A. Spending on customer acquisition is building real barriers to entry.
I tend to agree with DHH that the barriers to entry will never be high enough in the daily deal area. Also, as Groupon seeks to stay ahead of daily deal competitors, it cannibalizes its own business model – namely, the artificial scarcity and urgency of daily bargains reverts to more and more on-demand variety. We see this already.
B. Spending on direct sales is building a valuable collection of local merchants.
Others have built directories of local businesses before. The Yellow Pages, Yahoo are examples. Yelp, etc. are more modern examples. Can Groupon unlock a profitable business model from their collection?
C. Spending on marketing is building enough public goodwill to transcend value propositions altogether.
Groupon is a great brand name, so far. Public goodwill is damn fickle, though. I'd like to think that consumers require a real value proposition from their favorite brands, but I'm not sure that they always do.
When it comes to daily deals, I doubt consumers will chose Groupon over a better deal, just because of the Groupon name.
When it comes to daily deals, I doubt consumers will chose Groupon over a better deal, just because of the Groupon name.
On this count, it's worth remembering that extreme bargain hunters have very low loyalty to vendors. It's what allows them to take advantage of the best deals. Which is why I think a lot of businesses have been disappointed in the results from Groupon deals, and why the moat around Groupon is pretty shallow, given how much they've spent.
Eh. How much Groupon disappointment do you think comes instead from brick & mortar small businesses being utterly unacquainted with the high-volume low-conversion sales model of the web? Because that seems like the thesis behind Groupon: give local biz a taste of how customer acquisition is tuned and scaled on the web.
I'm a loyal customer of several well-known, well-regarded small businesses in Chicago, and none of them have the marketing savvy of the least-successful successful web startup we can think of.
So in that regard, I think the people who worry about the disloyal deal hunters miss the point a bit. That's the flip side of the 5-10% conversion rate: the 90% who bounce. Web people don't flip out about this. Local biz does.
Remember, the most popular current alternative to Groupon is advertising. The only reason local biz people don't flip out over advertising effectiveness is that nobody knows how to figure it out.
I don't see Groupon, or any of the clones as a good investment, for a very simple reason: there's no network effect. In the social realm, thats really the key. Social networks like LinkedIn, FaceBook and Twitter increase their value with each additional user. Telephones are also a classic example of the network effect. Groupon does not become more useful to me the more users it has. Possibly, it becomes more useful to merchants but from the merchant's I've discussed this with, other sites simply offer them better terms and, therefore, more profit.
Personally, I think sunchild had a great point by addressing that the artificial scarcity is gone. Myself, and my peers, have now reverted to buying these deals on-demand. If I want a massage deal, I head over to YipIt (an aggregator) and do a quick search. I don't waste my time reading their emails.
SwellJoe and GentleBen also addressed the same issue: lack of loyalty. My biggest complaint as a person on constant data overload is that Groupon (I use the Android app) now sends me over a dozen deals per day, half of them for suburban restaurants which I would never patronize. Its no better than coupon books or every other "deal" marketing ploy now.
Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google.
Facebook is charging fast too. LivingSocial. Etc.
They need to get out in front of this. And that’s what they’re trying to do.
If your explanation for why they are losing money is that they're doing what needs to be done then that's fine, but you're forfeiting the 'defensible moat' argument. They're losing money because a bunch of established businesses could come in and take over if they don't. That part doesn't make them a ponzi scheme but it does make it a bad business to be in.
The part that makes it a ponzi scheme is that they are now seeking more investors even though the vast majority of the money from the last few rounds went to earlier investors. That's pretty much the dictionary definition of a ponzi scheme:
A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investorshttp://en.wikipedia.org/wiki/Ponzi_scheme
There is nothing wrong with taking some money off the table so the early investors/employees aren't operating under undue risk, but the scale of cash-out at Groupon is more than a bit fishy.
"If your explanation for why they are losing money is that they're doing what needs to be done then that's fine, but you're forfeiting the 'defensible moat' argument. They're losing money because a bunch of established businesses could come in and take over if they don't."
It's not one argument or the other - that's a false dichotomy. It could be that, right now they're still vulnerable, but are doing what needs to be done to build their "defensible moat".
And in fact, this makes perfect sense. They're a very young business, they're spending a lot of money building their economic fortress. The fact that they aren't profitable is surprising, but for such a young company not too surprising.
