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402 Part Three Key System Applications for the Digital Age

No one knows if this business strategy will work. Many merchants report
that the Groupon deals are not creating a larger group of repeat customers.
Instead, only the most price-sensitive customers show up at the door, and then
never return when prices go back to normal levels. Competitors are springing
up everywhere around the globe, including Google Offers and AmazonLocal.
Groupon may overcome some of the hurdles it faces by virtue of its brand
and scale. But investors will want a return, and Groupon’s biggest challenge
will be showing a profit of any kind in the next few years.
Sources: Alistair Bart, “Groupon’s New Operations Czar Grasps Shaky Helm,” Reuters, August
22, 2012; Shayndi Rice and Shira Ovide, “Groupon Investors Give Up,” The Wall Street Journal,
August 20, 2012; Stephanie Clifford and Claire Cain Miller, “Ready to Ditch the Deal,” The New
York Times, August 17, 2012; Chunka Moi, “Google Offers a Two-Pronged Attack on Groupon’s
Business Model,” Forbes, June 29, 2011; Jenna Wortham, “Loopt Flips Daily Deal Model Upside
Down With U-Deal,” The New York Times, June 23, 2011; Don Dodge, “How Does Groupon
Work? Is Its Business Model Sustainable?” Dondodge.wordpad.com, June 11, 2011; Michel de
la Merced, “Is Groupon’s Business Model Sustainable?” The New York Times, June 8, 2011; and
Utpal M. Dholakia, “How Effective are Groupon Promotions for Businesses?” Rice University,
March 12, 2011.

roupon combines two of the major new trends in e-commerce: local-
Gization and social networks. Selling goods and services on the Internet
is increasingly based on social networking—friends recommending friends,
as is the case with Groupon, and companies targeting individuals and their
friends who are members of social networking communities such as Facebook
and Twitter. E-commece is also becoming increasingly localized, as companies
armed with detailed knowledge of customer locations target special offers of
location-based goods and services. There are mobile apps for Groupon as well
as for many other companies that are increasingly pitching and selling over
mobile platforms, and e-commerce is becoming more mobile as well.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. The business challenge facing Groupon is how to
create a profitable business that can take advantage of Internet technology
and social networking tools in the face of powerful competitors. Groupon’s
management decided to base its business model on localization and social tech-
nology. The business earns revenue by asking people to recruit their friends
and acquaintances to sign up for discount coupons to create a “critical mass”
of potential customers for a local product or service. Participating merchants
sign up with the expectation of attracting large numbers of new customers. But
Groupon has serious competition, participating merchants do not always reap
benefits, and it is unclear whether the business model is solid and profitable.
Here are some questions to think about: How does Groupon take advantage
of social networking and location technology? Do you think this business model
is viable? Why or why not?

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