Groupon: the fastest growing company ever!
In late 2010, Andrew Mason, Groupon CEO, covered the title page of Forbes and was said to be building “the fastest-growing company in Web history”
Just a few weeks earlier, it had been reported that Groupon rejected a $6 billion takeover offer from Google. A year later, Groupon had its IPO surging to a valuation of $16b. But after a promising start, things went downhill fast.
Following years of disappointment that saw the share price drop, they have embarked on a strategic repositioning.
With a new CEO in place, they are making big bets on what they think are the best ideas right now.
And that is a great opportunity for us to find out what these ideas are.
Why does it matter?
Groupon uses an ecommerce platform business model and is positioned as what I call a demand aggregator, similar to Yelp and others. Many of my readers contact me with their ideas for a specific ecommerce platform with a quirky spin or one that is targeting a specific niche.
Should we be discouraged by Groupon’s fortunes? Absolutely not! Look at their great user numbers (Q2 2019 Factsheet (pdf)):
- 200 billion app downloads
- 46 million active users and
- Over 1.5 billion sold Groupons
What does Groupon stand for?
Best known as a daily deals platform:
Groupon is a local e-commerce marketplace and the leading daily deal site worldwide, connecting millions of subscribers around the world with merchants by offering goods and services at a discount. Groupon FAQs
And transforming to a daily habit local commerce platform:
“Groupon (NASDAQ: GRPN) is building the daily habit in local commerce, offering a vast mobile and online marketplace where people discover and save on amazing things to do, see, eat and buy. By enabling real-time commerce across local businesses, travel destinations, consumer products and live events, shoppers can find the best a city has to offer. Groupon is redefining how small businesses attract and retain customers by providing them with customizable and scalable marketing tools and services to profitably grow their businesses.” Groupon, About
Business model canvas
We are going through the canvas in a way that aids the best understanding of their business model starting with how they make money.
On a high level, Groupon distinguishes between two types of revenue: (1) service revenue, (2) product revenue.
(1) Service revenue
Service revenue is primarily earned from commissions on transactions by:
- Selling goods or services on behalf of third-party merchants (typically through the purchase of a voucher)
- Retail purchases made using digital coupons accessed through Groupon (card-linked offers)
- Advertising revenues for traffic generated through the Groupon site or emails
(2) Product revenue (goods)
- Revenues from direct sales of merchandise inventory through the goods category
With this, you know that there are two types of products/goods: those sourced and owned by Groupon and those where Groupon is the intermediary. Goods sourced and owned by Groupon are also warehoused by them. Fulfilment is managed by them but delivered by 3rd parties.
We have identified a number of business models here:
- Platform business model
- Advertising model (pay-per-display, CPM and/or pay-per-click, CPC)
- Ecommerce retail model
You can spot the various business models and segments on Groupon’s website.
Revenue by segment
Now that we know what they make money with, let’s gain some insights into the value proposition. As always with platform business models, we need to think about the value proposition to all sides of our multi-sided platform.
Value propositions to consumers
- Savings and deals
- Discovery of new things
- New choices
- Inspiration to try new things (editorial and email) and incentivising this with lower prices
- Risk reduction to try new things due to the review system and Groupon as an intermediary
- Ease of transactions (e.g. sourcing of vouchers and payment)
- Local discovery on-the-go (via app): new things to see, eat, buy and experience
- Price comparison
- Ambition: to become the app for daily local commerce habits
Value proposition to merchants
- Additional revenue
- Marketing with no upfront costs: the ability to offer discounts at no upfront cost (compared to marketing via Facebook, Google where payment occurs based on impression or clicks of which only few lead to sales). With Groupon, there are no costs without revenues
- Additional distribution channel to the customer, esp for discounts
- Additional promotional channel to attract new customers
- Word-of-mouth promotion (as in person-to-person but also via recommendation/rating on Groupon and social media accounts)
- Prospect of cross- and up-sell once the customer takes up the discounted deal (in particular with in-store offers)
- Engaging copy: ads written by Groupon-employed copywriters and direct channel to the customer (via email / notifications)
- A range of marketing solutions (merchant products) and tools
The benefits (value proposition) that these tools promise to the merchants:
- Booking tool to help utilise business assets better (esp services, e.g. restaurants, spa, massage, beauty, repair, health providers, etc)
- With certain bookable offers the risk of no-show shifts from service provider to user due to upfront payment
- Creation of representative business pages that can be discovered by Groupon users
- Campaign management / tracking tools: Trackability (visibility of which customers have come via Groupon whereas this is much more difficult to find out for other ad channels) and insights into geo-demographic segments
- Ability to scale offer/promotion up or down (e.g. more offers on low days/day-of-times and less on peak days/hours. E.g. a restaurant may offer discounted deals to Groupon customers on weekdays and none on Fridays/weekend days)
- Insights in terms of customer feedback/ratings
- Interaction with customers – responding to feedback
- Simple forms of inventory management and integration
- API integration for other ecommerce tools to connect to (e.g. SellerCloud, Sello)
Note, that the various competitors offer similar types of products that are often more powerful. However, for local merchants, the simple forms that Groupon offers may be more suitable as to not add complexity to often quite simple businesses who are not exactly keen to provide training to often casual support staff.
