"...when you consider that better than 60 percent of Amazon's sales come from repeat customers--which implies that they're loyal..."
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.
I think the piece of the puzzle that most people have trouble with is not that they'll have repeat customers. It's that those customers are loyal to Groupon... or more specifically, loyal to the concept of deep discounts. The part most people, including myself, have a hard time grok'ing is that merchants will continue to punish themselves by doing business with Groupon.
I think that perhaps you're not grokking Groupon, the customers of Groupon have never been the bargain hunters, they've always been the merchants. The bargain hunters are the product Groupon sells.
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.
It is the other way around. My friend has a wine store and he was an early adopter of groupon. I think he started almost 2 years ago?
He stopped doing it because it brought in riff raff customers that were cheap and were pretty much broke.
No, he got it right. His point was that Groupons customers are merchants, and they have been screwing their customers. Excluding the first sentence, your point completely validates what he was trying to say.
That's just semantics. There are three parties involved: Groupon, end customers and merchants. It was pretty clear who marciovm123 and I were referring as the customers in the posts.
There was some insight that was muddied by the confrontational language, and the semantic ambiguity introduced by marciovm123. There are two interesting issues:
(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).
"they're selling other people's products" -- as every reseller does. And who do they sell them to? Their customers.
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.
"That's just semantics" is a common way of saying "you're arguing over semantics instead of the point." When arguing semantics is disguised as a genuine rebuttal, it's a fallacy.
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.
Yes, by "that's just semantics", I meant that it doesn't matter which party you call the customer. The thrust of the argument is still that Groupon is screwing over merchants and that I'm not convinced that merchants will continue to work with Groupon.
Exactly this. I'd be very interested in a stat of how many of Groupon's merchants are operating these deals at a profit. I know one SF merchant personally that does, but I suspect its very few. Even more importantly, I'd be interested in how many of these Groupon customers are returning to the merchant. If that number is high than Groupon has hope, if its low then they aren't actually adding much value and they can only continue fleecing small businesses for so long.
"I'd be very interested in a stat of how many of Groupon's merchants are operating these deals at a profit."
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.
Yeah -- it's a really bad setup in the end though because Groupon attracts the type of customer that isn't likely to spend a lot of money in the first place unless there is a deal. In other words, Groupon can attract a lot of customers, but the quality of those customers isn't very good (at least from my personal experience, all of the people I know who heavily use Groupon don't really use it at places they haven't already heard of before). The ROI must be terrible, but it also can be difficult to measure.
I think it depends on the kind of business. I think it is useful to break Groupon deals into a few categories, as well as the number of customers involved in any given deal:
FAST-FOOD DINING
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).
SIT-DOWN DINING
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
I think a lot of it is profitable for merchants these days. Invariably when I peek at Groupon, the deal falls into the category of "useless shit that is insanely overpriced normally, and with the deal is just reasonably priced useless shit".
I'm an investor at the TechShop in the Raleigh-Durham area. We ran two Groupon deals over the past 9 months. Both had very good results (~280 sales each, at $120/Groupon. Groupon took ~20%). We were VERY careful to structure our deal such that we would make a profit on each deal - membership is fairly cheap per customer. Our main cost is instructor time for classes, and we have a minimum number of people/class. Furthermore, the business is such that getting a potential customer to visit the TechShop is very valuable (the TechShop has a certain wow factor), so we were counting on the discount given via Groupon as the cost of getting someone to visit and try the shop.
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.
If you're a Groupon shopper, wouldn't the novelty, of say, going to that same spa wear off the second and third time you saw the deal? Similarly, if you keep selling your services on Groupon, don't you cheapen your brand. To me, there's not much incentive for repeat customers.
More and more I see deals that are likely to be turning a nice profit. For instance, last month there was an acting seminar in LA -- only a single 5-day session was offered which all Groupon buyers would attend. ~300 people signed up at $100 per head, for around $30000 revenue.
Additionally, an article on HN earlier today pointed out that Amazon had to spend a lot of money investing in infrastructure, whereas the only similar thing Groupon has done is assemble a "phone book" of interested businesses and consumers.
I seriously question the loyalty of new Groupon customers. Typically they sign up because of one deal. They might even buy the deal. Then Groupon proceeds to spam them every day with deals they aren't remotely interested in, at locations far from their home. Unsubscribe.
This. The problem is that Groupon's variety of merchants is very low - I suspect because it's only worthwhile to merchants with an incredibly wide profit margin (e.g., spas or other services that have low variable costs).
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.
