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GROUPON’S BUSINESS MODEL: SOCIAL AND LOCAL

G roupon is a business that offers subscribers daily deals from local merchants. The
catch: a group of people (usually at least 25) has to purchase the discounted coupon
(a “Groupon”). If you really want to go to that Italian restaurant in your area with a 50
percent discount coupon, you will need to message your friends to pay for the coupon
as well. As soon as the minimum number of coupons is sold, the offer is open to everyone.
Here’s how it works: Most Groupon deals give the customer 50 percent off the retail price
of a product or service offered by a local merchant. For example, a $50 hair styling is offered at
$25. The Groupon offer is e-mailed to thousands of potential customers within driving distance
of the retailer. If enough people use their PCs or smartphones to sign up and buy the Groupon,
the deal is on, and the customer receives a Groupon by e-mail. Groupon takes a 50 percent cut
of the revenue ($12.50), leaving the merchant with $12.50. In other words, the merchant takes
a haircut of 75 percent! Instead of generating $50 in revenue for hair styling, the merchant
receives only $12.50.
Who wins here? The customer gets a hairstyling for half price. Groupon gets a hefty
percentage of the Groupon’s face value. The merchant receives many (sometimes too many)
customers. Although merchants may lose money on these single offers, they are hoping to
generate repeat purchases, loyal customers, and a larger customer base. Moreover, the deals
are short term, often good for only a day. The hope: lose money on a single day, make money
on all the other days when regular prices are in effect. It’s a customer acquisition cost.
Founded in 2008 by Andrew Mason, Groupon rocketed to prominence in less than three
years, going public in June 2011. By that time, Groupon had more than 83 million customers,
operated in 43 countries, and had sold over 70 million Groupons. Nevertheless, Groupon,
like many social network sites, has been struggling to show a profit. In 2011, it lost $254 mil-
lion on $1.6 billion in revenue. Its biggest expense is customer acquisition. Groupon clearly
believes that new customers are worth it: Groupon spent $768 million in marketing in 2011.
The question is whether Groupon’s business model can work in the long run. Critics point
out that Groupon’s revenue per customer has been falling, the conversion rate of custom-
ers into subscribers is slowing down, the tens of millions of e-mails Groupon uses to inform
users of deals are poorly targeted, there are increasingly fewer Groupons sold per customer,
and the revenue per Groupon
is falling.
The solution, according to
the company, is scale: get big
really quick, and develop the
brand so that competitors will
never be able to find an audi-
ence. With enough custom-
ers and fast enough growth,
Groupon may still turn out
to be profitable. Groupon
embarked on an acquisi-
tion spree in the first part of
2012, purchasing companies
such as Uptake, Hyperpublic,
Adku, and FeeFighters, which
it believes will help its posi-
tion in the small and medium-
sized business market.
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