the cost of acquiring new customers.

The only thing worse than Groupon's business practices with their merchants are the Groupon customers themselves.

Groupon coerces local businesses into signing up with ridiculously high discount rates with promises that it's "getting people in the door" -- the gut reaction of the business is to sign up and then maybe some of those people will be repeat customers!

Except most Groupon customers only signed up because it was crazy cheap. A bouquet of a dozen roses for $10? They'll buy that. But a regular price bouquet at $40? Nah. Very few will be repeat customers, and likely not enough to cover the loss that Groupon's high discount cost the merchant. Also, Groupon takes anywhere from 40-60% of the deal, plus a "credit card processing fee" that's usually 3-4%.

Also, a big mistake (in my experience with Groupon) is that they do not have an API for merchants to use. They should have allowed point of sale developers to integrate with the Groupon redemption system. As it is now, the whole redemption system can be a royal pain for a small business to account for correctly in their POS system.

I agree Groupon is a terrible deal for many (most?) businesses, but it's not coercion. Nobody held a gun to these businesses' head and forced them to sign up, nor threatened them, nor anything really.

They sold these merchants a fairy tale about repeat customers - a too-good-to-be-true fairy tale that merchants failed to verify on their own, and got burned.

Now sufficient people have been burned that many merchants no longer take Groupon seriously. That's fine, and that's the system working as intended.

> "They should have allowed point of sale developers to integrate with the Groupon redemption system."

This is much, much bigger thing than you suggest. For one thing, most "point of sale systems" at small businesses are cash registers. They don't get firmware updates, much less an internet connection and programmability.

For point of sale systems of higher sophistication (a restaurant, say), these systems are highly custom, closed as all hell, and integrating anything into them without the express an dedicated intent of the original vendor is pretty much impossible.

This is also why all attempts to disrupt the restaurant reservation/management space have been so far unsuccessful. Integrating web-age software into extreme legacy meatspace systems is pretty much the hardest problem that could be presented to a consumer internet company.

Groupon can pull every engineer they have into this, chew on it for 2 years, and barely make a dent. Hilariously enough, the feature you're talking about is bigger than most companies.

That's true, I used the wrong word. Groupon sales reps are dishonest, though. We have roughly 80 offices in a bunch of states, and we have a national rep with Groupon who managed all of our standardized deals. However, local reps would still call each local office and try to sell them, and would quote sales rates and repeat customer rates to offices -- numbers that Groupon had no way to obtain, and were so far off the mark it bordered on being hilarious.

Another factor is that many businesses that try these steep discount programs is that they are already on the rocks.

Another factor that bites merchants: refunds. Supposedly, when you mark a Groupon code as "redeemed", Groupon won't refund the customer's money without contacting you first. However, they sometimes still refund the money and try to deduct it from your final check (which, for most merchants IIRC, is 60 days after the close of the deal). This causes a lot of headaches for merchants that have hard costs with their deals (product, inventory, etc). Sadly, some number of Groupon customers request refunds even after redeeming their deal. They are stealing, basically, and the merchant is the one that suffers.

> api stuff (couldn't find a good quote to pull from your awesome points, sorry!)

That's true for a lot of those markets you mentioned, definitely. A full-fledged API would likely be difficult. There are other businesses that would benefit, though, particularly some franchise units that are starting to use web-based POS systems (per the last International Franchise Assoc conference I attended).

If you were a local franchisee of a tanning salon, and your franchisor-provided POS were Groupon-compatible, I'd think you would be more apt to sign up.

The merchant console for Groupon is actually very basic, there's not a lot to it. You sign in, view your deals, and can mark individual Groupon ID#s as "redeemed". We wrote some terrible code to mock it into an API for our franchisor system, using screen scraping and other monstrosities I am NOT proud of. Do not open groupon.py.

Previous threads on Groupon have suggested that the $6 billion dollar Google deal would have never gone through.

This title is pure genius! Enough said.

Thanks ! Glad a lot of people liked the title !

I can't stop laughing at that great title. Seriously.

I'm not a merchant, and I've never used a Groupon deal as a consumer. I say that to show how disconnected I am from Groupon. And yet, I hear that merchants often have trouble collecting whatever they're supposed to get from Groupon; they're sort of the PayPal of deals. That rep must not be good for sales.

Groupon or rather GRPN might be under a lot of pressure now, because their acquisition costs for new deals is (still) very high and they face tremendous competition all over the globe (esp. from more versed local competitors - you really need to know a local market to create good deals). anyway if groupon stays innovative (for example in terms of their deals creation - eg. using an automated process, rather than cold calling OR creating significant social buzz around a lot of their deals) then I believe in the long term they have one of the most sustainable businesses out there (although with rather low margins)

Note: Goods may be damaged

And .. No money back :-)

Why do people insist on correlating poor IPO performance with a company that somehow messed up? We keep seeing this with Zynga and Facebook too. These companies didn't mess up, those that invested in the stock did.

I'm not saying Groupon is doing well, but to suggest that they should have just sold to Google here is wrong; they still got their payout (the IPO) and they still have their company to boot.

My experience with Groupon deals is that they are not targeted to a small enough geographic region.

People might be enticed to frequent a merchant outside of their normal shopping area to take advantage of a deep discount, but very few will permanently expand their shopping area.

I suspect most merchants don't see a permanent increase in repeat customers.

Great title. Seriously though what type of barriers do you think they could have put up? Exclusive deals?

They must have gone lighter on the margins with the merchants and locked them in. One example I can think of, is to have merchants accept Groupon coins, like Bitcoins, and make people gain Groupon coins elsewhere.

The Schadenfraude is strong in this one.

The title of this article is amazing.

Thanks! Like I mentioned before, I am glad a lot of people liked the title!

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