Neither consumers nor businesses are loyal to Groupon. And the moment deals start to decline in quality, consumers will hit 'Unsubscribe' or 'Report as Spam' and it's Game Over for Groupon. I've already tired of their endless emails and blocked them. I'd be interested in seeing their churn rate - acquiring new customers to replace those that leave is going to increase in cost exponentially.
Groupon Economy is Recession Economy, and groupon issues food coupons to it's members, merchants accept food coupon because they believe customers don't have money and selling at discount is better than no sale.
If groupon don't make profit, nor the merchants it is surely bad for the company and it's investors
The thing with Groupon is that it can't afford to keep it's implicit promise to merchants. It's a conflict over customer loyalty. If the customers become loyal to a couple of local restaurants, Groupon loses them and must 'purchase' new ones. If they remain loyal to Groupon's offers, then they will not be worth the merchants' expense to put out the offer. Based on this, Groupon must either keep spending to acquire new customers, or new merchants. Either way, the large marketing costs are here to stay (until they saturate the one market or the other and burn out). I don't think Amazon had any such fundamental conflicts to deal with.
Timely, since Groupon competitor LivingSocial is heavily backed by Amazon. Amazon invested in their infrastructure, whereas Groupon lined their pockets. Theres is no real comparison between the two, other than the article's title.
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.
That interview with the LivingSocial CEO[1] was excellent. I think their idea of the local restaurant marketplace will do very well. That idea really makes sense to me, in a way that groupon doesn't.
The big difference is Amazon has always sold tangible goods to actual consumers.
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.
Well... Groupon has always sold tangible goods and services to actual customers, too. Customers that are every bit as fickle as the ones Amazon had to win over a decade ago. They may succeed or fail at this, but it's not like they're still looking for a business model.
The people who get the coupons are not the real customers in Groupons case, but rather the local shop owners.
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.
Not a business model, a strategy to generate profit from their current model. Groupon's current strategy is to take a customer base that doesn't generate profit, and make it larger. Yet they haven't shown any way that scaling will reduce costs much.
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 allows them to offer better deals -- if Groupon can generate 1,000 takers for a Dreamdu5t Cafe coupon and Google Offers can only come up with 200 then Groupon can drastically undercut whatever margin Google is taking and win your sale.
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.
> Scale allows them to offer better deals -- if Groupon can generate 1,000 takers for a Dreamdu5t Cafe coupon and Google Offers can only come up with 200 then Groupon can drastically undercut whatever margin Google is taking and win your sale.
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.
Groupon and Living Social and Google and Facebook are all trying to convert Jane Doe to their subscriber. I find it extremely questionable that Jane Doe is going to be much more likely to come back to Sorbus Spa whether she bought her coupon at one service or the other. Ultimately the client is responsible for delivering goods and services that merit repeat business.
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.
I was suggesting the possibility of different coupon services marketing themselves to different segments of the populace; the most common characterization (as far as I can tell) of people who use Groupon is as cheap or stingy, so a service which was able to promote a view of its subscribers as more affluent or using the coupons as a low-risk way of trying something (as opposed to just shopping for deals) would be better placed to market to businesses.
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 Amazon's case, it was amazon which was taking up the losses and not the producers of goods.
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?
No. Of all the things you can describe the stock market as, rational is not one of them - and that's before you consider the amount of computer trading.
This is a big moment that could potentially affect a lot of people. Some HNers may be considering investing- discussion of this opportunity will probably help with this decision making.
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
That said, I would never invest in Groupon,
simply because I don't use the product ever.
Indeed. I tend not to invest in things I don't understand. I've never understood the appeal of most of the deals on Groupon and have never bought a Groupon. So, I'll be staying away from their stock, as well.
... and if you really don't like Groupon's numbers you can short the stock. Although, I'm not sure how practical that is for the individual investor.
You can take a look at the most recent tech IPOs and see what you think. (dang, yoku, dmd, qlik, smt, motr, logm, ftnt, swi)
Even shorts who are eventually right still get blown up unless they correctly anticipate when the market will realize the price is too high. Put options aren't dangerous like this for the buyer (your loss is limited to the price of the option) but you have to wait for sellers to decide to start writing those, and I don't know much about holding or trading them.
I actually though about Amazon when I saw people starting to rag on Groupon and its bottom line.
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.
The fundamentals of Amazon's business are much better than Groupon's though. Its still unclear whether or not Groupon is sustainable for merchants. There are two questions that merchants should be asking when they are trying to decide whether or not to run a Groupon:
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)
Groupon can always lower their cut in the future though once they have built out their database of customers. It also wouldn't surprise me if they laid off half their workforce once their rate of customer acquisition starts leveling off.