"There is nothing wrong with taking some money off the table so the early investors/employees aren't operating under undue risk, but the scale of cash-out at Groupon is more than a bit fishy."
I agree, but I'm not sure I get this argument. Isn't this something that the investors decide? I mean, it's not like the founders were duping anyone. They went up to some VCs, asked them to buy a big portion of their shares, and the VCs agreed (after thoroughly looking at the numbers, I might add). The investors seemed fine with it and considered it a good investment nonetheless, so what does it prove? Nobody was duped here.
I think the only difference between what's happening now with Groupon and what usually happens with small startups is the scale of money involved. Groupon is similar to other young companies, but a lot more money happens to be involved.
They're a very young business, they're spending a lot of money building their economic fortress. The fact that they aren't profitable is surprising, but for such a young company not too surprising.
Ok, I'll give you that. Maybe this is money well spent. I think you will see arguments both way on this one. I personally don't think it is.
Isn't this something that the investors decide? I mean, it's not like the founders were duping anyone.
Even if you tell the public, "Full disclosure: I'm running a ponzi scheme, you want in?" it's still illegal.
The scale of money is disconcerting but the actual behavior that is being rewarded is what concerns me. If fully appreciate that I might be wrong here, but I need to hear a better explanation of why I'm wrong.
I'll be honest, I'm probably much less qualified than you to say whether their money is being well spent. I'm just betting that the investors, who are pretty savvy, do know whether their financials are good. Of course, you're suggesting that the investors are in this because they believe future investors will pay them back, and so on, but I think the people investing in Groupon are doing so for solid reasons.
'Even if you tell the public, "Full disclosure: I'm running a ponzi scheme, you want in?" it's still illegal.'
Someone mentioned in another comment that a Ponzi scheme, by definition, means that people don't know it's a ponzi scheme. The commenter contrasted this to a pyramid scheme, where everyone can know. Is that true?
In any case, I thought it worthwhile to copy this form Wikipedia:
"A bubble: A bubble is similar to a Ponzi scheme in that one participant gets paid by contributions from a subsequent participant (until inevitable collapse), but it is not the same as a Ponzi scheme. A bubble involves ever-rising prices in an open market (for example stock, housing, or tulip bulbs) where prices rise because buyers bid more because prices are rising. Bubbles are often said to be based on the "greater fool" theory. As with the Ponzi scheme, the price exceeds the intrinsic value of the item, but unlike the Ponzi scheme, there is no person misrepresenting the intrinsic value. With the greater fool theory in mind, some may invest even though they believe the securities are overpriced due to a bubble."
In other words, the only thing that really changes between a Ponzi/Pyramid scheme and a bubble, is that investors think there is actually something of value underlying the investments. Obviously, many people disagree, but I'm not sure that we shouldn't give savvy investors the benefit of the doubt. Especially investors who have a lot more access to proprietary information, and who have had a lot more time to look over Groupon's terms.
* Note: I wrote a lot of things about the definition of a Ponzi scheme which are probably obvious to you. But I'm just now, with all this talk, starting to dig into what these mean exactly, so all of this is new to me.
I'm just betting that the investors, who are pretty savvy, do know whether their financials are good.
You should probably stay far away from Wall St for your own good. The savviness of the investors should be a warning sign, not one that instills trust. Remember, in an IPO, they are the ones on the other side of the handshake. They have every incentive to fool you.
As for your other points. A ponzi scheme is like Bernie Madoff where you pay off early investors with the money from later investors. I don't believe being open with how the money works would change that. Pyramids are usually where members are pressured to get even more members because a percentage of the new hires' sales goes to the person who brought them in. The bottom of the pyramid cannot get their investment back because they run out of "greater fools". It's all a bit confused because if you buy into Groupon you also get ownership of a business which may or may not be worth something.
We really can argue about the semantics of these labels but really what it comes down to for me are these two questions: Is this a healthy business, and have the founders acted in the best interest of the business? To me the answers are I don't think so and absolutely not. I don't trust an executive team that would allow 90% of a non-profitable company's runway to go into their own pocket with my money.
They've acted in their own self interest to which many would say "whatever, it was a fair trade". I want people the people who think that way to realize that sometimes we restrict trades that are "fair" regardless of how stupid you are for getting into them. Roulette is a losing game but it is a fair game. We also restrict and regulate it heavily.
