I probably have an irrational hatred for GroupOn. It annoys me deeply that someone built a $5B company on the idea, Let’s sell coupons on the internet. But I do think I have a valid claim as to GroupOn’s overvaluation, for two somewhat connected reasons: first, I predict fatigue by both customers and merchants with regard to GroupOn’s value proposition; second, I don’t see how the company withstands competitive pressure.
GroupOn is a media channel that helps retail outlets advertise sales of their product at drastically reduced prices. It uses large regional sales forces to persuade merchants to launch drastic price-reduction deals, and to advertise them exclusively through GroupOn. GroupOn then communicates these deals to a large number of subscribers, who have the option to take the deal, by paying an up-front fee, and redeeming it for a considerable value of product. For each subscriber that takes the deal, GroupOn takes a (fairly significant) cut of the up-front cost of the deal.
For the merchant, the value proposition is advertising and customer acquisition. For a cost, merchants induce a large number of potential customers to try their product. (There may be secondary value propositions linked to cash-flow and coupons not redeemed, but I suspect these are minor.) The value proposition for the merchant improves as more GroupOn subscribers are exposed to deals, as the merchant’s ability to retain customers improves, and as the magnitude of the discount shrinks.
For the subscribers, the value proposition is information and customer surplus. For a cost in time, customers learn about drastically reduced prices on goods and services they might be interested in, and have the opportunity to participate in these deals by paying an up-front fee. The value proposition for the customer improves as deals are better tailored to what they want, and as the magnitude of the discount grows.
The squeeze for GroupOn is thus: subscribers want bigger discounts; merchants want smaller ones. Both sides want to squeeze out the middleman, which is GroupOn. If the market were a stable monopoly, GroupOn might be set. But in actuality, there are numerous competitors emerging–LivingSocial being the largest–and these represent a huge threat to GroupOn’s bottom line. In short, why would a merchant choose GroupOn do advertise its deal when it could get a better deal from a couple competitors that together have equal reach? I also think there’s a fairly skewed perception by merchants and or subscribers as to how good these deals really are for them. Merchants will realize their customer retention is lower than they think; subscribers will realize that merchants are sneaking in hidden costs (i.e. shipping costs, increasing prices prior to launching a GroupOn); and both sides will realize that it’s really not worth their time.