To do that, wouldn't they have to admit that they aren't growing like nuts anymore, and wouldn't that kill their valuation? (Even established companies like Apple and Google base most of their valuations on the premise of future growth. When the premise of future growth goes away, you have Microsoft.)
It shouldn't negatively affect their valuation. They would still be able to grow at the same rate, but they would do it by widening the channel rather than by acquiring new customers. It would actually be a big win for investors.
My point is that it if the answer to the 2nd question is "no" for most merchants it doesn't matter how much you widen the channel the business is still unsustainable in the long-term. Even so, how do you see them widening the channel? Going into a completely different model that does not fit their brand? The entire discount space in every market is now chock full of competitors doing similar things to Groupon.
Even today, Amazon's position is surprisingly precarious. It relies on loopholes in tax laws for competitive advantage which, if they are closed, are predicted halve its income.
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.
Amazon hasn't taken on notable investment or debt in a long time, and vendors and employees still get paid every month.
Amazon maybe be making some small fraction of what they claim, but it is certainly a positive fraction, which is the most important consideration for solvency.
Disagree - the catalog business model was a proven quantity going back a century or more, e.g. Sears. Amazon was the first mover and was focused on building footprint pretty much from the beginning. Despite this critical article, a more accurate survey of that era's business press would give the impression that Amazon.com was the "good one" compared to the Outpost.com like pump-n-dumps that were often nothing more than a few webservers. Maybe Amazon didn't get serious until the lean times, but the press hype was generally correct.
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?"
Lesson: as early as 2000, people were throwing around the phrase "Ponzi Scheme" to mean "a business whose long-term prospects I'm slightly suspicious of".
Back in 2000 online purchasing and e-commerce were still in their infancy. It was difficult to predict back then whether traditional models of commerce applied to these businesses, and to what degree consumers would adopt online buying.
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.
Back in 2000, Amazon did not face the same type of competition Groupon faces today. There was no Facebook or Living Social, Google did not have 30 billion in the bank. Groupon is now competing against Facebook, Google and Amazon(Living Social). If you're merchant, you have more options to choose from and less reasons to go with Groupon.
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.
Why are we comparing everything to a ponzi-scheme lately?
"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."
The biggest issue with Groupon is the fact that while it may offer a great deal for consumers, and may make tremendous revenue on each deal, it doesn't appear to be a great deal for the merchants involved. Oftentimes it seems like a losing proposition in order to have customers come thru the door - people who may never return until there's another Groupon.
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.
Yes Amazon turned out to be real, but Pets.com, Kozmo.com, Webvan, Flooz, eToys, Boo.com and the theGlobe.com weren't real. My guess is that there will be some winners from the graduating class of Web 2.0 — but there will be bodies. By the way if you ant to see a great film on that era check out Startup.com: http://www.imdb.com/title/tt0256408/
Maybe I'm just out of the loop these days or I need to get into Manhattan more, but I can recall seeing actual Amazon ads in places like bus shelters and subway platforms and also hearing radio ads back in 2000. All I've heard of Groupon is from the Internet. Have I missed any big ad campaigns they've done or has their growth all been Net-based word-of-mouth?
I don't know of any, but on the other side of the coin lets consider that the net penetration 11 years later is much higher, and maybe the ROI of print advertising for their demographic is not as high.
Amazon had to deal with customer acquisition and customer retention, while Groupon has the added challenges of merchant retention and margins being squeezed by competitors in a sector with relatively low barriers to entry. To me, it's a steeper uphill climb for Groupon.
The way that Groupon has defined the sector actually does present fairly high barriers to entry in that you need a dedicated sales force to 1) discover potential merchants and 2) arrange a deal that will work for the Groupon purchaser and the merchant. If someone redefines the sector by successfully removing the need for that sales force while maintaining the satisfaction of merchants and consumers, they will crush Groupon.
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.
<quote>
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. Of course, Amazon is buying customers, just as all companies do. Some companies do it by dumping money into advertising, some by offering discounts. Amazon does both. The only important question is whether Amazon is spending too much on those customers, and the answer seems pretty clearly to be no. In its latest quarter, Amazon added 3.8 million new customers, and spent an average of $19 to acquire them. When you consider that better than 60 percent of Amazon's sales come from repeat customers--which implies that they're loyal--and that the average customer spent $116 in 1999 (10 percent more than in 1998), $19 seems like something of a bargain.
The difference is... Groupon can never scale well and have great profitability-- they need 8000 employees to do what? They have a list of merchants and a database of emails and what else? As pointed out on another HN thread, Amazon built a moat what has Groupon done?
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.