If you follow business news, you’ve undoubtedly heard that Groupon, after going public a few months ago at $20 a share is a fire sale at under $5 at the moment, or as Crain’s columnist Joe Cahill puts it:
“Groupon, Inc., hatched four years ago has gone from vibrant adolescence to droopy middle age faster than a time-lapse video of the life cycle of an orchid.”
Amidst all the negative press and analyst downgrades, the key factors in investor sentiment seem to be a sharp decrease in the daily deals business in general, and the formation of Groupon’s new “goods” division, in which they are the direct retailer of, well, goods. The latter being a problem because, for a business that was basically just a website, it puts an inventory liability on the balance sheet.
I won’t pretend that I’m a hot shot business analyst, or a top echelon executive, but neither is Groupon CEO Andrew Mason, who gets the credit for creating the daily deal industry, but may also get the credit for nose-diving it into the ground. To say “I bet he wishes he took the 6 billion from Google” sounds like quite an understatement at present. I think though, that I know how Groupon can save itself. After all, Groupon is a essentially a website, and I have three of them that I run off my home computer.
Actually, that’s inaccurate. Groupon is an email marketing campaign. Groupon sends a daily email that hawks vouchers for half-off or more on products or services provided by other companies. Groupon generally takes 50% of the proceeds and pays out the rest to their client well after making sure they have all of the cash on hand and the clients have provided the goods or services to the customers. If I said I wanted you to invest money into a company that did this 5 years ago, you’d probably laugh in my face, because why the heck would anyone give you their product for 1/4 the asking price? They’d have to be nuts! If you could prove to me that businesses would actually flock to your service, it’d be a different story - but that’s not how Groupon started.
If you were a Groupon member when it was new and all the rage, you may recall the actual meaning of their name:
Group + Coupon = Groupon
Originally, you would get an offer in your email in the morning, for, say, a $50 gift certificate to a restaurant at the price of $25 - but, in order to receive the discount, a certain number of people had to purchase the deal, in a sense creating a volume discount for being a part of a large group. If the number of purchasers didn’t meet the minimum, the deal was scrapped.
Since this is a theater blog, we can relate this concept directly to group ticket sales. When I price group tickets, I normally give a 50% discount at somewhere around 50 tickets (it didn’t used to be that steep, but since we’re offering daily deals and half price tickets all over the place, it’s hard to tell a group leader they have to pay more than someone who is buying two tickets when they are buying 50, but I digress…). For me to offer 75% off the price (a groupon), I’d really need to be moving a ton of inventory to make it worth it, say a group of 500 tickets.
So, when Groupon was new, you’d call up the friendly rep (probably an actor friend of yours, working for Groupon is the 21st century version of waiting tables) and say “I’d like to offer tickets to Hello, Dolly! at half price. They normally go for $40 a seat. I need to sell at least 500 to make it worth it.” The Groupon rep would say “we can do it if we make the minimum 200 people, in our experience, that’s a good minimum for theater, and as with all of our deals, you understand Groupon takes 50% of the actual purchase price, right?”. You’d probably negotiate the minimum to 300 or so, but they’d never budge on that 50%.
So, in the end, you’d be getting $10 a ticket, and looking to sell at least 300 of them and net $3000 to make the hit you might take on full price tickets worth your while. That was the original model, and it made sense, because there was a reason for the discount in the customer’s eye. “We’re getting this awesome deal because they are making money on the volume!” their subconscious consumer rationalization would go. It protected the value of the actual retail price. Groupon would slate you for a date, and they’d send an email to their members, and you’d anxiously await what would happen.
It was very special to be “selected” by Groupon to run a deal. In those days - before the app, before Groupon Goods, Groupon Live, Groupon Local, Groupon Now, Groupon Getaways, etc. - you got an email a day with one exciting deal in it. There were big businesses doing Groupons, too! I remember when the Gap did something like $50 for a $100 voucher. That’s a great deal!
At some point along the way, Groupon likely realized that A) they don’t make any money when a deal doesn’t meet the minimum, and B) they had enough businesses knocking on the virtual door that they didn’t need to have a minimum anymore. Groupon was suddenly no longer in the groups business. It also stopped being so special. Anyone with a massage parlor or nail salon or teeth whitening equipment could run a deal, and not just for a day, when of course they could sell many more tanning sessions over a 4 day period.
A Groupon stopped having the emotional trigger to the customer that they were getting a once-in-a-long-shot offer. Now, if you want a massage, just look at the email you receive every day with 30 offers on it and scroll until you find a massage. There’s bound to be one on there. If not, check Living Social, or Tippr, or YouSwoop, or any of the other 100 Groupon clones. The full retail price is no longer protected. The market is showing us that a massage is not worth the over $100 that it used to cost, but more like $60, the average price for one on Groupon (of which the masseuse gets $30).
Groupon made these changes at the perfect time too. The economy was bad. People couldn’t afford as many luxuries, and luxury businesses needed customers. Since the number of deals going out per day was now infinitely flexible, Groupon could grow - and it did, dramatically. Groupon had 3000 employees in 2010, 5000 in early 2011, and now boasts over 10,000 employees! For a
website! email marketing company!
But guess what? Companies that have done a daily deal - or maybe many daily deals - have started to realize the implications on their bottom line, on their staff, on the quality of their product, and on their perceived value. Now, you don’t see as many great deals anymore. You certainly don’t see the Gap. Now you see restaurants offering a $20 voucher for $10, and it’s only valid on weekdays. There are too many offers, too much to look at and process. People are smart - much smarter than we give them credit for. They know when something is off, and because of it daily deal purchases have rapidly declined. Some people have characterized Groupon’s behavior worse. This blog calls it out as a straight up ponzi scheme, promising an introduction to thousands of new customers to businesses while taking a huge cut of the money.
Groupon had a brilliant business model. You’d make $3000 by busting the asses of your staff and paying actors and crew to put on a show for 300 people. Groupon got their $3000 for sending an email. They grew exponentially, but with very few legitimate assets. Apple has patents, Google has digital infrastructure, Wal-Mart has a hyper streamlined supply chain and real estate. Groupon’s sole major non-cash asset is it’s subscriber list, and now their solution is to diversify the company by expanding into physical inventory and trying to compete with giants such as Wal-Mart and Amazon on discount goods. Good luck.
As I see it, the only way for Groupon to salvage what was once an ingenious idea is massive layoffs and a return to the special-super-sweet-awesome-once-in-a-lifetime discount opportunities one at a time, into an estimated 100 million in-boxes once a day. Curate it again. Select only the best deals. Offer them for only a day. Return to the group model of “we’re all in this together” so people post on Facebook “Hey, I claimed this super-sweet awesome deal, and if 30 more people don’t claim it by midnight, I’ll lose it.”
It will anger investors because it won’t deliver the historical growth they expect from this company, but it will deliver a profit and sustainability. After all, it’s just an eblast, a website, and some cutesy language. They probably shouldn’t have invested in the first place.