Risks and limitations for merchants
The value propositions are compelling. However, it doesn’t come without risks for merchants:
- On the flip side to no upfront costs are typically slim profits on the deals if any. Businesses have to significantly discount their offering to advertise on Groupon. On top, they need to pay their dues to Groupon for each deal taken up. This article to small businesses describes the potential pitfalls along with some tips
- The use of loss leaders may be significant (numbers are not known). But this may not work for all merchants and/or only for a short period of time. If it doesn’t lead to repeat customers, many of the deals may effectively be a loss for the merchant
- One-off bargain hunters that don’t take up cross or upsell offers
- No repeat purchase or very low lifetime value customers
- Risk of cannibalisation of own offerings or users
Groupon is very aware of the downside risks to the merchants and addresses these:
“46.2 million active users, $35 billion saved by consumers in North America 81% of customers say they are likely to return to the merchant again” Groupon, Q2 ‘19 fact sheet
This is one of the most significant topics which I will cover in more depth later.
Value proposition to both
- Card-linked vouchers: A voucherless form of purchasing discounts through Groupon and payment (and cash back) at the merchant rather than upfront payment
- Loyalty card-linked offers: rewarding consumers with 5-10% cash back / discounts for repeat visits
- Aiming to initiate a virtuous cycle that leads to better communities
- Social interaction and exchange
- Stimulation of local economies
Risk to Groupon
- Merchant/user will build direct relationships once Groupon has initiated contact (cutting out the middleman). This could probably happen through additional in-store loyalty discounts and/or after finishing off the Groupon campaign. It would be the ultimate goal of merchants to achieve this. Groupon’s loyalty card-linked offers are trying to find a win-win-win
- One-off (or sporadic) users rather than habitual and loyal users
Many of the above fall into what economists call reduction of search costs and transaction costs which I will cover in-depth later.
- Local businesses are the most important partners. It was always Groupon’s ambition to be the “operating system of local commerce”. The direct sales of goods was the fastest growing segment (in terms of revenues only) and maybe the focus on local businesses got lost along the way. But now it is the most important priority in their transformation
- National brands: Groupon partners with many retailing partners (similar to the Amazon example below) to offer codes & promotions
- Search engines and social media platforms: Google and Facebook are partners and competitors. Google is one of the main digital ad channels but also a competitor who has captured a lot of market share on local search. Groupon uses Facebook somewhat less, but they too are a go-to place for people and for local businesses for advertising
- Payment providers: esp those credit card companies that collaborate on the card-linked offers which is a new technology in the online-2-offline space for providing and redeeming rewards. It gets rid of QR codes (or, worse, printout tickets/vouchers) and credits back the discount/rewards directly on the customer’s card at payment
- Affiliate network: website owners can become affiliates and promote Groupon deals on their sites via banner ads and links and earn up to 10% commission on sales. There are various tools to support these affiliates
- Acquisitions: Groupon has taken over many companies (here a listing in Chrunchbase and here on Wikipedia). They fall mainly into the categories competitor or tech companies. It is, of course, very difficult to try and acquire (all) competition in a low entry barrier industry
- Tech companies: that build interfaces (see above) or whos technology Groupon is using against licensing fees (they have recently lost a patent case against IBM having to pay $50m)
- Regulators: Like many start-ups, Groupon too had their share of criticism and legal cases. In 2012, they settled a class action around voucher expiry dates (which was 12-18 months). In the settlement, they exceeded Federal law requirements of 5 years for giftcards and offered an unlimited lifetime guarantee
- Investors: investor’s assessment of the company plays a considerable role. It can lead to capital injection which last happened in 2016
- Lobby groups: discussions on political/legislation matters can significantly influence the trajectory of tech businesses. Groupon is a member of The Internet Association among a few dozen companies. Their current focus is certainly in other areas. But for other ecommerce platforms, like Amazon, lobbying is one of the current focus areas
Groupon has coupons for many large brands including Amazon on selected promo codes. Some are available for longer periods other are shorter campaigns. Similar pages exist for a whole range of large brands. Many of these have are Groupon’s competitors, like Amazon.
