Ever since Google offered $5.3 billion for Groupon, I heard countless times about the wonders of Groupon. Repeatedly, I told people that Groupon uses a bad business model. Groupon claims profitability by using an accounting method called Adjusted Consolidated Segment Operating Income (ACSOI). This metric removes the cost of acquiring the customer from the revenue and as a result Groupon made a profit of $80 million. Of course when you put this cost back into the equation the company actually had a net loss of $113 million. Accountants are possibly the world’s great magicians. I wish I could do the same magic on my business and make $200 million magically appear.
However, making money appear out of nowhere is actually the least of Groupon’s problems. The big problem is their approach to marketing. Groupon by its very design must rely on advertising to get their customers. They spend a fortune on online ads to target customers. I was completely surprised about the Google offer because Groupon probably is one of Google’s biggest advertisers and if Google owned Groupon, I’m sure their other advertisers would see a conflict of interest if Groupon’s ads remained at the top of Google. Those very ads are the life blood for Groupon. Without the ads Groupon’s source of customers would dry up and sales would plummet too.
Groupon is in essence a very expensive email list. Groupon has just over 83 million people as its subscribers, of which only 16 million purchase. Topically if you wanted to purchase an email list you could get the same same list for $100-200. It helps Groupon that the people actually subscribed to the list, but is the list worth the nearly billion dollar cost to acquire it. Those in the email marketing space know that that it hard to keep the loyalty of their subscribers and maintaining such a list can be expensive. People will come and go and just because they are on your list doesn’t mean they will purchase from you now or ever.
One of the biggest problems with Groupon is more about the core idea of it. Groupon offers great deals on other people’s products. It convinces other business owners to embrace its model that paying a lot for a customer makes good business sense. There is not evidence to support this. One Groupon ad I saw was for a hot air balloon ride in Toronto. If I had purchased the ad, I could gotten a ride for much below the actual cost of the that ride. Great for me, not so great for the advertiser. The problem is it would be very unlikely I would ever want to take such a ride more than once in a lifetime. Also, why would I be willing to pay for such a ride again at full cost. As a consumer the Groupon price for the service becomes expected price. The only way the advertiser can win is if the customers would be willing to pay full many times after the initial purchase from Groupon, which is highly unlikely.
To make the situation even worse Groupon’s own success is the biggest failure for advertisers. Imagine you are that high air balloon company and you up wake the next morning to see 1000 people bought your coupon. Sounds great until you realize that you can’t handle the volume of sales and you realize that every sale comes at a loss for your business. Also, now your business must service the customers where you do so at a loss in lieu of your regular profitable clientele. This is the most common situation advertisers find themselves. It represents the biggest problem with Groupon. If the advertisers can’t possibly make money from advertising, why would they continue to advertise. For Groupon this means constantly finding new sources of advertisers with ever smaller pool to draw from. Now I have heard stories where companies have made money from Groupon, but these are few and far between.
So if you see an ad for purchasing Groupon you might want to pass.
Below is a really great response I received from Ernie who wrote:
“Groupon does not do list price checks to make sure merchants do not
exaggerate their normal list price. The balloon company that was offering
the ride you mentioned had increased their regular list price by $100.00
from $275 up to $375 and then immediately discounted by 51%. It appears that
instead of saving $190.00, you would save only just over half of that amount
at $100.00 which is about 36%. So now would you have been just as excited to
buy something that you might not have really been planning to buy if it was
just about 1/3 off? Still a reasonable deal but not the seriously exciting
half price.
If that’s not enough, now you have to deal with the overselling and
inability to actually get what you bought. This company gets around all that
messy trouble of going out of business by just cancelling flights due to
unsuitable weather. By the end of the flying season many people must wait
until the next year or two or three….
Bottom line is Groupon feeds on Greed. Their initial greed inspired their
setting up the system. They play on the public greed for big bargains and
they play on the greed of the merchants to exaggerate their prices to fool
the public.” …a pilot for Not Just Hot Air.com