Anyway, I think we're in agreement on this: it's really interesting to talk about. :-)
I'm pretty sure there are "Groupon for X" companies in YC. So clearly people see that there is money to be made.
I'm not exactly sure why everyone is hating on Groupon. Why not hate on Zynga for coping other games? Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high?
The daily deal marketplace may not end up being a winner-take all market. But will having the biggest subscriber list give Groupon an advantage? Once they flip the switch from growth mode to profit mode, who knows what might happen?
I assume the hate is mostly just misdirected jealousy because it seems "so obvious anyone could do it." But like Andrew Chen's recent post, it's not easy to build both your consumer side and your merchant side. Anecdotally, I've heard many of the top 10 deal sites have trouble lining up their next day's deal.
While the daily deal industry is far from perfect yet, Groupon certainly unlocked a space that a lot of people are jumping into. And I assume that someone will figure out how to do it right for both merchants and consumers in a profitable, sustainable way.
"Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high?"
I assume the hate is partly financial advice of sorts, and there's no great need to harp on Linkedin after its stock goes down. Besides, there was hate on Linkedin just before and after the IPO.
This may not apply to this market, but I think it's still insightful:
"Here's a model that we've had trouble with. Maybe you'll be able to figure it out better. Many markets get down to two or three big competitors—or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does very well.
Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth.
If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.
Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.
Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it.
And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it.
In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen.
For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening."
I think it all comes down to how effectively branding and marketing have destroyed the EMH. Airplane tickets are fungible they're easy to compare on price. They're also expensive enough that people take the time to shop around. However because of the regulators no brand of airline is unsafe.
Buying an expensive branded cereal is probably not a completely rational action IF you could identify equally good no-brand cereals you'd save money. But certainly in the west the cost is such a small part of most peoples spending that they don't bother.
I worry about Groupon but not for the reasons here. Regarding the financials, it could easily ratchet down acquisition and marketing spend and be very profitable. The barriers to entry arguments are very superficial. Sure, just programming a competing service and closing a few merchants is not that hard. But building an 8 figure mailing list is not easy. Finally, some suspected and I'm inclined to agree that the otherwise ridiculous payoff of early investors and employees might be explainable as necessary to turn down the Google offer.
My main concern about Groupon is the core proposition may not actually work in the long term. There are all sorts of problems with fatigue, inherently cheapskate customers, high rates of existing customers, worsening economics, etc.
what justifies taking ~300 million off the table (and that's just 1 person) and then going back to ask for more a short time after? sounds like the investors were keen to exit and make their buck ASAP. i don't think that is a good sign in general. andrew mason took a much more reasonable payday.
"Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google."
Wouldn't a proper business model dictate just about the opposite? When trying to build a profitable customer base, you should focus on keeping customer acquisition costs DOWN, not spending 3x revenue on it. For example, Super Bowl ads just don't seem like an appropriate way to spend money for them right now.
This is nearly identical to what happened in the last dot com crash. Sure, Groupon does have significant revenues, but they haven't proved (to me anyway) that these revenues are sustainable without their massive expenditures.
We've heard numerous times that Groupon considers its sales force to be a major asset, partially justifying its valuation and forthcoming IPO. Maybe. However, unless that sales force proves to be a strategic asset to a customer-facing feature, whether it be cheaper or more interesting deals than the competition, I don't see a multi-billion dollar value there.
"You cannot overlook the fact that they’re also making hundreds of millions of dollars each quarter now"
I don't understand this "oh but they're making $4 billion so they must be a great company!" argument. If my business plan is to pay people $2 and have them give me $1 back, I could also make $4 billion (and I'd be loosing $4 billion in the process, but that's just "marketing expenses"…).
It's not the usual use of the term "making money" in business, either. If you run a restaurant that has $5m in expenses, and $5.5m in revenues, you're making $500k, not $5.5m.
I just feel as if the only justification for this new round of founding MG brings to the table, is that a) they will be able to cut back spending (=profit) and b) Google and Facebook are producing similar products, so it must be something good. Personally, I'm convinced by neither arguments and would argue that it isn't just risky, but pretty much doomed to fail (or rather, be a really bad investment for the public).