- Growing the marketplace through new customers, merchants and deals
- Adding new partnerships to offer new deals
- With local merchants
- With national brands (example in Q2 ‘19: AMC Theatres being the largest global cinema chain; GasBuddy, a tech company tracking lowest fuel prices)
- And anything in between
- Making sure there is a critical mass/density of deals per location/target market
- Sales to merchants / brands and consumers and crafting deals in collaboration with merchants
- Marketing to get new consumers onboard (it is important to have a critical density of deals and merchants for each of the targeted markets in order to reach marketing economies of scale)
- Engaging customers and stimulating consumption (i.e. selling) through more frequent purchase and increase customer lifetime value for the businesses, via their app, email offers, notifications, quirky ad copy, SEO and all the other digital advertising techniques that they are better at than most of the local businesses
- Expansion through starting-up cities. In Groupon’s current situation, it is more of a contraction and re-focussing on the most lucrative countries and cities and growing back from there
- Expansion in terms of verticals
- Mastery of digital advertising (paid and organic across various channels)
- Increase customer lifetime value of customers through innovations like Groupon Select
- Reduce negative network effects: The biggest negative effect on merchants is the fear of low customer lifetime value (specifically, one-time bargain hunters)
- Further reduce friction, for example recently acquired Presence AI
- Further develop and improve merchant tools. This is very important in their transformation to a more open platform
- More broadly, work on the four strategic pillars (stakeholder letter Q2 2019):
- Improving the customer experience,
- Building an open platform,
- Driving international growth and
- Maintaining strong operational rigor.
- Support customers, esp merchants
- Develop new value propositions: card-linked offers and loyalty cards are called out by the CEO as one of the recent, most promising value proposition additions that aligns with the strategic transformation
Key resources / assets
The master resource (or asset) of any platform are its network effects. It is the resource/asset that needs to be built and nurtured. In Groupon’s case, this is having a large, growing and fresh choice of deals (from a user perspective). From a merchant perspective, the asset of interest are Groupon’s active users.
- A very large selection of deals
- Including merchant data: photos, description, location, pricing, deal details, redemption details, etc
- Including user-generated data: reviews / ratings
- Relationships with local businesses
- Relationships with national brands
- A large user base
- 200m app downloads
- 46m active users, defined as at least 1 purchase in the last 12 months
- The Groupon brand and what it’s identified with (can also be a downside with some merchants)
- The technology / digital assets
- The app – 200m downloads
- The website: (1) Desktop/tablet version (2) Mobile version
- Developed functionality, tools and solutions and patents
- User Data (and insights – usable for better marketing)
- Contact data
- Credit card data
- Location data while browsing local deals (if enabled)
- Behavioural data: User habits / purchase and browsing history, location history (when using the app)
- Geo-demographic data
- Sales teams 2,200
- Merchant developers who work with merchants on deals
- Technology developers
- Editorial teams
- Merchandise, logistics
- Intellectual property, related to tech, editorials, processes, etc
- Groupon search and ranking algorithms
- UI/UX, presentation
- IP embedded in the technology and more
(We are looking at this from the lens of the underlying needs, how they are served and what the things are that affect the customer relationship with Groupon)
- Promotion with no upfront cost is a trust-enhancing value proposition
- Collaboration with Groupon through the sales and merchant development teams (the sales team is the largest employee group within Groupon and they mainly focus on the merchant side)
- Use of merchant tools and solutions (self-serving)
- Positive reviews and word-of-mouth effects
- Dedicated merchant resources for sharing stories and ideas
- On the negative side: one-off bargain hunters with low customer lifetime values
- Negative reviews (or fake reviews) will always be an issue, esp for small businesses that feel unfairly rated/reviewed
- Serving the need for discounts
- Value of deals
- Ability to afford better (or more) goods/services than they could otherwise
- Self-serving through the search, purchase and redemption
- A large amount of choice
- Trusted via reviews by other users and through the brand
- Faith in the brand with issues management
Groupon also have their share of mixed feedback. Across various review sites, they are achieving typically between 2.5-3.5 star rating.
