On November 4th, Groupon is expected to go public with many doubts about the company. This summer, the company has been valued as high as $25 billion dollars. However, recent valuations of the company suggest much less than the projected amount. On Friday, October 21st, a regular report suggested that the company would be valued no higher than $11.4 billion dollars for its IPO. What happened to the company? It can easily be explained with an inadequate business strategy, the novelty of online coupons, and buyer behavior methods.
Groupon is a company that was the first to enter the market of online coupons. Andrew Mason, founder of the company, formulated the idea of signing up customers and offering them online coupons by an email list. By connecting the idea through all electronic devices, Groupon offers deals on thousands of products in hundreds of cities. In recent years, many restaurants and other companies have worked through Groupon to try to attract customers. However, the extra value the companies expected from Groupon turned out to hurt them more than help.
Groupon’s business strategy was not prepared for the immediate success that the company was going to encounter. Two years after its formation, Groupon grew to 10,000 employees in an effort to maintain the 100 cities and 25 countries the company inhabited. While reporting large revenue growth, the company had to continue increasing its operating expenses to keep up. Thus, Groupon had an extremely difficult time accumulating positive net income. As a matter of fact, the company just reported that it was operating at break-even two days ago (Oct. 21).
From these two graphs, one can clearly see that marketing spending has a relationship with customers: as marketing spending decreases, the amount of new customers decrease. When I look at these numbers, I believe that Groupon tried to make the company look more attractive to customers by getting operating cash flow. Groupon drastically cut its marketing spending just so that it could report in the news that it now operates at break-even.
In addition to losing customers through cutting marketing spending, Groupon also loses former customers because of little success in the Groupon idea. For example, if a restaurant offers a Groupon ad that states “$40 of pizza for $20”, Groupon takes 50% of the sales ($10), leaving the restaurant with only $10 of revenues. While it will create buzz and increase demand, a company can only keep its Groupon offer up for so long because it only creates value for one person: the customer. Instead of being a win-win-win strategy, Groupon creates an environment where the customer gets a bargain while both the restaurant and its own company suffer from discounting.
Another important aspect to Groupon’s struggle is that it is competing in a difficult industry. The industry of online couponing has increased exponentially since the formation of Groupon. Most price sensitive customers have all heard of companies such as Living Social, Amazon, and the many coupons through Google. Also, big name companies also have the spending to offer exactly what Groupon does through their own marketing techniques, saturating the online coupon market even more. As the market becomes saturated, companies are doing whatever it takes to edge its competitors.
Lastly, Groupon struggle to succeed in its market because of its discounting strategy. Groupon believes that restaurants and other businesses will continue to want to work with them because of the demand increase and buzz that it creates. However, restaurants are beginning to realize that this strategy does not work well in maintaining a strong customer base. Take B.F. Skinner’s ideas of operant conditioning for example. For most companies that use Groupon to help market their product/service, they typically offer a discount once or twice a year. According to Skinner, this type of reinforcement is considered fixed intervals, which generally creates the least amount of responses compared to other strategies. Therefore, the company will see a jump in responses (demand) for its product/service during the time that it is discounted, but then the demand will slowly drop until another discount is offered.
In conclusion, Groupon will have an extremely difficult time succeeding in the online couponing industry. Currently, Groupon is cutting costs in order to make its company look more appealing towards the IPO. I believe that its new cost cutting is a terrible way to try to generate more value towards the company (you can only cut so far). Instead, I think that Groupon should try to continue creating more value out of more outputs and inputs (demand and costs). While they did not reap any positive income in the short term (2008-2010), I think that the only way Groupon has a chance to succeed would be to invest more into the company. In an effort to strengthen its business model, Groupon should invest to differentiate itself from their competitors in the industry. By differentiating, Groupon could detach itself from the idea that online coupons are like junk mail. Groupon can put more value into its company to create the ideal win-win-win model for customers, Groupon, and the companies.
Austin Stadler
BEM Major
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