I don't know about this Ponzi scheme label, but I'm pretty damn sure Google was buying a brand that was well known in that market space. This would have reduced the competition for market entry. Groupon's site is not difficult to make at all. It's nothing complex. So Google's $6 billion offer I think was purely on the business side and nothing technical.
I suspect Google was looking at the possibility of modifying it to fit in with their advertising business. I can envision several ways that could have worked out.
That's a little weasely, because the people calling Groupon a Ponzi scheme tend to talk about how minimal their competitive advantage and technological "moat" is. Google can build stuff. Why'd they try to buy this?
It wouldn't be right to assume that because Google has many smart people, everything they do as a result is smart. Google is hardly an innovative company anymore. In fact, they seem mostly to be coasting on existing models and paying lots of people mostly just so that they don't work for existing and potential competitors.
I think this is a fallacy stemming from the fact that Google's initial products were so unbelievably successful and important that they are likely to be permanently hard to top. I do not agree with you that Google is no longer innovative, and I particularly disagree with the notion that they are so uninnovative that they'd believe they lack the technological prowess to compete with Groupon.
Oh, I don't mean to suggest that at all. I'm just trying to suggest that an offer from Google doesn't, to me, at present imply that the offeree has any special merit. Google is cash-rich and can use cash strategically.
I haven't been one of those calling it a Ponzi scheme or any other con, because it pretty obviously isn't; it has problems and I doubt it is sustainable, but not for those reasons. (Megan McArdle on http://www.theatlantic.com/business/archive/2011/05/why-does..."One study found that 32% of Groupon merchants lost money (with restaurants faring worst) and 40% said they wouldn't do it again; even people who made money had staff problems due to high volume and, er, cheap tippers")
It is usually easier to modify working code than to write something from scratch, if my suspicion is right, I expect Google will launch its own Groupon-like service integrated into its other offerings eventually.
> It is usually easier to modify working code than to write something from scratch, if my suspicion is right, I expect Google will launch its own Groupon-like service integrated into its other offerings eventually.
Simple, Google is worried Groupon theoretically could get a huge share of local advertising like they were with Yelp.
Google isn't infallible, they are mortal. I think most likely they were willing to overpay because they could afford it and are desperate to get into "social".
Also, Groupon is a ponzi scheme because they use new investor money to pay old investors--not because they don't have a moat, which they dont-- no patents, 8000 employees and how do you scale with that many employees, a list of merchants and user emails.
The new investor money was overtly premised on paying old investors. The new investors were buying the risk from the old investors, who had just been asked to turn down $6bn. I think you're oversimplifying a bit.
The fact that there are so many clones isn't proof that Groupon's business model works, it's just proof that there are no barriers to entry. Compared to Google and Facebook, their mailing list isn't much to brag about either. If they had impressive churn rates, you can bet we'd be hearing all about it by now. The fact that they keep those numbers secret is highly suspect, in my opinion.
Also, paying hundreds of millions out to early investors is exactly what they should NOT be doing if they're trying to "get ahead" of their competition. If they had any faith in their own business model, they'd put it into the business and expect even higher returns.
There are almost zero barriers to entry. Groupon has a list of a few thousand merchants, a few million emails, 8000 employees, and sells a dollar for fifty cents. How can you scale with so many employees and ever be profitable? It's not sustainable at all. They have no patents or any semblance of a defensive moat. Groupon is also declining in the cities it first launched in like Boston. Their future does not look good.
A. Spending on customer acquisition is building real barriers to entry.
I tend to agree with DHH that the barriers to entry will never be high enough in the daily deal area. Also, as Groupon seeks to stay ahead of daily deal competitors, it cannibalizes its own business model – namely, the artificial scarcity and urgency of daily bargains reverts to more and more on-demand variety. We see this already.
B. Spending on direct sales is building a valuable collection of local merchants.
Others have built directories of local businesses before. The Yellow Pages, Yahoo are examples. Yelp, etc. are more modern examples. Can Groupon unlock a profitable business model from their collection?
C. Spending on marketing is building enough public goodwill to transcend value propositions altogether.
Groupon is a great brand name, so far. Public goodwill is damn fickle, though. I'd like to think that consumers require a real value proposition from their favorite brands, but I'm not sure that they always do.
When it comes to daily deals, I doubt consumers will chose Groupon over a better deal, just because of the Groupon name.