Customer relationships are incredibly important, especially for platform businesses. As we know platform businesses work and scale well due to indirect network effects. The items listed under customer relationships can enhance or dampen these effects which can be profound.
- Volunteer work: Giving employees freedom of volunteering. Over 100,000 hours volunteered since 2011
Most transactions on the user side are automated through the app/website. For merchants, there are be more interaction with the sales/support and merchant development teams. Groupon is trying to become more efficient and one part of this is through better merchant tools.
Transaction, interaction and advertising channels:
- App, website and mobile browser version of the site
- Email offers
- Push notification on website / app
- New channel for interactions: Presence AI voice assistant
- For redemption: voucherless card-linked offers
- Customer support channel
- Search engines (organic and paid traffic)
- App stores (organic and ads)
- Social media pages:
- Advertising: TV, radio, Facebook, Google, banner ads / display network, affiliate network, coupons and various other
- Merchant solutions & tools (see above)
- Large sales/merchant development teams
- Merchant app
- Scan coupons (QR code)
- Manage campaigns
- Payment tracking
- Customer feedback tracking
- Merchant portal and resource pages:
- By business size:
- Large national brands (differing by selected country / location of user)
- Local businesses (location-based, e.g. search near-me)
- By business type: focusing on verticals (differing by country), e.g. US:
- Food & Beverage
- Health & Beauty
- Things to Do
- Home & Auto
- Hotels & Travel
- Goods & Products
- Merchant / business properties:
- Types of deals
- Opening times
- Price range
- Category within the vertical
- Nearby geographic factors
- Transaction volume
- Facility properties
- Classic geo-demographic segments
- User activity type (major segments based on the website): Things to Do, Kids Activities, Nightlife, Restaurants, Spas, Massages, Hair Salons, Travel
- These are obviously linked to the merchant verticals that Groupon is focusing on
- Some of these will be more correlated with certain geo-demographic groups (e.g. hair salon and gender/age/urban, nightlife and age/urban)
- Behavioural based on:
- Order history
- Browsing history
- Search history: queries, categories, location, etc
- Interests based on orders taken up or history
- Propensity to share with their social network
- Propensity to review/rate
- Consumption behaviours / trends
And, of course, the big thing are micro segments, esp those combining merchants and consumers.
Here are extensive cost details from the annual report 2018 (pg 52+).
(1) Cost of revenue
Direct and certain indirect costs incurred to generate revenue:
- Credit card processing fees,
- Editorial costs,
- Compensation expense for technology support personnel who are responsible for maintaining the infrastructure of our websites,
- Amortisation of internal-use software relating to customer-facing applications,
- Web hosting and
- Other processing fees are attributed to the cost of product and service revenue in proportion to gross billings during the period.
For product revenue transactions, cost of revenue also includes
- Cost of inventory,
- Shipping and fulfillment costs and
- Inventory markdowns.
- Fulfillment costs are comprised of third-party logistics provider costs, as well as rent, depreciation, personnel costs and other costs of operating a Groupon-owned fulfillment center.
- Primarily of online marketing costs, such as
- search engine marketing,
- advertising on social networking sites and
- affiliate programs, and
- offline marketing costs, such as television and radio advertising.
- Additionally, compensation expense for marketing employees is classified within marketing expense.
- From time to time, we offer deals with well-known national merchants for customer acquisition and activation purposes, for which the amount we owe the merchant for each voucher sold exceeds the transaction price paid by the customer. Our gross billings from those transactions generate no service revenue and our net cost (i.e., the excess of the amount owed to the merchant over the amount paid by the customer) is classified as marketing expense.
(3) Selling, General, and Administrative
Selling expenses reported within selling, general and administrative (“SG&A”) on the consolidated statements of operations consist of:
- Sales commissions and other compensation expenses for sales representatives, as well as costs associated with supporting the sales function such as technology, telecommunications and travel.
- Compensation expense for employees involved in customer service, operations, technology and product development, as well as general corporate functions, such as finance, legal and human resources.
- Depreciation and amortization,
- And other: Professional fees, Litigation costs, Travel and entertainment, Recruiting, Office supplies, Maintenance, certain technology costs and other general corporate costs.